Small business: Here is how to access financing

JUNE 20, 2016

Surveys indicate that one of the major reasons for small/medium businesses (SMEs) going out of business is cash flow issues. SMEs are the most powerful generator of jobs in the economy and thus their financial wellbeing is extremely important. In South Africa there is no large scale venture capital or private equity industry. Government does offer incentives but they are not well marketed and can be difficult to access. That leaves the major banks and one or two other funders.

A recent survey by the Reserve Bank found the following when looking at bank loans:

  • Loans to medium sized businesses have shown healthy growth over the past few years. These are defined as entities with annual sales in the region of R400 million. Loans to this category grew by 80% from 2008 to 2015.
  • In the small business sector there has been no growth at all. This segment is defined as loans of up to R7.5 million. The total loan book of banks only exceeded April 2008 in October 2015.

Why do small businesses find it hard to access loans from banks? 

Since the global financial crisis banks have become more conservative and risk averse. In this environment, small businesses are the first to suffer. SMEs less than two years old have been particularly hard hit. As they have no meaningful track record, banks are loath to lend to them unless they have good security and a good business case.

The pattern shown in the Reserve bank report is that banks like to begin with transactional banking. They thus open current accounts, money market accounts and see how the businesses operate. Once the banks are comfortable with the business they will then consider advancing loans. The problem is that new businesses are cash hungry when they start and often if they get through the first two or more years they can come up with a creative plan.

Are there finance houses out there?   

Yes there are. The one that springs to mind is Business Partners which in 2015 increased lending from R673 million to R1 billion. This type of lending comes at a price – interest rates are higher and very often the finance house takes an equity stake in the business.

So what to do

  • Be very cost conscious. Careful budgeting should be done
  • If you need to borrow money, you need to be precise. The funder will want to know:
    • How much money do you need
    • What will it be used for
    • When and how can you pay back the loan?
  • Make sure your credit record is good. If you have an adverse credit history, settle old debts. With current technology, potential funders will almost certainly unearth your history, so be upfront about it
  • Try to build up some form of security and/or establish sound relationships with stakeholders such as suppliers and debtors 
  • Remember it can take several months to secure funding so take this into account.

Article sourced from the Mazars Messenger by Mazars. Visit