Banks not the be-all, end-all of lending
The contraction in the economy has seen investors and conventional credit providers alike pull back on lending. If credit provision for large corporates is being restricted, one can only imagine what is happening to businesses that have typically been fragile - the small and medium-sized businesses (SMEs).
The focus should be on empowering the entrepreneur and expanding their perspective when they think about access to funding.
Entrepreneurs have long fallen into the trap of familiarity. When they think funding, they naturally gravitate towards the traditional banks - forgetting the space that is full of alternative lenders.
The biggest obstacle for alternative lenders is not bad debts or stringent credit policies, but educating entrepreneurs about the benefits of alternative funding solutions.
Among the reasons entrepreneurs get declined for funding is a misalignment between their funding needs and the potential funder’s lending criteria.
Other countries, such as the UK, have clearly become conscious to this misalignment. Since 2016, as part of the UK government's bid to promote small business, they passed an Act (SBEE Act) that obliged the major banks to refer SME finance applications that they have declined to alternative credit providers.
We certainly need that in South Africa, an intentional referral effort by banks to connect SMMEs with alternative funders. Nonetheless, entrepreneurs must do their homework to find alternative funders that match their business requirements and stage of the business’ life. Alternative funders tend to be niché and specialised, with their credit policies built around funding support.
Small businesses must think about a concept that's not as complex as it sounds: building a “data bank”. Many alternative funders use transaction data to perform their risk underwriting processes. Having reliable transaction data opens new channels of funding.
Asset-backed solutions are well suited for businesses that have equity trapped in assets they already own. They can leverage business assets (for example, vehicles or specialised equipment) by providing them as security to alternative lenders to access quick short-term funding.
Cash is, and always has been, king in any business. Furthermore, a rand received by a business today, if redeployed effectively, is better than a rand received tomorrow. Businesses fail every day, due to cash flow pressure as debtors stretch repayment terms.
The funding solution seeks to address working capital and cash flow challenges for business that have invoiced their debtors. The funder buys a business's future invoice for a fee. This allows businesses to transfer the risk of the invoice to the funder and unlock the cash from its debtors by getting it upfront.
The availability of fintech lenders challenges conventional lenders in the algorithms that they use to understand risk. They cut the high acquisition costs and operating leverage from their business models, as they lend through proprietary channels.
Mandla Khupe is the head of commercial at Retail Capital.