With the exit of global banking giant Barclays from our shores, it might leave business owners wondering what the future of access to funding in SA might look like.
This, as well as slow economic growth, challenging international trading conditions, the chaos of an election year, difficult regulations and red tape does not paint a rosy picture.
Access to Funding: The Reality
Just how important is easy access to funding for growing companies? The SAICA SME report states that “According to SME’s, the main reasons for business failure are overwhelmingly cash flow related”. A business of any size and in whichever industry needs financial stability to operate sustainably.
Aiming to expand is an even more complex objective that requires SME’s to raise growth finance. Taking this into consideration, how can SME’s be expected to operate sustainably as well as grow, if accessing finance proves to be one of their greatest obstacles?
With disinvestment and job losses looming in traditional banking, the relevance of such institutions will be challenged more and more. The tough criteria, vast amounts of paperwork, high interest rates and general unwillingness to lend out money has given traditional funding institutions a bad name among entrepreneurs.
The floor is open for new and innovative ways to solve this funding issue.
The Funding Marketplace
One of the key developments has been the rise of the funding marketplace. A funding marketplace can be described as a platform where willing lenders meet willing borrowers to close funding transactions without the traditional financial intermediary like a bank being involved. Platforms like this is a major breakthrough for SME funding in the country.
What are your margins?
In quoting interest rates to borrowers, the answer lies in the margin. A funding platform, being online-based, eliminates many of the high overhead drivers of traditional funding institutions, like large physical offices and massive payroll costs.
This enables these platforms to offer lenders higher yields on their savings, and to offer borrowers lower rates on their loans, all because they require a much smaller margin to cover their costs. Magic!
Scoring your creditworthiness
Score cards that are designed to determine each borrower’s creditworthiness by looking at its financial health and expected future cash flows assist peer-to-peer funding platforms in allocating capital.
Borrowers then receive money from multiple verified lenders at competitive interest rates and low fees.
Drawing from the platform’s credit rating expertise, lenders also benefit from its services in what appears to be a win-win solution.
Types of Funding Marketplaces
As an example, meet SME funding marketplace RainFin. They are disrupting the SME finance landscape by offering unsecured access to SME funding within 48 hours – unheard of via traditional routes.
Their costs are low, offering both saver and borrower an exciting interest rate. RainFin seems to understand that in a fast-paced, high tech business environment, the needs of SMEs are immediate.
What’s also quite incredible about their marketplace is that it allows lenders to share the risk of loans, which makes individual borrowers more likely get funded by a pool of lenders who share the risk of the loan.
Partnerships with the likes of Rise Africa and ABSA should see them doing some exciting numbers in time to come, benefitting our business community.
FinTech hubs are sprouting across the country to help fuel this disruption in finance. Spots like Alpha Code, Rise Africa and the Bandwidth Barn are playing big roles in fostering innovation.
Cloud FinTech businesses are being invested in and scaling into Africa, as can be seen from cloud accounting company SMEasy and financial forecasting champions Riskflow with their CFO Apps.
Big business is also taking notice. Investec is making some serious investments into FinTech. Finance executive group CFO South Africa has recently launched FinTech Africa, coupled with exciting events to fuel conversation and investment into this space.
Enterprise Development is also starting to serve as a major conduit of SME finance. Innovative ESD funds like Edge Growth’s Vumela and Asisa funds are making cleverly channelling corporate BEE spend into finance for scaling companies.
Telkom has also recently come to the table to launch a sizable new fund in this space that is looking to provide black-owned companies with funding solutions.
It’s beautiful to watch organisations use the new codes to play a positive role in business and job creation.
This and other exciting new ways of getting funded are working their way into the market to offer innovative solutions to the company that’s ready for growth. With Section 12J also slowly moving more into the spotlight, new life is being blown into the venture capital space.
4Venture Capital Company
Section 12J allows investors in a SARS registered Venture Capital Company a 100% tax deduction for their investment.
On a 41% tax bracket, this means that an investor only has a 59% exposure on his money, but with 100% of the upside. This serves as government’s mechanism to channel high net worth individuals’ investment portfolios into young companies.
The launch of Grovest VCC’s latest fund called GroTech, aimed at disruptive technology companies, as well as other new funds raising capital, sees more players coming into the venture capital space, with more investors waking up to the opportunities of this asset class.
Money is available. It is up to founders to make sure that they are ready for funding. Companies need to look long and hard at their ability to clear a due diligence and also to provide a unique offering that makes business sense to a funder.
Businesses that have their house in order, can prove sustainability and growth, as well as a unique value proposition just need to keep knocking.
Government expects 90% of jobs to come from these entities. As a country, we have so much riding on the success of SMEs.
Starting new businesses and upscaling existing ones is of critical importance to us.
Seeing more and more disruption in the SME finance landscape fuels our opportunity to create a sustainable SA with inclusive growth and enough jobs to make the rounds.