An early payment revolution is about to hit the SME market
MoneyWorks's Thandeka Zondi plans to get SMEs their working capital from government and big corporates.
Late payments by big corporates and government can spell disaster for small business. But CA and entrepreneur Thandeka Zondi may just have come up with a FinTech solution that will see SMEs getting paid on time AND save large institutions money. Sounds too good to be true? Thandeka has all the ducks in a row and is set for launch in the second quarter of this year.
Speak to any small business owner and they will tell you that cash flow is their biggest challenge. They have to spend money to make money, but all too often, late payments from government and big business means that there is no money to spend and so the wheels stop turning. Enter Thandeka Zondi, a 37-year-old chartered accountant who has hatched a plan to launch a FinTech company that supports SMEs in getting early payment from large organizations.
In the early career, Thandeka worked at the Auditor General . “The AG contracts out of a lot of work to black firms and one of my roles was to work with those firms. I started engaging with them to find out what their key pressure points were. Their most urgent plea was, "Can you pay us sooner?"
Then she moved to a medium-sized black firm herself, she was fascinated to see that it was facing exactly the same challenges. "It was a great business, delivering great solutions, but we were spending too much on executive time chasing clients for payments."
She thought about how to provide solutions for SMEs to reduce this strain on their cash flow. "Initially, I wanted to streamline their back office so that they would be able to get financing, but as I started to look at the processes in different ways, I grounded to a FinTech revolution."
Laying the groundwork for success
Oxford University's Said Business School had just launched its first FinTech program, which Thandeka gave to herself as a birthday gift. “It was very expensive, but it was a good gift. While I was doing that course, I came across digital supply chain finance, and gained an understanding of how it was gaining momentum globally, and I wondered if it couldn't be a solution for some of the challenges facing the small and medium-sized business sector in South Africa that I had come across with a particular focus on black owned businesses. ”
In South Africa, as the economic situation remains depressed, the challenges for SMEs are increasing. “Working capital is critical, but no corporate is going to put pressure on their balance sheet to pay someone early. Suppliers are going out of business waiting for the public sector to pay. So I thought, what if I partnered with those corporates and the public sector? I would pay their suppliers early, and they could pay me later. In addition to the benefit of working with sustainable SMEs, they will be comfortable that an early payment program with MoneyWorks will provide them with the benefit of claiming BBBEE points for early payments to qualifying SMEs. ”
Unlike most businesses, Thandeka's MoneyWorks platform has growth of SMEs and transformation as a cornerstone. The financing solutions are targeted at improving access to working capital by black-owned or partially black-owned SMEs. She plans to offer two solutions that will ultimately improve the working capital of SMEs.
With the first solution, MoneyWorks will partner with corporates and public sector institutions to establish an Early Payment Program utilizing their credit credentials that will enable SMEs to apply for Early Payment (EP). The SMEs will upload their invoices for services provided on the MoneyWorks system. MoneyWorks will pay the SME the approved invoice value less an EP fee within 36 hours. The corporates and public sector institutions will settle MoneyWorks in line with the payment terms originally applicable to the SME.
“There are all sorts of costs involved in late payment, ranging from reputational to legal. In the Public Sector for example SMEs have gone under waiting for payment and those that can afford to have governmented for the money owed to them. Government has to respond and pay legal costs which has seen a rise or fruitless and wasteful expenditure as result. "
She explains that national and provincial departments and entities had R319 million of fruitless and wasteful expenditure due to penalties and interest on overdue accounts and late payment in the 2017/18 financial year. In addition, over 30 percent of the national and provincial departments were cited by the Auditor General as unable to pay creditors within the legislated 30 days in the 2017/18 financial year.
"This solution will reduce this number and statically significantly if the national departments sign up with MoneyWorks because suppliers will be paid on time which will result in a reduction in late payment interest and legal fees dealing with summons."
The second solution partners with established large and medium-sized women or black-owned business to establish a supply chain financing facility that will enable them to extend their payment terms to suppliers. This means MoneyWorks will settle their suppliers within the 30-day payment term and they will have 60 to 90 days to pay MoneyWorks. This solution provides a working capital solution that until now they have not been able to access which had constrained business growth.
“The idea behind these solutions is to be creative around growing SMEs. That’s really my passion. This country needs to create jobs right now, and for businesses to create jobs, they need to grow, and to do that, they need cashflow,” Thandeka says.
Funding and financials
Thandeka has secured start-up funding from Resultant Finance, where she sits on the board and is acting as a chief operations officer.
“I proposed the idea to them, and they could see how it could deliver benefits down the road. They said, ‘We like what you are trying to do in this space, so we will give you enterprise development funding to grow this platform.’ They do asset rental financing. So they have the pipeline and the deals. We have a similar methodology for financing businesses, and the same philosophies around making sure there’s compliance. So Dr Mdu Gama, a director at Resultant Finance, has given me financing and access to his team to assist me as I build MoneyWorks,” she says.
In addition, she is talks with equity investors who share her passion for entrepreneurship and transformation through access to finance solutions and will bring to MoneyWorks deep skills in capital raising, credit assessment and building successful businesses.
Thandeka has Cat I and Cat II regulatory approval from the FSCA to establish an alternative fixed-income fund that will be underpinned by SCF and Asset Rental Finance transactions executed through the MoneyWorks Platform. “We’re targeting a 15 to 25 percent fixed income return which is higher than the traditional fixed income funds as well higher than the pooled Private Equity IRR of 8.5 percent over three years without the equity risk.
The fund will provide funding for the facilities to be provided on the platform to enable the supply chain finance transactions and the return will be based on the fees charged for the facilities.
The risks for the fund are reduced by the processes built into the platform that require the suppliers to the corporates and public sector institutions to enter the appropriate buyers code and for the corporate to confirm and approve the invoice prior to any payment being made my MoneyWorks.
There is limited risk for the fund in making payments for government, because despite all the delays, government generally pays in the end. “They have the budget, but that doesn’t mean it’s always available. It can be dependent on someone else paying them, or on a revenue target. And if they aren’t getting paid, then they also have the cashflow challenge.”
MoneyWorks will be targeting institutional investors in the medium-term to invest in the fund however in the short-term MoneyWorks has established specialised ESD Fixed Income Fund that that will manage some of the B-BBEE set aside ESD funding in the various measured entities to provide an early payment programme for their beneficiaries.
The tech behind the revolution
To find the right people to build her platform, Thandeka went to a lending conference in the United States. After considering various options, she partnered with developers who supply marketplace lending software as a service (SaaS) platform internationally to build an enterprise model tailored to her business model and market which “made me more comfortable, because I am not a developer, I’m a solutionist. The platform as a result is robust, compliant with international best practice, and is hosted on Amazon’s cloud server, which is secure. It’s fit for purpose, and I have people who can deal with a problem if something goes wrong.”
To streamline the onboarding and credit assessment process, she has partnered with TransUnion who have their own data for assessing credit risk, and combined this with other analytics so that the platform will “spit out someone who isn’t great. One corporate or public sector institution might only qualify for a R5 million facility, while others might qualify for R25 million.”
In addition she has digitised the FICA requirements of running a fund and providing credit and contract management and approval. “I’ve spent the better part of the last eight months testing different technologies and putting them together in a way that makes a whole lot of sense while also complying with all the applicable regulatory requirements.”
At the time of publishing, Thandeka was engaging potential buyers to establish an Early Payment Program. The target date for the MoneyWorks launch with the initial buyers and funders is Q2 2019.
The SME payment revolution has begun!