- Retail Capital's CEO says demand for loans to fund small businesses surged in 2020.
- A combination of businesses opening online stores or using payment devices expanded the universe of enterprises Retail Capital could lend to.
- All this happened while banks claimed that there was not enough demand to make the loan guarantee scheme a success.
On 11 July, government's promise to help distressed businesses keep their heads above the Covid-19 wave reached its end of life. The Covid-19 loan guarantee scheme, which made up the biggest part of South Africa's R500 billion pandemic relief package, came to an end.
The last update by the Banking Association of SA (BASA) showed that only R18.39 billion of the promised R200 billion was approved by banks and taken up by small businesses under the scheme.
Throughout the scheme's short lifespan, BASA said there wasn't enough demand. However, it did point out on the last update on 26 June that 56% of applications received were rejected because they did not meet the eligibility criteria.
Distresses businesses were locked out
However, small and medium enterprise (SME)-focused lender, Retail Capital, had a different experience.
"I think it's an easy way out for banks to say there's no demand; it's passing the responsibility back to the market and not themselves," said Retail Capital CEO Karl Westvig.
Westvig said it appeared as if demand for assistance fell flat because while the loan guarantee scheme was meant to help address SMEs in distress, when the government set the qualifying criteria, it closed out businesses in despair.
One of the qualifying requirements of the loan guarantee scheme was that businesses that apply must have been in good standing with their banks at end-February 2020. National Treasury later amended that and said applicants must have been in good standing by 31 December 2019.
"So, they didn't give it to the distressed businesses. The criteria immediately locked out a lot of people. To apply was also difficult with the information required, the forecast and historical data, many people abandon their applications," Westvig.
So, Retail Capital saw an opportunity to step up. Because most of the businesses it funds generate a turnover of less than R10 million, it knew banks wouldn't touch that market. Yet, those were the businesses who struggled the most under harsher lockdowns.
Demand was there
Initially, the lender also saw a 90% drop in demand after lockdown level 5 as only a few businesses could trade as essential service providers.
"But as soon as the lockdown lifted, the demand came straight back because businesses needed to restock their stores. They needed to catch up on some of the salary payments. They needed to trade again, and you can only trade if you have working capital," said Westvig.
In fact, Retail Capital had record demand for three months straight in October, November and December 2020.
By that time, the company had also expanded to service new sectors. Industries like healthcare, which traditionally didn't need access to working capital, started needing money as they moved to offer their goods and services online.
Also, as more businesses set up online stores and started using payment systems like PayFast, it broadened the universe of enterprises that Retail Capital could now lend to.
The migration away from cash, also helped by payment device providers like Yoco and iKhokha, allowed Retail Capital to lend more to informal traders too.
Westvig said companies like Yoco are revolutionising the financial services value chain because in the past when only banks provided point-of-sale devices, many micro-businesses couldn't afford it or couldn't qualify for one in the first place.
When the new players came with devices that cost under R1 000 with no further monthly charges, township and other micro-businesses started adopting payment devices too. With their transaction history gone digital, Retail Capital is now able to lend money to them.
"Once we can see digital transactions on the device and there's settlement into a bank account, we can fund them. In some cases, they need only one month of transaction history," said Westvig.
In the ten years that it's been in existence, Retail Capital loaned R4.5 billion to small businesses. Since the lockdown began in March 2020, the company wrote loans of almost R1.8 billion. It's now targeting to reach R8 billion in loans disbursed by 2023.
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