Tom Stilwell
The National Development Plan (NDP) states that small and expanding firms will become more prominent over the next few years and that they will generate the majority of new jobs. This will be stimulated by, among other things, improved access to debt and equity finance. Statistics show small, medium and micro enterprises (SMMEs) employ almost 60% of the employable population of South Africa today, and more than 12 million South Africans rely on small enterprises for their livelihood, so it’s time to address the finance gap.
In 2012 at the National Council of Provinces Trade and International Relations committee meeting, the Department of Trade and Industry (DTI) highlighted some of the issues facing the SMME. The most common are: SMMEs are unable to provide proposals that are convincing of their sustainability, difficulty in accessing markets and business regulations and legislation.
The SMME is seen as the high-risk, high chance of failure endeavour that makes any financial institution wary. Recent figures released by the DTI reveal that about 70% of South African SMMEs fail in the first year, one of the highest rates in the world. This figure is big enough to give any investor pause.
“SMMEs range from home-based micro-businesses to mid-sized enterprises with annual turnovers of R10-million or more,” says Daryl Blundell, general manager of Sage Pastel Accounting. “Each of these has different funding requirements and each has a different risk profile for lenders and investors. Banks are wary of lending to micro businesses because they are perceived to be high risk due to the failure rate in this segment, and many of these businesses also struggle to meet the commercial security and credit history requirements set out by South Africa’s lending laws and regulations.”
The 2014 Business Partners Limited SME Index found that SMMEs are apprehensive about the economic challenges facing the sector. The same survey saw SMMEs emphasise the importance and value of funding assistance from government to benefit and grow their businesses.
“Financiers regard SMMEs as high risk as they are often perceived as not honouring their commitments, not having financial systems and controls in place and financial information that is out of date or of questionable accuracy,” says Gerri van Biljoen, executive director at Business Partners Limited. “The financing world changed after the credit crunch of 2008. Policies were changed and the approach to credit is different. Did this help SMMEs? Not at all.”
An established SMME is likely to meet with significantly less resistance than start-ups, and younger SMMEs that do obtain finance often have to pay a higher rate of interest to accommodate the risk, which can make the funding unaffordable. The NDP expects SMMEs to drive the South African economy into a well-heeled and stable future, but fresh business ideas are difficult to ignite.
“Where we have noticed more complexity is in the start-up business phase, as many traditional banks still view self-employed individuals as a risk and they battle to get funding,” says Tom Stilwell, head of Mercantile Private Bank. “This is a challenge that countless business owners face on a daily basis. Ironically, the employees of these businesses, when it comes to personal borrowing, don’t usually encounter such hurdles.”
This “payslip” mentality places SMMEs at a disadvantage and has denied a significant number of entrepreneurs access to much-needed financial assistance. It also has the knock-on effect of making the business owners themselves feel marginalised. But there are always three sides to any story and Dr Ricardo Dames, a successful black executive in the SMME area, suggests that small business owners only have themselves to blame.
“While many SMMEs lament that there is no or limited funding available to them, we have done significant research on this and were astounded to find out just how many funding sources actually exist for SMMEs,” he says. “It was interesting to note that these funders were equally frustrated with the lack of SMME uptake of their products and services.”
So while legislation and risk are responsible for a large percentage of SMMEs battling to get finance, there are other factors at play. There is a lack of information as to what funding solutions are available and how they can be accessed and this is often as a direct result of finance providers struggling to target the appropriate SMME.
Dames adds: “The risk appetite for public and private funders differ quite a bit so it is always best for SMMEs to scope the funding sources that are available, identify the ones that best meet their needs and then enquire what the application and eligibility requirements are first.”
SMMEs also need to be up to date on their taxes, have clear business plans, ensure their financial projections are realistic and accurate and absolutely ensure that their taxes are paid and credit records pristine.
“Access to finance is not the only problem affecting SMMEs,” says Happy Ralinala, head of Business Banking South Africa at ABSA. “The high failure rate in the first two years of trading is mainly due to a lack of business management skills. SMMEs struggle to draft fundable business plans and need access to mentors and networking opportunities.”
Ralinala does agree that SMMEs face far more stringent issues around finance than established enterprises, but ABSA is one of a number of banks that has addressed this concern through new platforms and solutions.
