by Sarah Gurney

Money for your small business

Alternative funding when banks decline business loans

SMEs can turn to Retail Capital for business loans
Financial support.jpg

With the latest employer figures revealing a decline in the number of self-employed individuals – from 1 281 000 in the beginning of 2008, to 1 243 000 in the second quarter of 2012 – it is clear that entrepreneurs are experiencing more and more difficulties in getting their businesses off the ground.

David Lewis, Chief Executive Officer of Retail Capital – a business cash advance provider – believes that small business entrepreneurs are a massively underserved segment in the South African banking and credit environment.

“In recent times, the 'credit crunch' and the associated bank liquidity problems has resulted in banks becoming far more conservative in lending policies which has increased overall decline rates," he said.

"Some banks have exited entirely from specific small business market segments that are perceived as 'higher risk'. In short, the business need for working capital has increased, but the availability and accessibility of credit has reduced,” Lewis said.

Retail Capital recently undertook a research survey targeted specifically at those within the hospitality Small and Medium Enterprise (SME) sector, in order to identify some of the issues associated with obtaining working capital in South Africa’s volatile economy.

Unsurprisingly, access to working capital was attributed as the biggest challenge faced by SMEs.

The survey did indicate that the majority of respondents still turned to their banks or a traditional financial institution first when needing to obtain working capital.

However, as many as three out of 10 business owners had previously had their application for a business loan declined by a bank and only 39% of successful applicants rated the overall experience as positive

Respondents attributed the top three reasons for obtaining a business loan to be the desire for expansion, followed closely by the need for equipment and renovation

Almost 60% of applicants cited “lack of flexibility” as the most common frustration when obtaining a business loan from a bank, followed closely by the length of the application process and a poor approval rate. 

After banks, alternative funding providers were listed as the second choice for obtaining working capital. Respondents cited high repayment rates as their main concern when approaching a non-traditional financial institution. 

Seventy percent of respondents found the flexible repayment terms attractive, 41% highlighted “no security required” as a valuable feature of a financial product, followed closely by a speedy application processing period.

Established in the United States over a decade ago, the business cash advance product was introduced to South Africa by Retail Capital in 2011. 

In simple terms, Retail Capital advances a lump sum of the business' future sales – so the business effectively funds its own growth.

Retail Capital takes an agreed percentage of daily credit/debit card sales until the total value that has been purchased is reached, with no fixed payment period.

The key advantages of the product when compared to traditional funding sources are that no financial security or guarantees against business failure are required and that the pay-over process is linked to turnover, so the repayments are flexible – which respondents to the survey highlighted as the most attractive feature of alternative funding. 

Secondly, the application process is simple and comparatively quick – one could effectively have access to the funds within ten days.

The complex and lengthy application process was noted in the survey as being one of the biggest disadvantages when obtaining funding from a bank.

“Only through the support of SMEs will South Africa meet the target of 5 million jobs by 2020, as  entrepreneurship is considered the most important mechanism for economic growth and sustainable job creation. SMEs are the engine which drives new job creation and only through their subsequent support can we be expected to meet this target. If banks are not adept at addressing this problem, SMEs will need to obtain their funding elsewhere,” Lewis concludes.

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