SMEs face barriers to necessary finance, but alternative lenders offer hope


As the coronavirus pandemic forces South Africa to grapple with a new reality, many of the country’s significant economic and social challenges have become more severe. Many SMEs are struggling to sustain their bottom line, and for them, access to finance can be the lifeline that lets them pay employees, buy more inventory or stay solvent.

What does the data show?

Xero surveyed SME decision-makers in South Africa before the lockdown. We found that small business decision-makers would take out a loan of R234,563 over the next year to support growth and they want to borrow almost R3 million (R2,711,160) on average over the next five years. Despite this, just under half (47%) said they had been rejected for a loan, either from a bank or traditional credit provider, while a further 70% said they are unfamiliar with alternative lending.

Likely, these numbers are now even higher following the impact of lockdown. In fact, a recent Heavy Chef survey found that 71% of small businesses expect they will need additional funding when the Covid-19 restrictions are relaxed.

Xero also found that 28% of SMEs didn’t have a clear enough picture of their financials to apply for capital in the first place. Keeping on top of your cash flow is more important than ever – especially for those looking to apply for the grants and schemes being offered. Unfortunately, according to the Heavy Chef research, 68% of SMEs were unsuccessful in their application for Covid-19 funding. In short, access to finance is a major threat to the recovery and long-term aspirations of South Africa’s SMEs.

Understanding the barriers

Access to capital is a fundamental necessity for the support and growth of almost every type of business. Regrettably, however, ‘applying for a loan’ has picked up negative connotations. If we are to ensure that businesses can access the capital they need, we must remove the stigma against borrowing as SMEs seek funding – whether it’s an essential government loan in light of Covid-19 or a private one to help spur business growth.

Many businesses reported a lack of confidence and tools as the main obstacle they faced in seeking finance. Over a third (35%) of respondents to Xero’s survey agreed that they lack the confidence to invest in their business, as they don’t have the right tools to apply for a loan. A third (31%) reported that having to provide financials to lenders manually puts them off applying, and a similar number (33%) said the process was often too confusing.

Now more than ever, it’s critical that SMEs have a clear picture of their financial health to put them in the best possible position when applying for a business loan. Somewhat worryingly is that over a quarter (28%) of decision-makers reported that they didn’t have a good enough view of their financials to support an application.

Businesses are also put off by traditional lending processes, but don’t have a good knowledge of the alternatives. Almost three-quarters of respondents (74%) agreed that traditional lenders were becoming more stringent or pulling back on lending. The same percentage reported that they would be more likely to apply for finance if there were more lending options available. Worryingly, 76% agreed that they are not clear on what alternative lending options there are in the market for SMEs.

So, what is an alternative lender? According to Trevor Gosling, CEO and Co-founder of alternative lender Lulalend, “Alternative lenders leverage technology, automation and data-driven decisions to help provide SMEs with quicker decisions.” South Africa’s alternative lending sector is rapidly growing to accommodate groups that have traditionally been overlooked, including SMEs.

Daniel Goldberg, a co-founder at digital financing company Bridgement, commented: “We need to focus on removing the barriers that prevent small businesses from getting the funding they need to grow. Part of this is closing the knowledge gap that exists around alternative options. There will also be several learnings from the current financing schemes the government is running in response to Covid-19. Technology, real-time data, and alternative lenders can play a key role in simplifying processes in the future.”

Funding to support the country’s SMEs

“The reality is that 85% of SMEs are being ignored when it comes to relief,” commented Retail Capital CEO, Karl Westvig. “This is because banks follow the traditional credit-vetting criteria, which often requires surety and security.” Therefore, according to Westvig, “the best-placed funders for these businesses are often alternative lenders. They have cash flow-based lending models and use risk scorecards and data-driven approaches. To assist SMEs in need of support during this time, we ask the government to dedicate R10 billion of the R200 billion loan guarantee fund to the non-bank sector. These alternative lenders are best placed to get these funds as quickly as possible to where they are most needed.”

Trevor Gosling of Lulalend outlined the need for alternative lenders: “The SME sector is difficult to underwrite, so banks already have a low-risk appetite for funding this market. Additionally, traditional lenders rely on analogue methodologies and in many instances require collateral, which precludes many business owners from being able to access funding. Alternative lenders work outside of the traditional banking system, and can, therefore, be more nimble.”

Surviving and prospering after the coronavirus pandemic will require many businesses to reach out for financing. We must work to destigmatise the borrowing process and make sure that SMEs are aware of the options so that the country’s businesses can come back strong.

As a global small business platform we work with many alternative lenders like Retail Capital, Bridgement and Lulalend, among other financing providers, to make it quicker and easier for SMEs to apply for the capital they need.

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