20 Sep Building a financial collective could save our economy
Building a financial collective could save our economy
According to Stats SA, 40 percent of our GDP is generated by small and medium companies. Others have put this number as high as 60 percent. As South Africa continues to fight its way out of the jaws of a looming recession, it’s the owner-run businesses and SMEs which continue to keep the economy ticking over.
However, these valuable contributors are not always afforded the support they need. Commercial banks, under increasingly stringent regulatory pressure and a shrinking appetite for risk, are often simply not able to extend the vital growth capital these businesses need, putting not only jobs, but our GDP, at risk.
The answer to this challenge does not lie in changing the rules and regulations governing lending, but in a fundamental change of mindset from the greater business collective.
If you can’t lend, pass it on
South Africa does not find itself in a unique situation. In an effort to promote lending competition and fill the growing SME funding gap, the UK government turned to technology and regulation to find a solution.
In November 2016, the British Banking Association launched the Banking Referral Scheme.
Each time one of UK’s nine largest banks turn down an SME’s application for funding they are required to offer the business owner the opportunity to have their details shared with one of three digital platforms: Funding Xchange, and Funding Options, and Business Finance Compared, with Alternative Business Funding becoming the fourth platform on 1 November. Each of these works with dozens of alternative finance providers.
Relying on an algorithm, the platforms match companies to the best lenders and products for their businesses. The technology analyses a series of data points about the business, its history, trading style and what they are looking to achieve in order to find the most suitable potential lenders. The platforms also generate a probability factor for each match. The service is free to the SMEs, and a finders’ fee is paid by the lenders, which have secured the new business.
While the scheme has not been without its critics, at least one of the platforms (Funding Options) has gone to extra pains to include a team of experienced business finance specialists to assist with the more complex deals. According to the company, it has secured millions of Pounds of finance with more than 40 alternative finance companies.
What we can learn from the UK
According to Stats SA, large businesses now contribute three percent less to the GDP than they did just two years ago. The economy is now relying more heavily than ever on medium and smaller companies to keep the economy ticking over.
SMEs have always struggled to gain access to finance. However as banks become increasingly wary of taking on risk, even medium and larger companies are finding access to growth finance difficult. However, accessing finance still remains one of the biggest challenges for local SMEs.
There is no shortage of effort from government structures. The DTI’s Black Industrialist Programme, (although drawing criticism) is a sure step in the right direction. So too is the recent announcement from the World Bank’s International Finance Corporation, which loaned FirstRand $200 million which will be on-lent to local SMEs.
Added to this, the number of alternative lenders is growing exponentially in South Africa. Paragon deals with almost 100 commercial and non-bank lenders alone, and this number is growing on a weekly basis. The argument that there are no lenders out there is clearly false.
The problem remains that business owners have no central or coordinated repository where they can find these lenders.
More than this, they often have nowhere to turn when they are looking for advice. Business accelerators abound. Start-up incubators are growing in number and influence. Yet business owners are still hopelessly ill informed about how to access finance and what kind of finance they should be looking for. And this lack of awareness extends to owner-run businesses which already have turnovers in the hundreds of millions.
More than simply accessing the right finance for the deal, local businesses generally lack teams of advisors who they can turn to for guidance. The culture of mentorship seems to be missing in the local market.
If South Africa were to implement a solution like the one in the UK, we would need to learn from their mistakes.
Requiring banks to pass on lending applications which have been turned down is a good start. However creating a collaborative solution designed by the full lending ecosystem – both traditional and non-traditional, and supported the myriad of business advisory outfits – would be the smart way to go.
Evidence from the one UK solution which did work, shows us that the key ingredient in success is designing supporting functionality around the offering. By giving SMEs and owner-run businesses a full service offering, enabled by solid platform technology and drawing on success of the ecosystem economy, we have an excellent chance of boosting the number of successful loans.
A solution ike this would also assist the many successful, established owner-run businesses and high net-worth individuals, (many of whom are used to only dealing with their banks and traditional lenders), access a host of new lenders and new products – and by extension enable more investment and more deals. We would be stimulating growth, creating new jobs, and making sure that an otherwise stalling economy is given the boost it so desperately needs.