Small, Medium and Micro Enterprises (SMMEs) are being left dead in the water as legacy lending criteria keep their lifelines just out of reach.
To realise meaningful growth in the small business sector—and thereby stimulate the economy—South African funders need to rethink their evaluation criteria.
The Business Case for Backing the Entrepreneur
South Africa is currently facing its highest unemployment rate at 32.6%, resulted from three million jobs lost during Q1 and Q2 of 2020, of which two-thirds were women. Empowering female small, medium, and micro-entrepreneurs can alleviate unemployment significantly.
The SMME sector holds the most potential for job creation and presently drives 30% of the economy. Yet, budding enterprises struggle to obtain capital injections that could set them up for their next growth phase.
Retail Capital, a business funding company, reported that none of the 40 000 SMEs they serve in the sub-R10-million category received any funding from the government during the pandemic due to “onerous conditions” that disqualified distressed businesses based on their balance sheets.
For years, the status quo of business funding has been, “Produce healthy financial reports to secure financial support.” However, in a South African context, this approach is counter-intuitive. Despite having a viable business model, few small businesses (and even fewer micro-enterprises) have complete financial reports or enough historical data required to earn them a second look from funders.
Funders Need to Look at Lending Through a New Lens
As astute business people trained to spot both risk and potential, South African lenders would do well to apply their expertise in identifying strategically sound business models. As Outsourced Finance MD, Depo Ogunruku, puts it, “Looking at the mind of the entrepreneur instead of relying purely on financials.”
Ogunruku, “Capturing financial records and preparing management reports are not what launches a successful business. A good business idea that satisfies a need in the market profitably does that.” For this reason, Ogunruku proposes investment models that provide much-needed guidance or mentorship with financing, such as incubator programmes and angel investment.
Initiatives that are leading the way to real change in SA include Nedbank’s Together, Beke le Beke’ and Nic Haralambous’ Slow Hustle programme.
“To add business insight and IP to a financial investment shows that you are backing a winning horse. You are fast-tracking the success of your investment,” Ogunruku concludes.