/ 13 July 2018

SMEs hobbled by funding gap

(John McCann/M&G)
(John McCann/M&G)

Small businesses are routinely cited as the answer to South Africa’s stubborn 26.7% unemployment rate. But startups, micro-enterprises, and small and medium businesses often struggle when faced with the “ f-word ” — funding.

A report released on Tuesday by Finfind, an online research and development programme that links small businesses and funders, highlighted that, even though “globally, over 95% of [small] enterprises employ 60% to 70% of the working population”, the sector remains underserved.

The report showed that finance for the sector in South Africa has remained low since 2008, yet funding for large business has increased.

Only 1% of small, medium and micro-sized enterprises (SMMEs) access formal financing, and 87% do not access it because owners do not apply for funding, believing they will be unsuccessful, said Paul Smith, author of the report.

The funding gap in this sector is between R86‑billion and R346‑billion, according to the report, which analysed 11 033 small business funding requests, as well as 48 funders and 238 funding products.

It found that most entrepreneurs in the early phase of their businesses use their own savings, pension funds and money from family and friends.

Using data from another survey, it noted that 87% of startups are self-funded, 8% are supported by family members, 2% receive “angel funding” from wealthy investors, 2% have bank loans and 1% obtain funding from development finance institutions.

The median loan requested by a small, medium or micro-enterprise in South Africa is R400 000. This ranges from R300 000 for a micro business to R3.6‑million for a medium-sized business, the Finfind report showed. The survey also points out that the private sector provides more funding products aimed at small businesses, with 218 on offer versus the 110 available from the government.

Entrepreneurs requested funding in 2017 for start-up or working capital, or to buy equipment or expand the business, the study said.

Among the reasons cited for why small businesses do not receive funding were the lack of a credit history or a bad credit history, inadequate collateral, lack of skills and knowledge to produce financial statements, and poor business models and plans.

The report points to banks being unable to serve the funding needs of small businesses funding needs by using “a one size fits all” approach. This is because they tend to follow traditional lending practices, such as relying on collateral and conventional credit scorecards when they assess small businesses for funding.

“SMMEs have poor knowledge of their business’s credit record, with 61% not knowing their business credit score, yet this remains the standard way the funders access their creditworthiness,” Smith said.

Another barrier highlighted by the study was the amount of documentation required by financiers when they assess funding applications. Businesses with viable models and plans are denied funding, it noted, when they are unable to produce up-to-date management accounts, financial statements, budgets and tax clearance certificates.

Unlike countries such as Japan and France, South Africa does not have established credit information infrastructure initiatives and quality business credit record data, said the report. This becomes an additional hurdle that stands in the way of entrepreneurs accessing funding, as funders cannot trace their previous applications for loans, the financing terms and the reasons for rejection.

“The Reserve Bank or National Credit Regulator should publish effective lending rates or indicator rates for small business loans, which would allow borrowers to compare offers,” the report recommends.

Thulebona Mhlanga is an Adamela Trust financial reporter at the Mail & Guardian