DAVID Lewis is chief executive of Retail Capital.
SUMMIT TV: There is growing evidence more entrepreneurs are experiencing difficulties getting their businesses off the ground, and one of the key challenges is getting finance once they've been declined by the banks. David, what are the key challenges South African businesses are facing, given the tough economic climate?
DAVID LEWIS: Small business owners are a big part of the South African economy – employing two-thirds of South African workers, and generating over half of the gross domestic product. These are typically businesses that use debit and credit card facilities for their customers to pay: restaurants and bars, medical practices and retail outlets.
We did a survey of 25,000 of these people and it was very interesting because the current climate is challenging and consumers are experiencing food, transport and fuel inflation, so discretionary spending is under pressure. In addition business owners are facing higher municipal rates and margins are decreasing.
The single biggest challenge seems to be accessing funding that's flexible and available without long delays. The banks seem to be reducing overdraft facilities and are being far more conservative, requiring more security and a longer track record.
STV: In a country where close to half-a-million small businesses have closed shop over the past five years, what are we doing wrong?
DL: There's lots of reasons why businesses close down. The environment has been challenging so we have to look for efficiencies in the short term, limit expenditure and grow income just to remain in business.
In a global marketplace where resources and alternative products might be available at a lower cost than locally, that's an additional challenge. Business owners are often passionate about their products, but don't always focus on cash-flow management or structured finance planning.
If you think about a restaurant owner they often have a flair for great food and customer service and they bring these attributes together but they don't have strong financial or accounting focus. Most small businesses, especially in this segment, will have some form of cash-flow crunch during the trading year, and one will see that with the off-peak season or with an unexpected expense like equipment failure.
Small businesses don't have cash reserves readily available and their ability to access working capital in a short time frame is just not there.
STV: Why are some business loan applications declined by banks? Surely it's not just a business plan that is not good enough?
DL: The trade facility granter is saying they need to make money in terms of interest income, and that needs to be higher than the costs of the application, providing the money and managing the accounts and losses.
Certain types of businesses are perceived as higher risk, for example start-ups where there's only a business plan, are much higher risk than established businesses - so the banks are much less likely to grant funding there.
Certain types of industries are much higher risk, based on known business failures, for example independent restaurants where failures are well publicised.
In the marketplace there is a perception that the cost of borrowing money is high, but in reality the market is much lower than for goods and services. For example we happily pay three to four times the cost of a burger in a restaurant where we think prime plus 5% is a high interest rate.
STV: Are there options for business owners that have had their loan applications declined by the banks?
DL: Yes, there are a few options depending on the business. If we think about businesses that do business with other businesses, there are other options available for equipment purchases where there are leases or they can use purchase order finance, which means fulfilling a large and profitable order, and because they have invoices and a debtors book they can use cash receivables financing.
For business to consumer businesses like restaurants, shops and private practices there are fewer alternatives. Most commonly, they would use their own private credit facilities and even extend their bond if that was available or take out a loan in their personal capacity and use that to finance the business, as well as approaching family and friends.
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