“We have identified this problem and mitigated the risk through the introduction of various funds and Enterprise Development Centres,” says Ralinala. “From a Barclays Africa perspective we have reviewed our lending policies and aligned criteria to propel job creation. We have grown our lending book year-on-year and we have eight Enterprise Development Centres across the country with more planned for rollout throughout 2015.”
Standard Bank has also invested into the sector and currently banks around 25% of SMMEs, with credit extending into the billions. Ethel Nyembe, head of Small Enterprise at Standard Bank, is also quick to emphasise how important it is to provide support that goes past cash and into control.
“Investment into SMMEs is undergoing qualitative change as it becomes clearer that they require support beyond credit finance and transacting solutions,” she says. “Standard Bank has a number of programmes aimed at enhancing SMME capabilities such as the Entrepreneur Development Programme and sponsored educative programmes like Growth Engines and the popular Think Big TV show.”
Government entities such as the Small Enterprise Development Agency are among more than 36 business incubation, skills development and funding initiatives provided by the state, municipalities, donors and commercial providers to drive the growth of SMMEs. Each one underscores the value of business skills and management capabilities, and why these are as important as finance when it comes to the successful growth of the SMME.
“Finance is always available for businesses that have clear plans and business models in place, along with solid structures, experienced management and a solid and compelling economic right to exist,” says Alfie Naidoo, chair of Raizcorp. “SMMEs need to ask themselves whether they have the appropriate strategy in place relative to the economic, political, competitive and social environment. While banks may be more reluctant to lend during tough times because they don’t want the level of bad debt to rise, if a small business has the characteristics above, they should be in a far better place than their competitors to receive the funding they require.”
The growth dynamic
One of the most common complaints raised by small, medium and micro enterprises (SMMEs) is that a lack of finance is an inhibitor to growth.
Tom Stilwell, head of Mercantile Private Bank says: “Research commissioned by Mercantile Bank points out that a lack of access to finance is a leading factor preventing business growth. One of the biggest issues that can impact a small firm’s growth is the difficulty they have in raising money to invest in their operations.”
The thing is, money is not necessarily the magic ingredient. There are other factors at play when it comes to building a sustainable business and cash thrown at a problem isn’t always a solution.
“There is some correlation, but it depends on the mix of investment type,” says Ethel Nyembe, head of Small Enterprise at Standard Bank. “International research has shown that small businesses require four broad categories of investment: equity and venture capital, operational investment, entrepreneurial skills development and market dynamism. Lack of finance has the potential to constrain growth, but in reality these other factors are more significant. Furthermore, South African banks actively compete for the business of well-managed, profitable enterprises with a strong plan for growth.”
Happy Ralinala, head of Business Banking South Africa, ABSA Retail and Business Banking adds: “At Barclays Africa we have found that access to market[s] is just as vital as access to finance. We believe that this poses a material risk to the longevity of SMMEs.”
On the flipside, the Sage Business Index 2013 found that 63% of South African businesses agree that banks aren’t doing enough to make funding available to SMMEs, with just over half saying that they need to look at alternative funding sources.
“A lack of financing is one of the parameters within which small businesses in South Africa must operate,” says Daryl Blundell, general manager of Sage Pastel Accounting. “This is not always necessarily a bad thing because it helps to keep new enterprises grounded and disciplined, qualities that will help them to build sustainable businesses for the long term. SMMEs are resourceful and resilient, and capable of finding creative ways to finance growth.”
Accessible finance when needed can absolutely correlate to growth; however it doesn’t automatically guarantee that the small firm will suddenly shoot off into the stratosphere. Often the results are dependent on how the owner has planned for the future.
“More often than not, the outcome is based on whether the SMME has a clear plan and business model, solid structures in place and an experienced management team,” says Alfie Naidoo, chair of Raizcorp. “If the small business owner is not personally mature enough to base funding applications on sound long-term growth imperatives, or doesn’t have the inner strength to handle the strain that growth financing inevitably creates, the investment or funding will have the reverse effect and will end up likely killing the business rather than growing it.”
The answer is not cut and dried; it is perhaps a blend of all elements, as SMMEs without business plans or long-term goals and financial projections are unlikely to succeed with or without finance. Those that plan ahead and prepare for the copious paperwork and proof required for financial support are most likely to be successful.