BANKING

Investing in SME development

Morné Cronje, CEO of FNB Franchising
Morne Cronje_FNB Franchising.jpg

South Africa’s economy is currently growing at 1.5%, which is below the levels required to create jobs. The ideal levels of growth need to be between 3% and 6%, therefore, sustained investment in SME development could contribute towards better growth. In addition, the country needs to equally work towards creating an ecosystem which enables SMEs to thrive, such as opening up the supply chains, trading zones and any other resource support small businesses require.

This is how a stronger involvement of SMEs in trade and investment will change our economic landscape, says Morné Cronje, CEO of FNB Franchising.

Cronje says the biggest obstacles SMEs (including franchisees) face when it comes to financing their businesses, vary, depending on the type of business. One of the main issues we should take into consideration is that franchising is not necessarily a small business venture because of the capital investment, which is often required before the businesses even starts operating. Depending on the type and size of the franchise, financing needs will differ.

“As far as small business is concerned, the main challenges we see on credit applications include a lack of a proper business plan; unrealistic revenue projections; limited or no financial track record; limited growth potential and a lack of collateral for the funds required.

“When applying for finance with a lending institution, it’s important for a business, big or small, to be able to prove its ability to repay the debt over the proposed period. There is a great need for funding, but there’s also a great need for resource support and mentoring. Financing options include banks, public sector agencies tasked with uplifting enterprise development, angel investors, venture capitalists and crowd-funding, These are some of the avenues SMEs should explore,” he advises.

As for the import role SMEs can play to boost trade and industry, the significance of SMEs to South Africa’s trade and industry can be seen in the country’s National Development Plan (NDP), which states that the sector will be the key driver of future growth. The Department of Trade and Industry (dti) has introduced a number of legislative amendments, which are aimed at integrating SMEs into the country’s broad supply chain, both in private and public sectors. In May, the dti is expected to introduce new Broad-Based Black Economic Empowerment regulations and a score-card which promotes enterprise development. All these interventions are likely to boost trade between small and big businesses, and potentially result in job creation.

Cronje says the dti has been doing enough on this score since the advent of democracy and has been at the forefront of efforts to improve enterprise development. Currently, the dti is revising the BBBEE score card to further boost the support of small and medium enterprises.

What more can be done – in both the public and private sectors to advance the position of SMEs in favour of banking support? “Over the last five years, Government has shown reasonable intent to create better conditions for SMEs. We have seen evidence of this in the establishment of a dedicated Ministry of Small Business Development as well as the relaxation of certain tax laws. Recently, the Ministry of Finance announced a R3.5 billion budget for mentoring and training of SMEs. Having said that, a lot still needs to be done. There is an indication that both private and public sectors are realising that the challenge to boost SMEs requires strong collaboration. In 2012, FNB partnered with the Companies and Intellectual Property Commission (CIPC) to enable a simpler and more effective process of registering new businesses. We need to see more partnerships of this nature in order to rapidly address the systematic and resource challenges faced by small businesses.”

Historically access to finance in South Africa has been more limited for start-ups, micro-enterprises, entrepreneurs from previously disadvantaged communities or any other group with limited collateral or weak (or limited) credit histories. But does this indicate a weakness in the banking environment or in credit allocation?

Cronje says over the last decade, banks have been among the leading institutions which have played a pivotal role in SME development. Currently, some of the banks have dedicated programmes which address various challenges that SMEs face, including funding.

“The regulations of South Africa’s financial services sector demand that banks do all the necessary due-diligence before granting credit. These regulations are designed to protect both the applicant and the bank. Even though banks continue to invest in financial inclusion, which is also targeting rural areas, great deal of work still need to be done.”

According to Cronje, a lot can be done to have a positive effect on SMEs’ access to finance:

  • South Africa needs a bigger pool of angel investors and venture capitalists.
  • We need to build an enabling ecosystem.
  • Co-ordinated mentoring or incubator programmes need to be developed.
  • Better integration of SMEs into supply chains of corporates and public sector will need to happen.
  • Businesses need to ensure that their companies have a clear ‘profit path’ because this will boost their chances of securing finance. For instance, if a business has guaranteed contracts, they could use those as an assurance that the loan will be repaid. In addition, there should also be a track record of the company’s finances because banks do consider a businesses’ track record on lending decisions.

He says there is currently no compelling data which indicates the position of SA banks towards SMEs compare to other developing countries. “However, every environment is different and in South Africa, we have a long history of economic exclusion; therefore, plans to boost enterprise development across the country only started post 1994. That said, it is our belief the broader South African society, including banks, continues to show genuine commitment to boosting enterprise development. Significantly, South Africa also has an opportunity to exchange expertise and best-practice with emerging economies such as China and India through BRICS.”

Talking about National Treasury, the Financial Services Board and the South African Reserve Bank have been supporting and promoting finance for SMEs, Cronje says they continue to play a key role in enterprise development. “The focus of state institutions on SME development is largely around creating an enabling operating environment, rather than being actively involved in financing. National Treasury continues to incentivise support for SMEs and allocate budget to better the ecosystem. On the other hand, SARS has been very effective in terms of ensuring that tax amendments affected SMEs are implemented timeously and effectively.”

Nilo Abrahams

 

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