Let’s be honest: the odds of a new business succeeding are not great.
In the US the failure rate is about 50% in the first five years. In SA, the failure rate is reckoned to be 70% in the first year, according to former Trade and Industry Minister Rob Davies.
Henry Gachukia, chief credit officer for private banking and SMEs at Absa, says the reasons for this high failure rate have been extensively studied, and the most common cause of failure is mismanagement of cash flow.
“Believe it or not, sometimes the best thing you can do for an entrepreneur applying for a loan is say ‘No’. Don’t get me wrong, we’re in the business of lending money, but it has to be for the right reasons, or the right project. Giving money to an entrepreneur who goes out and buys a new luxury car rather than use the cash for the benefit of the business is asking for trouble. We’re definitely on the lookout for small businesses that have that survivability factor.”
Options for SME funding
The most common sources of funding for SMEs are:
- The entrepreneur’s own savings
- Borrowings from family and friends
- Government programmes (such as for tourism and women in business)
- Crowd funding
- Venture capital
- Fintech companies offering stock and working capital financing
- Traditional banks, the single largest source of funding for SMEs (and the cheapest).
“Like all banks, we saw a spike in bad debts in the months that followed the Covid-19 lockdowns,” says Gachukia. “We were able to assist clients by granting them a three-month repayment holiday, and this year we are seeing a return to more normal trading conditions. Overall, small businesses are not doing well. Many businesses exposed to tourism and hospitality have closed down, either temporarily or permanently, and these sectors will not recover until the economy reopens for business.”
Types of financing from Absa
Absa offers SMEs two broad categories of finance:
- Short-term loans, typically in the form of an overdraft, to cover working capital needs (for example, where clients have been invoiced but payment has not yet been received). Another type of funding offered is for businesses that have been awarded a contract or purchase order by a public sector entity and need to cash to fulfil the contract. This is for loan sizes of between R50 000 and R3 million.
- Longer-term financing needs, such as asset finance (if, for example, the business needs a bakkie or machine to expand production).
Enterprise development centres
Absa operates a network of Enterprise Development Centres across the country to assist SMEs in accessing development finance through its partnerships with corporate and other clients. These centres also provide financial management training and mentorship to entrepreneurs.
“Our experience is that small businesses need more than funding. They need guidance and coaching, and a proper understanding of what is involved in cash flow management, and what separates those companies that survive from those that don’t,” says Gachukia.
“We have dedicated development teams to assist businesses in a variety of ways: through training, workshops, marketing, networking, business planning and, not least of all, helping to arrange cash advances on the back of secured contracts with government and big business. We should never assume that money is all that is needed. It’s only 50% of the problem.”
Absa has four enterprise development centres across South Africa. These are hubs for emerging SMEs to receive training, and access computers and boardroom facilities, as well as opportunities to network with other businesses and entrepreneurs.
Workshops are held throughout the year on topics such as business plans, cash flows, licences, permits, registration regulations, financial literacy and entrepreneurial skills development.
Women empowerment and agricultural funding
The women empowerment finance facility is suitable for new and existing female-owned businesses. It is aimed at businesses with an existing revenue stream and positive cash flow but lacking a deposit, collateral or security. Qualifying applicants can receive loans of up to R5 million.
Black-owned SMEs operating in SA can apply for agriculture BEE finance of up to R15 million through Absa, with repayment periods of up to 10 years.
Working with government small business programmes
There is a common misconception that SMEs are a neglected segment of the economy. This is not true, says Gachukia. Government has several programmes aimed at the small business sector, and Absa collaborates with them in several areas, for example, the Khula Enterprise guarantee scheme, which provides loan guarantees to small businesses. This enables the bank to be softer on its lending terms to SMEs.
“We see the SME sector as a major part of our banking business,” says Gachukia. “Many of our small business clients have gone on to become larger businesses with very different banking needs, and we have been able to assist them to get there, with trade finance, forex and all the other services we typically offer to the corporate sector.
“We see our SME customer base as the future backbone of the economy. This is why we provide not just finance, but training, networking and mentorship to get them to the next level.”
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