With more than 2.5 million small and medium sized enterprises (SMEs) in South Africa, you’d imagine that getting funding for these businesses would be simple. However, accessing funding remains the largest challenge faced by South Africa’s small businesses. In fact, there is a R86 billion – R346 billion funding gap according to a study sponsored by the SA SME fund.
The good news is that a problem this size draws out innovators who see opportunity. South Africa now has a growing and thriving alternative lending sector that is focused on providing funding for this market by developing new lending models, a specific focus on certain sectors, using data in new ways and finding different ways of assessing risk which are in some parts more appropriate for this market than the approach taken by banks.
Dominique Collett, head of AlphaCode, which incubates, accelerates and invests in early stage financial service ventures, explains: “We’re interested in helping fintechs that are doing things that the banks aren’t doing well. SME lending is a massive gap and a global problem. As SMEs are the lifeblood of any economy, it’s important that these new financing players succeed and meet the needs of this market.”
Johan Bosini, partner at Quona Capital which invests in tech businesses providing financial services for under-served consumers and SMEs in emerging markets explains, “South African banks have historically focused on consumers rather than small businesses as businesses are less homogenous and therefore more complicated to service. Our banks’ credit products are usually inflexible in their loan requirements and take a long time to process more complicated credit applications. Banks can at times provide better pricing than alternative lenders, but small businesses often need funding immediately as opportunities present themselves and they are willing to pay a premium for speed and flexibility.”
Bosini believes that South Africa is going to see a lot of activity in this sector. Startups, banks and insurance companies will better focus on this market due to its strategic importance – this is the sector from where more job creation will come. “There needs to be healthy competition and multiple players to grow the entire ecosystem. We will see more collaboration to support small businesses. So much more needs to be done,” he concludes.
Finfind data shows that startup capital, buying equipment, expanding businesses and working capital are the largest funding requests in SA.