Building a financial collective could save economy
ACCORDING to Stats SA, 40 percent of our gross domestic product (GDP) is generated by small and medium companies. Others have put this number as high as 60 percent. As South Africa continues to fight its way out of the jaws of a recession, it’s the owner-run businesses and SMEs which continue to keep the economy ticking over.
However, these valuable contributors are not always afforded the support they need. Commercial banks, under increasingly stringent regulatory pressure and a shrinking appetite for risk, are often simply not able to extend the vital growth capital these businesses need, putting not only jobs, but our GDP, at risk.
The answer to this challenge does not lie in changing the rules and regulations governing lending, but in a fundamental change of mindset from the greater business collective.
Not unique South Africa does not find itself in a unique situation. In an effort to promote lending competition and fill the growing SME funding gap, the UK government turned to technology and regulation to find a solution. In November 2016, the British Banking Association launched the Banking Referral Scheme.
Each time one of the UK’s nine largest banks turn down an SME’s application for funding they are required to offer the business owner the opportunity to have their details shared with one of three digital platforms: Funding Xchange, Funding Options, Business Finance Compared, with Alternative Business Funding becoming the fourth platform on November 1. Each of these work with dozens of alternative finance providers.
Relying on an algorithm, the platforms match companies to the best lenders and products for their businesses. The technology analyses a series of data points about the business, its history, trading style and what they are looking to achieve in order to find the most suitable potential lenders.
The platforms also generate a probability factor for each match. The service is free to the SMEs, and a finders’ fee is paid by the lenders, which have secured the new business.
At least one of the platforms (Funding Options) has gone to extra pains to include a team of experienced business finance specialists to assist with the more complex deals. It has secured millions of pounds of finance with more than 40 alternative finance companies.
Struggled
According to Stats SA, large businesses now contribute 3 percent less to the GDP than they did just two years ago. The economy is now relying more heavily than ever on medium and smaller companies to keep the economy ticking over.
SMEs have always struggled to gain access to finance. However as banks become increasingly wary of taking on risk, even medium and larger companies are finding access to growth finance difficult. However, accessing finance still remains one of the biggest challenges for local SMEs.
There is no shortage of effort from government structures. The Department of Trade and Industry’s (dti’s) Black Industrialist Programme, (although drawing criticism) is a sure step in the right direction. So too is the recent announcement from the World Bank’s International Finance Corporation, which loaned FirstRand $200 million (R2.59 billion) which will be on-lent to local SMEs.
Added to this, the number of alternative lenders is growing exponentially in South Africa. Paragon deals with almost 100 commercial and non-bank lenders alone, and this number is growing on a weekly basis. The argument that there are no lenders out there is clearly false. The problem remains that business owners have no central or co-ordinated repository where they can find these lenders.
They often have nowhere to turn when they are looking for advice. Business accelerators abound. Start-up incubators are growing in number and influence. Yet business owners are still hopelessly ill informed about how to access finance.