It's time to disrupt the funding landscape in SA, says Outsourced CFO's Louw Barnardt
Massive outflows of foreign capital from our borders. Slow economic growth and tough global trading conditions. Difficult regulations and red tape. Upscaling private companies in SA is a massive task. But if we’re serious about growing our base of job-creating private companies, something needs to be done. As a nation desperate for job creation, we need to delve deep in order to understand the critical constraints for unlocking growth. These are the thoughts of Louw Barnardt, co-founder and MD of Outsourced CFO, a financial management boutique of CAs which assists private company clients in gaining access to innovative funding solutions. The SAICA SME report states that, “According to SMEs, the main reasons for business failure are overwhelmingly cash-flow related”. A business of any size and in whichever industry needs financial stability to operate sustainably. Aiming to expand is an even more complex objective that requires SMEs to raise growth finance. Taking this into consideration, how can SMEs be expected to operate sustainably as well as grow, if accessing finance proves to be one of their greatest obstacles? The SAICA SME report concluded that SMEs start with too little capital, collect debtors late, are subject to bad debts, and have overheads that are too high. Government expects that 90 percent of new jobs will come from SMEs. Therefore, big businesses and the public sector need to realise that SMEs will be crucial for growth of the fiscus as well as the private sectors turnover. This then concludes that SME growth is not only to the benefit of the SME, but in the best interest of big business and the public sector.
The tough criteria, vast amounts of paperwork, high interest rates and general unwillingness to lend out money has given traditional funding institutions a bad name among entrepreneurs. The floor is open for new and innovative ways to solve this funding issue.
One of the key developments has been the rise of peer-to-peer lending(P2P lending). To quote Wikipedia, "Peer-to-peer lending is the practice of lending money to unrelated individuals (or companies), called 'peers', without going through a traditional financial intermediary such as a bank or other financial institution."
P2P lending platforms could be the answer to providing affordable funding to SMEs. In quoting interest rates to borrowers, the answer lies in the margin. P2P lending, being online-based, eliminates many of the high overhead drivers of traditional funding institutions, such as large physical offices and massive payroll costs.
This enables these platforms to offer lenders higher yields on their savings, and to offer borrowers lower rates on their loans, all because they require a much smaller margin to cover their costs. Magic!
Score cards that are designed to determine each borrower's creditworthiness by looking at its financial health and expected future cash flows assist P2P funding platforms in allocating capital. Borrowers then receive money from multiple verified lenders at competitive interest rates and low fees. Drawing from the platform's credit rating expertise, lenders also benefit from its services in what appears to be a win-win solution.
This, along with other exciting new ways of getting funded, is working its way into the market to offer innovative solutions to the company that's ready for growth. With Section 12J also slowly moving more into the spotlight, new life is being breathed into the venture capital space.
Section 12J allows investors in a SARS-registered Venture Capital Company a 100-percent tax deduction for their investment. On a 41-percent tax bracket, this means that an investor only has a 59-percent exposure on his money, but with 100 percent of the upside. This serves as government's mechanism to channel high net worth individuals' investment portfolios into young companies. The launch of Grovest VCC's latest fund, GroTech, aimed at disruptive technology companies, as well as other new funds raising capital, sees more players coming into the venture capital space, with more investors waking up to the opportunities of this asset class.
Money is available. It is up to founders to ensure that they are ready for funding. Companies need to look long and hard at their ability to clear a due diligence and also to present a unique offering that makes business sense to a funder. Businesses that have their house in order, can prove sustainability and growth as well as a unique value proposition just need to keep knocking.
As a country, we have so much riding on the success of SMEs. Starting new businesses and upscaling existing ones stands alone among the seemingly decreasing pillars of hope for our economy. Seeing more and more disruption in the funding landscape fuels our opportunity to create a sustainable South Africa with inclusive growth and enough jobs for the hands of our people.