Funding for small business must be made a priority
Banks have long been criticised for failing the small-, microand mediumenterprises sector, particularly earlystage businesses, where start-up costs and working capital are among the primary reasons they reach out to funders.
But research published this week on funding for small businesses suggests that the blame does not lie only at the door of a seemingly unsympathetic banking fraternity.
Many small-business owners lack knowledge on the workings of the credit system or do not know their credit score, despite the allowance of an annual free credit record check.
The research also found that many struggle with financial recordkeeping and are unable produce up-to-date documents or manage cash flow properly.
These hurdles are compounded by traditional credit scoring and collateral seeking lending methods employed by banks. These methods favour medium to large businesses, creating a never-ending cycle of underfunding for SMMEs .
The study — the South African SMME Access to Finance Report 2017, published by Finfind — indicates there is an estimated “credit gap” of R86-billion to R346-billion in the small-business sector, particularly in agro-processing and technology.
The study was sponsored by the South African SME Fund, established by the CEO Initiative, which is a collaboration between the government, business and labour.
Last year, small-business funding requests totalled R40.9-billion on Finfind’s online platform, the study said. About 44% of the loan requests were for amounts less than R250 000.
The greatest demand was from early-stage SMMEs, which have battled to meet traditional credit vetting requirements. Venture capital funding opportunities for lessscalable SMMEs were also less promising last year, and many small-business owners lacked knowledge on raising finance, the study of 11 033 small businesses which sought funds via Finfind found.
Reluctance to lend to small businesses is evident in Reserve Bank statistics, which show that the percentage of small-business loans compared to total loans as at November last year was 10.4%.
Detailed data on smallbusiness loan applications and defaults is “nonexistent”, the study said, despite being necessary for policymaking. This may explain the Small Business Development Department’s poor response to the problem.
Finfind suggests that the Reserve Bank and National Credit Regulator should publish an effective lending rate for smallbusiness loans, which would allow borrowers to compare offers. Leading SMME banks use collateral-free lending methods and build alternate income streams through value-add products to boost their lending. It does, however, invite exploitation of sorts.
Funding for small business is an area to which the government should pay closer attention. If it does not, its vision of the sector creating 90% of 11 million new jobs by 2030 and contributing 60% to 80% of GDP growth then may well be a pipe dream.
The vision of creating 90% of 11 million new jobs by 2030 may well be a pipe dream