The evolution of SMEs & business finance

It’s undeniable that SMEs are the lifeblood of the global economy, with the sector accounting for 90% of all businesses worldwide and 50% of employment. In South Africa, small businesses and start-ups faced several challenges over the last two years, while still reporting a 62% growth over the past year according to Xero.  

The in which SMEs operate locally has transformed drastically, which helps to drive this growth. Small business owners are eager to expand into new markets and are willing to boost their tech and cloud skills. One of the biggest contributors to the growth and success of SMEs in South Africa has been improved access to financial products.

Easier, faster, and cheaper access to finance is partly owed to the rise of alternative finance. This is a sector that has risen due to the failure of traditional banks to accurately understand the needs of small businesses and respond quickly enough to these needs.

Technology development

South African SMEs’ rapid growth has been augmented by the development and integration of technology. Mobile payments is a perfect example of how technology can be used to catapult a business forward. According to Research & Markets, the mobile payment industry in South Africa is expected to record a CAGR (compounded annual growth rate) of 12.9% to reach US$ 29,4 million by 2025.

Snapscan, Zapper, Yoco, and Peach Payments have all made it much easier for transactions to now happen both contactless and online.

Peach Payments’ brand lead, Yudhvir Ranchod, says helping SMEs to integrate payments technology into their offerings has been a critical factor in growing the local market.  He says, “Digital payments help reduce errors, automate processes, free up administrative time and give consumers a safe, trusted means of paying for goods online, allowing business owners to focus on building a sustainable offering.”

Invoicing software shapes SMEs

The rise of platforms like Coupa, Xero and Zoho Books have allowed SMEs to structure their invoices for scale and to service corporate clients. This ultimately empowers business owners, as Blue Chip companies often want to (or need to according to their annual quotas) work with SMEs. These platforms allow business owners the ability to track and manage their invoices in a far more efficient manner.

“One of the biggest benefits of using an invoicing platform such as Xero, is that it provides SMEs the ability to set up automatic reminders as invoices become due and regular reminders once overdue. As any small business owner will tell you, cash is king,” adds Chloe Blumberg, co-owner of Finance Studio.

New capital-light businesses

Once viewed as a defensive tactic by underperforming businesses, the asset-light business model is now viewed as an essential model to overcome challenges and strengthen financial results.

With an asset-light business model, the business owns fewer capital assets e.g. company cars or office equipment are leased rather than bought. It’s a great way for SMEs and start-ups to aim for big goals whilst offsetting risk, compared to traditional business models.

South African SMEs over the last few years have been far more inclined to adopt this business model, where the business owns the operational part of the company, and the rest is outsourced. The benefit here is that SMEs can scale up faster and expand other parts of their business rapidly. Failing quickly is cheaper and less of a risk, so the growth curve is more rapid.

Although these strategic partnerships are an effective way to outsource, it can also leave businesses in a vulnerable situation where these external services are disrupted. The big sacrifice of not owning assets as an SME, is it often makes it more difficult to get traditional secured finance. In SA we have seen an increase in alternative lenders who cater for SMEs who may be faced with these financial issues.

The highs and lows for SMEs

According to McKinsey, SMEs in South Africa represent more than 98% of businesses and employ between 50 – 60% of the country’s workforce across all sectors. These businesses are also responsible for a quarter of job growth in the private sector. SMEs are one of the fastest and biggest job creators, in addition to raking in over R10,5 trillion in total turnover annually.

SMEs today look a lot different to what they did 10 years ago, one of the biggest attributions to this has been the need and capability to innovate. Smaller enterprises can respond rapidly to changing consumer and business needs, which is often driven by a start-up mentality combined with a spirit of resilience. The winning recipe is that SMEs are both reactive and proactive, allowing them to create a dynamic shift in the economy.

Challenges are abundant for SMEs, and curveballs are thrown their way daily. One of the many problems is that government support is lacking for SMEs, especially in the case of funding, where only 1.8% of all SME loans are government-backed.

In comparison to other developing countries like Brazil or Chile, the SA government falls by the wayside in giving SMEs all the necessary tools they need to succeed. Government incubators and support networks are non-existent, coupled with load shedding and expensive corporate tax which cripples the SME sector.

How do SMEs then survive in a South African climate? Perseverance and motivation combined with the support of larger corporates and innovators. These companies and people are rallying behind small businesses to ensure they succeed.

Business finance revolution  

A huge gap has been created in the market mainly because of the barriers to accessing traditional finance. Alternative lenders aim to fill this gap by creating innovative, customised and affordable financial products for SMEs.

It’s evident that alternative lending is one of the fastest-growing funding sectors in South Africa, with total transactions valued to reach over R400 million by the end of 2022. These lenders are here to stay, and marketplace platforms like FundingHub provide the ideal environment for business owners to get the best price and terms for the business finance they need.

Christopher Ball, co-founder of Finch Technologies, believes the traditional methods of getting business finance are a notion of the past, businesses now want finance when they need it and in the right form.

He says, “Large corporates are looking to help their suppliers and customers. One of the tools they can use to help cashflow, is by providing customers with a business finance marketplace platform with integrations to several lenders and multiple funding types.”

For SME lenders, it’s also provided a growing bank of data which can be leveraged in their credit decision-making. This assists them to make predictions and compare data to other developing countries. The data can also be used by other interested parties to make better decisions and predictions, for example, the government can use this data to make interest-rate decisions based on inflation.

As a start-up or small business owner in South Africa, you will be wearing many hats while juggling the economic and political climate. Embarking on a business finance journey can be daunting, making financial education a mandatory stepping stone.

But, business finance has evolved to become a much more transparent process, where the intention is not to catch business owners out but rather to guide you in making the right decision to suit your financial needs.

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