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Sensible way of getting behind SMEs

Niche financial services firm is enabling entrepreneurs in a manner that traditional banks can’t – or won’t – and actively contributing to SA’s economic goals.

Small and medium-sized enterprises (SMEs) are recognised in many economies as one of the key drivers of economic growth, social development and job creation. This is applicable to such a degree in South Africa that SMEs are increasingly featuring in public and economic policy.

The National Development Plan (NDP) – a policy adopted by government that aims to grow South Africa’s struggling economy by an average of 5.4% by 2030 in order to slash the unemployment rate from 27% to 6% – is one example.

The SME sector features prominently in the NDP for its role in helping the country to reduce chronic unemployment, poverty and inequality. In terms of the NDP, SMEs are expected to generate 90% of new jobs by 2030 (from current industry estimates of only about 28%). Two requirements seen by industry players as key to achieving this target is for SMEs to be able to access funding and for entrepreneurs to be upskilled.

But this is far from becoming a reality, according to Terence Gregory, CEO of niche financial services group Ecsponent. He says SMEs continue to operate in an environment fraught with stifling regulations while contending with insufficient skills and a lack of financial support.

“The reality is that SMEs don’t have access to finance or the financial products that will best suit them.”

Traditional banks often don’t have the appetite to fund SMEs, some of which don’t have any credit record, or assets to use as collateral, a track record in business.

Gregory argues that if banks continue to use their traditional credit scoring and assessment methods – which don’t take the nature of SMEs relative to their larger counterparts into account – entrepreneurs will only have access to financial products, such as bank accounts, but not credit facilities.

“Although there is an oversupply of credit in the market, it is only for the top 14% large businesses. It is definitely not for smaller businesses.”

How Ecsponent is closing the funding gap

Ecsponent is putting its money where its mouth is through its credit business. The business provides credit to SMEs that have been included in the black economic empowerment (BEE) procurement supply chain of larger companies.

Ecsponent doesn’t give credit directly to SMEs. Instead, the company directly funds transactions where SMEs have been contracted by larger companies.

For example, if an SME is awarded a tender to supply equipment to a large business, the entrepreneur will need to source the right equipment and get competitive pricing quotes in order to fulfil the tender requirements. The large business would appoint Ecsponent to manage and finance the tender on behalf of the SME, helping the SME to source the equipment and deliver on their undertaking to the client on time and according to specifications.

“In inserting ourselves into the supply chain network and tender from the beginning, we are actually saying to the SME ‘Let’s walk through the process’ together.’ This enables us to train entrepreneurs and impart business skills.”

Long-term development

Ecsponent’s credit model addresses two fundamental issues that hamper the growth of SMEs; financial inclusion and skills development.

Gregory says it is also about growing entrepreneurs to become entities of scale that can potentially compete with larger businesses in the long term. Ecsponent compiles a scorecard and report for large corporates on how the SME that is awarded a tender is performing financially after they have delivered on the tender contract.

“That large corporate business can then see that a vendor has become a supplier of scale and can now be their permanent supplier,” he says.

“For example, there is an emerging entrepreneur that supplied batteries to a large telecommunications company on a tender/order worth R25 million. They made a significant profit on the order. As long as the entrepreneur manages their money properly, they will very quickly be able to do transactions without our financial assistance. They will be able to go to commercial banks for funding.”

Ecsponent funds transactions that have no performance risks. In other words, it considers transactions in which there isn’t a requirement for SMEs to build or manufacture an order (such as equipment) from scratch, but to rather purchase it.

Gregory says there is no value limit to Ecsponent’s funding of a transaction. It is also sector-agnostic regarding the tender transactions it finances. This has put it in good stead in terms of the number of loans it advances.

Ecsponent’s loans and advances increased by 65% to R1.23 billion in the 15 months to the end of June 2018, with the credit business posting a small operating profit of R363 000. Gregory says Ecsponent’s double-digit loan advance rates are a reflection of the demand for funding by SMEs that is not on the radar of commercial banks.

Brought to you by Ecsponent Group.

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