Statistics SA estimates that 11% of small businesses in the country disappeared as a result of Covid lockdowns. Of the 2.3 million businesses left, only 30% are in the formal market, the rest are informal.
“This is a problem for the country because SMEs are the main engine of employment in the country,” says Jonathan Goldberg, CEO at SME financing group Preference Capital. “These businesses need support, and they have historically been shunned by traditional financing houses.”
The pain inflicted by Covid is reflected in Statistics SA data which shows unemployment hit an all-time high of 35.3% earlier this year. The SME sector was hardest hit by the Covid economic contraction, and many of those entrepreneurs that closed their doors may take years before they re-enter the market. Similarly, jobs lost due to business closure will not be easily recovered.
“Unfortunately, the impact of the Covid lockdowns will be felt for years to come. I’m happy to say that our SME clients had a higher survival rate than the average, because we were able to assist them with finance when it was needed most, and by getting their financial affairs in order,” says Goldberg.
“Many of these business closures that we have seen could have been avoided.
“This is why our clients have a higher survival rate. We help them get on top of their cash flow and put their balance sheets in order, in a responsible manner.”
Traditional banks are ill-equipped to service the SME sector, which is a niche that Preference Capital decided to enter when it was formed in 2014.
Goldberg points to two primary problems with the traditional banking approach to SMEs:
- Banks are not well set up to service small businesses. A prime example of this is the cost of extending loans, given the onerous and costly regulatory compliances to which they are subjected. Says Goldberg: “It doesn’t pay the banks to make ‘small’ business loans of say R250 000 due to the banks’ structure and regulation. It makes far more economic sense for them to lend larger amounts of money and that inevitably brings them into the larger corporate sector. That leaves the SME sector largely ignored. With Covid, banks have moved up the risk ladder, and that’s left a gap for people like us servicing the SME sector. Take trade finance, for example. We consider a R7 million to R8 million trade finance deal as a good deal for us, but banks won’t really look at that. So I see banks creating competition for themselves through their approach to the SME sector.”
- When things go wrong, banks often jump to liquidate, with little effort being made to find more creative solutions to the problem. “When things go wrong with us, because we are not a traditional bank, we can sort it out with a phone call,” adds Goldberg. “We can offer repayment holidays and do all kinds of magic to reduce the cash flow strain on the client. It comes down to the personal relationship. As long as the client remains in communication and we understand what is going on, we can come up with a good solution to their cash flow problems. Banks do not have anything like that degree of flexibility.”
The realisation that the banks were ill-suited to servicing the SME sector created the gap in the market now filled by Preference Capital, which brings a mix of skills – from high-level corporate advisory to traditional banking, risk assessment and sector specialists – to an SME sector normally starved for this type of talent.
“Advice is critical in what we do. Of course, funding is essential, but it is how this funding is applied in the business and when it is applied that we are able to help with,” says Goldberg.
Preference Capital was set up to offer a full suite of financial solutions for SMEs, from asset finance to short-term business funding, invoice and purchase order finance, trade finance and treasury risk management.
‘Selling’ money is not like selling computers
“When you are selling a computer, there’s plenty of choice and you won’t make a big mistake going one way or the other,” adds Goldberg. “When you are offering money, it’s different. Some people need equity in the business rather than debt, and they may be better off getting that from family members, or friends. In other cases, some short-term working capital, or trade finance is needed. It’s important for the business not to become over-reliant on debt and that is something we assess upfront: whether a business can afford to repay the debt and not require constant debt roll-overs.”
Most Preference Capital clients have pre-existing relationships with the major banks, any many have some kind of credit facility with them. That sounds like the banks are servicing their SME customers, but it’s the nature of the credit that is the problem, says Goldberg. “For example, the business may have a debtors book of R10 million and the bank extends the business a R1 million overdraft. That doesn’t really help the business owner, but he will take it anyway. What may be more appropriate in this case is invoice financing.”
Speed is of the essence
A common complaint against the banks is the length of time they take to process a loan application, and the volume of information required. It can take four to six months to get a bank loan approved.
“We try to make sure we get money to our clients within two to three days of getting the information we require,” says Goldberg.
How Preference Capital is disrupting the SME finance market
“You can come to us for two things: funding, and inter-personal relationship, and this is the one that’s key. Our clients have someone on the other end of the phone that they get to know rather well. Our relationship manager gets to understand your business at the deepest level. Communication is the most important factor in all relationships, and the worst thing is when someone owes money and goes quiet. We want the communication channel to remain open. If the client has a problem, we can always make an arrangement that works for both sides.
Brought to you by Preference Capital.
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