Cash-flow based lending works with small businesses

As it celebrates 10 years of being in business after starting out as a scribble on a napkin, small business lender Retail Capital has disbursed R4.1bn since inception to more than 37,000 clients. It has lent more than R1bn in the past year alone.

But with so many informal traders moving to card payments, CEO Karl Westvig tells Business Day the firm might reach R8bn in disbursements within two years.

What does Retail Capital do and how are you different from banks?

We brought the concept of cash-flow based lending to SA 10 years ago. Banks are typically asset-based lenders so they’ll need security typically, and some sort of asset. We lend against cash flows.

We look at a retailer’s turnover on a monthly basis. For example, we look at credit card transactions and will lend against that and then collect a percentage of the future turnover to settle a facility.

Why are you needed when there are big banks in SA?

About 95% of the businesses we fund earn less than R10m a year to the low end. If you look at the banks, the medium-sized businesses and small businesses they lend to start at R15m annual turnover.

Who do you lend to and why do you say it is changing?

There’s been a big shift. In the first five years of the business five to 10 years ago, it was very much a face-to-face formal model. We would physically visit each retailer and sit down with a business owner and discuss what the requirements were. Now, what’s happening is anybody — any informal trader, rural or urban, anywhere — can access a card device.

Informal traders are using the card machine to accept debit or credit, and we can see those transactions electronically. Now as soon as you have a digital footprint we can find you.

Who are your clients?

We used to work mainly in the retail space, so typically retailers and manufacturers and wholesalers that were primarily focused on the retail sector. Roughly 20% of our businesses are restaurants and the balance are a whole host of traders, everything from small informal spaza shops right the way through to clothing stores. We see obviously big growth in the building sector because of lockdowns.

But the townships are cashbased?

In the townships people are being targeted for cash so they are coming to cities to use a debit card and go back to the township and use cash to pay. So they all have access to debit cards.

The cash economy is strong in townships. Do you see mobile payments coming soon and changing this?

There’s something called push payments, which are currently being authorised by the Reserve Bank. The traditional payment is a pull payment. When I run a debit card on your account, I am pulling money out of your account.

Push payments will enable the use of mobile platforms. The technology already exists and regulations are coming through. So you will see real-time EFT payments, something called rapid payments. That will allow WhatsApp payments, real time EFTs and mobile payments and all the rest of it as opposed to credit card transactions.

Are formal businesses shunning cash?

We actually did a survey in the middle of lockdown last year. I think prelockdown about 10% of businesses were cashless and 90% accepted cash. And I think through lockdown that shifted to about 25%. One in four small businesses went cashless. So obviously that is more formal businesses.

How have the small businesses fared since the coronavirus hit SA?

About 10% of ours across the board have closed. Maybe 20% or 25% in the restaurant sector.

In the restaurant sector, it’s not always a permanent closure. You can understand the restaurant perspective. If they put a curfew at 10pm, they can take their last order at 8pm, so they can close by 9pm and get staff home by 10pm. So that drives business away, firstly, and secondly, when the alcohol bans are in place, profits are down. So thousands of restaurants have not opened their doors under those conditions. But some lose for two months and they reopen when conditions are better.

How have clients been affected by the weak economy?

So roughly 20% of our customers are restaurant owners. And obviously, they’ve been quite severely impacted by Covid-19. But then on the positive side, we’ve seen very strong performance in the building sector, hardware sector, electronics, gym equipment, sports equipment and those types of spaces, obviously.

Small businesses are resilient.