In South Africa the SME funding gap is estimated at more than $20 billion (R294.5 billion), according to a report by the International Finance Corporation, a division of the World Bank.
Unlike more developed markets such as Europe and the US, the alternative funding model in SA is still in its infancy. Trevor Gosling, CEO and co-founder of digital lending platform Lulalend, believes there is significant room for growth, and alternative funders have already made significant inroads in the SME funding market in recent years.
Gosling says businesses with a turnover of less than R20 million per annum have been neglected by traditional financial institutions. The main reason for the neglect is the risk aversion of these institutions.
SMEs are inherently riskier as they do not have large cash reserves and certainly do not have significant assets to put up as security against loans. Banks generally prefer to lend to less risky industries and require collateral as security against loans.
Gosling says Lulalend believed there had to be another way of lending to this particular SME segment, and it could not be collateral-based. It had to be unsecured.
“We have tapped into the global debt capital market through development finance institutions from Europe and the US. They are mandated to support emerging market economies.”
Lulalend has also accessed funding from global impact funds. “They are particularly attracted to the market we serve,” remarks Gosling.
Lulalend supports SMEs because it understands their value in the economy. More than 60% of all private sector jobs in SA are created by SMEs, and they contribute to around 40% of the gross domestic product.
Demand for alternative funding
The Covid-19 pandemic has caused a rather strong uptick in requests for funding from alternative lenders such as Lulalend.
From March to November last year the company saw a 35% increase in defensive funding requests where companies required short-term funding to pay bills, cover some expenses, or to restructure and consolidate debt or loans at more competitive rates.
However, from November 2020 to March this year (when stringent lockdown restrictions were eased) the company saw a reversal, with a 40% jump in more growth or positive funding requests to buy stock, upgrade facilities, increase marketing spend and employ people.
As the third wave and violent political unrest hit the country it swung back to a 25% increase in more defensive reasons for funding again.
Gosling says the lending landscape has been changing and Lulalend and other alternative lenders are starting to fund a sizeable portion of the SME market.
“I expect that to continue as alternative lending becomes more prominent and better understood by business owners and they realise there are more opportunities than [with] traditional financing institutions.”
Gosling believes it is important to have a “healthy” alternative lending market that will grow to a point where it is no longer an “alternative market”. It should become a fully-fledged SME lending market with the necessary size and scale.
The road ahead
Lulalend has been focusing on credit since it was founded seven years ago. It has developed an innovative risk assessment model by using artificial intelligence (AI) technology that incorporates all the fundamentals of a business.
“The success rate of applicants to acquire additional capital through our process is significantly higher than through the banks. We assist businesses that have a clear objective for the additional capital they require and know what the potential return on it can be.”
Lulalend understands that SME business owners are entrepreneurs. Financial management and administration are not necessarily their key priorities.
This led to the recent launch of Lulaflow which offers a cash flow management service to its customers. “We only require access to their business bank account or access to their statements. In return we offer them a holistic overview in an automated format of their cash flow position,” says Gosling.
Lulalend has developed AI-based analytics to categorise the business’s transactions and to create future projections based on transactional trends in the past. This gives the business owner a clear view and full understanding of their cash flow position.
They can plan ahead with confidence. One feature of the Lulaflow product is to alert the business owner when regular payments are not coming in on time and of the potential impact on cash flows.
Gosling says it has an impressive dataset on the operations and needs of small businesses as a result of engaging with its clients on what they need to survive and thrive.
“That has assisted us in understanding what products we need to develop in order to service this market better.” Besides the recent launch of Lulaflow, it is in the final stages of developing a transactional account to help customers with their business banking needs.
“We will launch our digital transactional account for SMEs in the coming months. Our business ethos has always been about speed and technology to ensure the success of SME businesses.”
The aim is to build a complete financial offering, from much-needed access to credit (Lulalend), and business support (Lulaflow) to a transactional account (Lula) on its digital platform.
Brought to you by Lulalend.
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