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ECONOMY: Responsible Cash Advance Industry Set to Change Growth Of SMEs


Recent Western Cape Business News

A RECENT economic survey by the Organisation for Economic Co-operation and Development (OECD) calls for boosting entrepreneurship, which is low in South Africa when compared to other emerging economies, and the growing of small businesses that can be crucial to economic recovery and job creation.

Part of the challenge is that the growth of the SME sector has traditionally been hampered by limited – or non-existent – access to finance. Yet the formalisation of the merchant cash advance industry is set to change all that.

With the current economic pressures facing South Africa, and an increasing unemployment rate, SMEs have a significant role to play in sustaining this country’s economy as well as in creating jobs for many of its citizens. According to some researchers, SMEs make up 91% of formalised business in South Africa, provide employment to about 60% of the labour force and account for roughly 34% of South Africa’s GDP.

However, one thing that is holding back many SMEs is access to finance. Studies have shown that only an extremely small proportion (2%) of SMEs in South Africa are able to access bank loans, and that they make almost no use of suppliers’ credit. When SMEs do apply for credit, as much as 75% of their applications are rejected.

“Small and medium businesses often struggle to get access to finance through traditional banking institutions, which potentially leaves them at the mercy of microlenders who charge exorbitant interest rates and have no vested interest in the success of their enterprise,” says Karl Westvig, CEO of Retail Capital, a merchant cash advance company.

“In many cases SME owners have to resort to borrowing from friends or family or using whatever cash they have at hand at any given time,” says Westvig. “This affects their ability to fund business development activities, resulting in changes to their risk profile as well as creditworthiness for future applications.”

It is for these reasons that Retail Capital spearheaded the formalisation of small business lending in South Africa through the creation of the South African SME Finance Association (SASFA), and the publication of its code of conduct to protect itself and its customers.

“The SME market is such a vital part of the South African economy, yet it encounters so many barriers to realising its true potential,” he shares. “With access to finance being one of these, there is potential for unfair lending practise and exploitation. The formation of SASFA and the publication of its code of conduct will go a long way to regulating the industry – which will in turn make it easier and safer for SMEs to access finance.”

The code of conduct calls for member organisations to adhere to four key operating principles: transparency, responsibility, fairness and security. It also provides guidelines for how to achieve these, relying heavily on the British Bankers Association Lending Code, upon which it is based.

“As the member organisations are committed to being recognised as reputable and ethical lenders in this space, it’s in our best interest to adhere to this code of conduct,” Westvig shares. “Should we fail to do so, SMEs have a channel to complain back to the Association, and this sustains our collective good names.”

At the same time, there is a global trend for venture capital investors to shift towards the later stages of business development, making it very hard indeed for these entrepreneurs to secure the finance they so sorely need. This is an unfortunate catch-22 situation for young enterprises, which need the capital to grow business, income and staff capacity.

In trying to identify the right business cash advance provider for their needs, SMEs should bear these facts in mind:
· The application process should be simple and the advance provider willing to support the applicant and explain the steps involved
· The cash should be made available within a short turnaround time – five days is a reasonable expectation
· Cash advance providers should be fully transparent as to the costs and terms of the repayment, supported with clear, explanatory documentation

To illustrate its commitment to these principles, Westvig explains that in the past two months 94% of loans applied for through Retail Capital were granted - predominantly in the industries of hospitality (29%), device finance (21%), retail (18%) and wellness (15%). “Funds were also made available to the borrowers in under two days, underscoring the company’s commitment to provide liquidity to SMEs.”

“Liquidity is a valuable tool for SMEs, and the barriers that stand in their path need to be overcome. We are confident that the formation of SASFA and the publication of our code of conduct will go a long way to providing financial support to this industry sector,” says Westvig.

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