Credit provides an effective means of financing for small businesses from the initial stage or to the next phase of growth, but while traditional forms of credit may seem like the intuitive “go-to” for small business owners, bank loans tend to be difficult. to secure it.
“As small business financiers, we approach small business finance on a less ‘box-by-box’ basis and more on a ‘case-by-case’ basis, considering not only top-level metrics such as cash flow and financials. but also skills and expertise the businesses of the entrepreneurs we work with,” said Jeremy Lang, chief investment officer at Business Partners Limited.
New statistical data from the South African Reserve Bank reveals that bank loans to SMEs now make up only 25% of total business loans. Business loans and advances declined in 2020 and are down nearly 6% at the start of 2021, with credit conditions reflecting uncertainty in the mid-pandemic economic climate.
The Organization for Economic Co-operation and Development (OECD) attributes this relatively low level of credit spread to the fact that banks are, by their very nature, risk averse and governed by strict underwriting criteria.
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A small business start-up is a big risk
Lang said that entrepreneurs, especially those starting a business for the first time, represent significant risks compared to the lower risks associated with larger, more established companies with commercial credit histories.
“At the other end of the spectrum, micro businesses employing five or fewer people have better access to private loan facilities, microfinance financing and government funds.”
However, a significant percentage of South African SMEs are between R1 million and R100 million in turnover, with a staff of between one and 35 people. The effort is what McKinsey & Company calls the “missing middle”.
These SMEs find themselves in a position that is not small or not large enough to be considered as a significant prospect for traditional lenders, with non-banks, independent SME financiers and investors finding it difficult to fill the existing “credit gap”, which is approximately $30 billion. for South Africa according to the International Finance Corporation 2019 report.
Lang said in the future, lenders and non-bank players, especially in the emerging FinTech sector, will continue to play a significant role in providing access to financing for entrepreneurs.
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Support for small business owners goes beyond rands and cents
SME financers, such as Business Partners Limited, are also in a position to go beyond “rands and cents” to provide support to SME owners.
According to the latest Business Partners Limited SME Index, there is a growing need for SME-specific information, resources and support in areas such as funding and business strategy.
Therefore, educational and mentoring initiatives can play an important role in helping young entrepreneurs navigate the often complex financing arena and how to use loans responsibly to grow and develop SMEs, which is even more important.
“Institutions have different requirements that determine whether entrepreneurs are eligible for credit. Financiers also have their own objectives, such as industry preferences, transaction size, collateral requirements and leverage and/or commercial return expectations.
SMEs can use funding from Business Partners Limited, for example, to develop SMEs through increased working capital requirements, finance asset purchases, finance business takeovers, buy commercial properties or renovate existing commercial properties, or even buy franchises, said Lang. .
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Documents required for small business financing
The documentation required to apply for a business loan also varies from lender to lender and basic financial documents will be requested as standard requirements, including a business plan, cash flow history and projections, as well as the most recent annual financial statements and management accounts. .
The employer’s personal documents, such as ID cards and marriage certificates will also be requested. Finally, the lender will ask for admin-related documents, including company and tax registration documents, office leases, shareholder agreements and business licenses.
A new assessment of the local small business landscape by the industry body, SME South Africa, revealed that there are several main reasons why entrepreneurs are denied funding including inaccurate or incomplete financial reports, insufficient evidence of healthy cashflow and bad credit scores.
“Non-bank SME financiers, such as Business Partners Limited, are generally more nimble and more adaptable to different levels of risk when compared to banks, but this does not mean that our due diligence is not as thorough as traditional lenders.”
He said that as the first port of call, the organization will assess the financial viability of small businesses and therefore entrepreneurs are advised to ensure that their business plans, forecasts and cash flow documents are presented professionally and in detail.
“Applying for funding can be a daunting task, so preparation is key. Do your research, get advice from experts and rely on the experience of successful entrepreneurs.