SMES The good, the bad
SMES The good, the bad and the ugly Alternative financing options for SMEs Funding remains one of the biggest limitations to both large and small businesses as banks adopt more stringent lending terms. The contraction in the South African economy has seen investors and conventional credit providers alike pull back on lending. If credit provision for large corporates is being restricted as well, one can only imagine what is happening to businesses that have typically been fragil—the small and medium-sized businesses (SMEs). The focus should be on empowering the entrepreneur and expanding their perspective when they think about access to funding. Entrepreneurs have long fallen into the trap of familiarity. When they think funding, they naturally gravitate towards the traditional banks – forgetting the space that is full of alternative lenders. The biggest obstacle for alternative lenders is not bad debts or stringent credit policies, but educating entrepreneurs about the benefits of alternative funding solutions. Mandla Khupe of Retail Capital, an SME funder, unpacks just what is on offer and how entrepreneurs can decide what’s right for them. Why alternative funding? Among the reasons why entrepreneurs get declined for funding is a mis-alignment between their funding needs and the potential funder’s lending criteria. Other countries, such as the United Kingdom, have clearly become conscious to this misalignment. Since 2016, as part of the UK government’s bid to promote small business, they passed an Act (SBEE Act) that obligated the major banks to refer SME finance applications that they have declined to alternative credit providers. We certainly need that in South Africa, an intentional referral effort by banks to connect SMMEs with alternative funders. Nonetheless, entrepreneurs must do their homework to find alternative funders that match their business requirements and stage of the business’ life. Alternative funders tend to be niché and specialised, with their credit policies built around funding support. Here’s an outline of the types of alternative funding solutions entrepreneurs can tap into. Merchant cash advance Small businesses must think about a concept that’s not as complex as it sounds: building a “data bank”. Many alternative funders use transaction data to perform their risk underwriting processes. Having reliable transaction data opens new channels of funding. The Merchant Cash Advance product is provided on the back of a business’ credit and debit card takings. The repayments are linked to daily turnover, therefore matching the repayments to the cash flow cycles of the business. This is a partner model in its purest sense, as it involves selling a business’ future unknown turnover. The product was pioneered in South Africa by Retail Capital that’s partnered with 15 000 SME’s and disbursed over R2,5 billion in funding. Bearing in mind: • The cash approval process can be as quick as a few hours, via an online application process. • Turnover should be split between card and cash. • Transaction history of at least three months. • No collateral is required. Asset-backed solutions This is well suited for businesses that have equity trapped in assets they already own. They can leverage business assets (e.g. vehicles or specialised equipment) by providing them as 36 | www.opportunityonline.co.za
SMES security to alternative lenders to access quick short-term funding. Invoice discounting Cash is, and always has been, king in any business. Furthermore, a rand received by a business today, if redeployed effectively, is better than a rand received tomorrow. Businesses fail, every day, due to cashflow pressure as debtors stretch repayment terms. The funding solution seeks to address working capital and cash flow challenges for business that have invoiced their debtors. The funder buys a business’ future invoice for a fee. This allows businesses to transfer the risk of the invoice to the funder and unlock the cash from its debtors by getting it upfront. FinTech lenders The availability of fintech lenders challenges conventional lenders in the algorithms that they use to understand risk. They cut the high acquisition costs and operating leverage from their business models as they lend through proprietary channels. Businesses that want to access this type of funding must have an online presence. These lenders typically offer many of the products mentioned above, but with the differentiator being that it is a greatly digital process end to end, from acquisition to repayment. Top funding tips Here are overarching tips for entrepreneurs looking for funding: Know your funder: SMEs must do their homework as to which funders to approach and for what type of funding. Failing to do homework on the funder’s lending criteria can results in many missed opportunities as business owners waste time chasing dead ends. Entrepreneurs must be more intentional in the way they go about raising funding. Build a data bank: This widens the pool of funders. As more and more alternative funders use data to perform risk analytics, small businesses would be surprised to understand how much information can be drawn by alternative lenders, given a record of transactions processed. Alternative funders as partners: It’s about knowing clients. Funders are continually improving processes to make sure that they give small business owners certainty when it comes to funding requirements. Mandla Khupe, Retail Capital www.opportunityonline.co.za | 37
