The catch between funding for SMEs and quality of SMEs

By Given Majola Time of article published Oct 14, 2019

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DURBAN -  Funders complain there’s a lack of quality SME transactions to finance; yet entrepreneurs on the other hand complain there’s a lack of SME funding.

How can both be right?  

Spartan SME Finance CEO, Kumaran Padayachee described the SME funding environment as currently being very difficult, as funders are receiving many more enquiries than usual, resulting in increased demand, presumably because traditional institutions are a lot more nervous. “We are also nervous ourselves. We are facing more demand, making it increasingly harder to make the right decisions because we cannot predict how tough it is going to get for these SMEs in the future,” said Padayachee. 

Spartan SME Finance has been in business for 38 years and is an alternative funding provider for established SMEs. Padayachee said that they are not a substitute to traditional banks; their funding expertise falls into place when an SMEs needs aren’t or can’t be met by the banks. He said their focus is to supplement businesses applying for funding, and they don’t take up any shares in the SMEs they fund.  

Padayachee said that while the country’s economy is on the backfoot and struggling with growth on one hand; on the other hand, they are seeing exciting growth in other areas. “At a macro-level, things may not be going according to plan, but in some sectors we are seeing growth. SMEs are active in areas like logistics, downstream mining, civil construction and engineering. We fund businesses across all sectors but these are the ones that have accessed a lot more funding from us over the past three months, which is positive. Preferential procurement is also doing a good job; we are now seeing a lot of black companies growing because of it,” he said. 

Padayachee said that from the funders side, there were two things that proved problematic and may be leading funders to take on the view that there are not enough quality deals in the SME funding sector. “Funders are not good at raising awareness that they exist or about what they do. South Africa has in excess of 200 funding entities. The banks are typically well-known because they are dealt with on a day-to-day basis and they have large advertising budgets and, which attracts entrepreneurs. However, many alternative funders are not as prominent because they are dealing with niche markets - just like SMEs they serve, but they don’t advertise as aggressively. This means that they are not as well known, and there is not much awareness about them.” He said this made it difficult for these funders to get the right type of entrepreneurs to approach them. 

The second problem experienced by funders is that some of them are not clear about the criteria, sectors and sizes of transactions they are involved in. He said that this was to the extent that some were not clear about what they do on their websites, leading to entrepreneurs wasting their time approaching the funder, and going through the process only to find out later that the funder does not actually fund their specific sector or offer the amount they require. 

Of SMEs looking for funding, Padayachee said there were entrepreneurs that did not increase their awareness enough, or did not research intensively about all the different funders in the ecosystem. “I encourage entrepreneurs to do extensive research on Google. It should be the long-tail research where one does not just search for terms such as: funding/business funding/capital, but rather goes into deeper research on working capital, asset finance, or bridging finance in more specific terms.” 

He said another area was the issue of the readiness of an SME or entrepreneur to apply for funding, as they often do not have financial information ready at the application stage. “All funders will ask for financial statements and management accounts, which are basic things. If SMEs do not have this information available, then the funder will not be able to help them until they do.”

The Spartan SME Finance CEO said this was not only a problem in South Africa but also around the world. 

According to Padayachee, the third issue experienced by some entrepreneurs was their expectation of ease. “Unfortunately, when it comes to funding, you cannot  just go and apply and then expect to get the funding just like that. If the funder is going to give you money, the process cannot be easy. As much as we can all try to make it easy, there is some difficulty in it. Expecting things to be easy is setting yourself up for failure.” 

Padayachee said he did not think there was a simple solution to fixing this conundrum. He said that it was however important to have a funding landscape of all the different funders by category and criteria that are available in South Africa. This needs to be regularly updated and widely distributed. He added that there were attempts to have done this in the past but in his view those efforts had not been comprehensive, well-distributed or updated, rendering them of little value. 

“SMEs need to know that funders exist, and know their criteria and processes. They also need to go to an advisor to champion them on raising the funding and navigating the opportunities - be it an accountant or accounting firm. They also need not be shy to engage with funders personally, perhaps by calling them before applying, telling them what they want to do, checking if they met their criteria, asking advice and alternative suggestions if they could not be helped by them.”


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