Much has been made of the role SMEs can play in South Africa’s future. SMEs – or Small-to-Medium Enterprises - have been touted by many as key drivers for South Africa’s developing economy.
The sector can aid with bringing down unemployment numbers, can contribute to GDP, and provide jobs for many thousands of citizens.
But in the age of pandemic, among the key challenges faced by small businesses during lockdown was existing debt, lack of cash reserves, and no access to relief funding, Fin24 reported recently.
With that in mind, what can small businesses do to kickstart their businesses, and how can institutions help?
Here we discuss the importance of SMEs for our future, what their biggest challenge is, and how they can attract funding to help them on their way.
So who exactly is an SME?
The answer to this question may vary depending on who you ask. In the South African context, and from the viewpoint of a major bank, an SME is a business that fits certain categories.
"In respect of South Africa and most African countries, an SME is a business making sales from zero up to around R20 million per annum, has employees not numbering more than 50, and generally does not have a governance structure, like a board," says Henry Gachukia, Chief Credit Officer for SME and private banking at Absa.
This definition may not speak to new terminology such as SMMEs, or micro-SMEs, which in South Africa, would typically be a business like a spaza shop. "These by the very nature offer very varying differences from an SME and require different thinking and solutioning for their funding needs."
Why is an SME important to all of us and to SA?
In recent times, the world’s approach to the job market has been changing. Working hard, getting a degree and finding a job is no longer guaranteed for many young graduates.
Entrepreneurship is becoming an increasingly important solution in providing jobs, and to driving a developing economy.
"If more people can think like an entrepreneur, it helps them much better to get along in life. Therefore, we believe that if we (as a bank) continue to support this, that means the better we will be at helping to solve unemployment," says Gachukia.
While the growth of small businesses may not be the silver bullet in solving the unemployment problem, it can definitely go a long way in assisting.
What is the biggest challenge facing SMEs today?
The biggest issue facing SME's today is funding, Gachukia believes. An SME’s access to funding can also be compounded by a number of unanswered questions.
"When it comes to lending to an SME, it can be a very simple challenge if you're working with 'the textbook company'. Do they have a set of accounts? Do they have a business model? What is it that they do?
"But for many SMEs today, their financials are not readily available. They are not written down. Yes, you may have their bank statements, but you need to sit down and have a conversation with the SME in order to understand them better and to understand what their needs are in order to structure the funding appropriately."
What funding options do SMEs have?
In light of this, there are varying options SMEs can investigate to assist in getting funding. An SME could:
- Have its own capital and savings, invested over a long period of time, or inherited.
- Funding programmes, where a big business, government department or development agency assist with funding.
- Crowdfunding, where a small business can attempt to harness the power of social media to attract venture capitalists or donations from ordinary social media users.
- Lastly, borrowing, such as from financial institutions or registered financial service providers.
When borrowing from an institution that is not a bank, the biggest challenge for the SME is the pricing costs.
"The charges can be quite prohibitive. But borrowing from banks remains the single largest source of funding for SMEs and relatively, by size, is the cheapest source."
What role can banks play in funding SMEs?
Banks have played the largest role historically in funding the country’s SMEs, with many mainstream products designed to aid funding.
This includes short-term lending options, like an overdraft, which can help a small business pay for rent for three months, or longer-term loans, which can help a business pay for a premises, or a delivery van.
More recently, banks have also taken to offering support to SMEs, by working with government agencies to help mitigate risk. Importantly, they encourage SMEs to start banking what they earn, so their earnings can be tracked and recorded, making the process of applying for a loan that much easier.
Absa for one champions their Business Evolve product. It has enhanced digital interaction, is easy to open, is reasonably priced and includes support features that enable the customer to establish a cash flow for their business.
A bank would only need adequate knowledge of the customer in or order to understand its business, which could include:
- A business model;
- Financials in the form of a balance sheet not older than 6 months;
- Bank statements not older than 6 months;
- 12-month cash flow forecast;
- A clean bureau report or adequate plans on how the negatives will be managed.
What are the great joys experienced in working with SMEs?
Henry has worked with many small to medium enterprises in his time. For him, he finds great satisfaction in being able to help budding entrepreneurs along with his team.
"I enjoy speaking to our customers, understanding them closely and being able to put money in their pockets. And that actually transforms their lives, in making a difference for them personally, and the community in which they serve."
And for small business looking for funding, Henry has one message for them: Don’t be afraid to speak to your bank.
"Have a conversation with your bank. Be able to step up and go and speak to them. If you feel uncertain about the conversation that you want to have, find someone who can support you to go and speak with you, but do reach out. We are here to help."
This post was sponsored by Absa and produced by BrandStudio24 for Fin24.