George Watson leads a life that would have any South African banker scrambling to phone a bankruptcy lawyer and a psychiatrist at the same time.
Watson’s company, New Business Finance, has R30-million lent out to 400 small business owners, of which R26-million is unsecured. From a typical South African financier’s point of view, it’s pure madness.
But, amazingly, Watson has been doing it for almost 10 years, and has not only survived where all other similar funds and initiatives have failed, but is actually making money and growing.
The company has just opened its fourth regional office, in Pretoria, after Cape Town, Johannesburg and Nelspruit, has grown its staff to 28 and is currently negotiating for a further R50-million from the government’s wholesale small business funding agency, Khula.
The money will be used to lend to even more of the world’s riskiest borrowers — owner-managed businesses, often start-ups, needing less than R250Â 000. The secret, says Watson, lies in an old-fashioned lending practice that South African banks have all discarded.
“We are the old-fashioned bank manager. You ring him up on a Friday [and say], ‘I’ve got to pay wages, I was expecting a cheque in from this debtor, it hasn’t arrived. Can you extend my overdraft till Tuesday? Please do this before you go and play golf.’ And then it got done.
“We believe absolutely that the only way this business will ever work is by having a very, very tight relationship with the customer,” says Watson. Most important is good service and a real interest in the success of the clients’ businesses.
“I spend time myself, speaking to customers of ours whom I (normally) don’t deal with. I ring them up and say ‘Hi, it’s me, tell me everything good, bad and indifferent about your business. You’re a good customer, there’s no problem, but tell me.'” Watson says this buys such loyalty from clients that they inform New Business Finance at the first sign of trouble.
“Every lender will say to the customer, ‘if you’re in trouble, call us’. But customers know very often that it means ‘call us, and we’ll decide whether we should sue you or not’. Whereas with us, they start to know that we’ll get them in, we’ll sit them down and we’ll look at the numbers. And we’ll be flexible because we want to see the thing work.”
It is an expensive business to run because it requires intensive servicing of clients: “You can’t just sit at a computer screen and watch the debit orders come in. You’ve got to be out there all the time.”
Eight of his staff are field officers who deal directly with clients. They feed into a computerised information system developed by New Business Finance.
Watson’s biggest expense is the rate at which he buys money to on-lend to his clients. Including fees, he pays a staggering prime plus two to Khula.
Finding money to on-lend has been the Malawi-born Watson’s biggest problem since he started New Business Finance.
He had cut his teeth in the United Kingdom’s non-banking small business lending sector and moved to South Africa in 1998 after his wife died and he wanted to start a new life.
He started by putting in £50 000 of his own money to prove that could work. It did, but Khula was only interested in NGOs at that stage, so Watson put in a further £200 000 of his own.
He persuaded a British investor to lend R6-million, but the rand collapsed and ruined the deal.
Meanwhile, Khula notched up one failure after another with non-profit lenders, and three years ago it was finally ready to give New Business Finance a try. At first, it lent them R4-million, then R10-million, then R20-million and is considering a credit line of R50-million.
Borrowing from New Business Finance is not cheap. Classified as a developmental lender, the company may charge a maximum interest rate of 44,2% a year, which it often does.
Watson believes that the mistake that many of the NGOs made was to charge too little interest, “because they perceived what they did to be developmental. That’s all very nice and good, but if you want to be in this market, you’ve got to be sustainable, which means, firstly, that you have to be profitable and, secondly, that you have to be able to manage risk. What this company does is nonetheless developmental. Our regular customers are developmental customers.”
Watson says the idea is that New Business Finance customers would graduate to the banks once they become established, but he finds that lots of his clients are return-customers whose finance needs outstrip their asset growth, and therefore continue to be rejected by the extremely risk-averse banks.
New Business Finance’s R30-millionloan book is made up of about 60% term loans and 40% short-term bridging finance for tenders and large orders. The company does about 60 loans a month.
To what extent is New Business Finance’s success a function of Watson’s own unique skills set?
Having trained up a deputy, Watson no longer vets every deal that his loan officers bring.
If the company can maintain its success, it will be a good sign that New Business Finance is scalable beyond the scope of Watson alone.
The challenge is to find and train up good loan officers, he says. He does not employ ex-bankers and those with previous lending experience because they are too difficult to “untrain”.
“I take people with intellectual skills, the ability to think laterally, good people skills, numeracy, and teach them how to do this. And they are people who enjoy it.
“The sort of skills we need are actually out there in abundance.
“A very interesting thing we’ve realised is there is a generation of kids coming out of universities now. They’re in their early twenties, very educated, very hungry, very keen. They are really making an impression in this business,” says Watson.