Fund­ing for small busi­ness must be made a pri­or­ity

Sunday Times - - Business Opinion - Asha Speckman

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

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