New approach needed for SME finance that looks at data not outdated processes

Small business growth is being hindered by a lack of access to finance as entrepreneurs struggle with antiquated bank assessments that rely too heavily on outdated manual processes and criteria.

In the 2016 National Small Business Survey business owners revealed that lack of funding or insufficient cash flow was the number one obstacle holding back their growth.

Of those surveyed, 25% had applied for some form of finance in the past 12 months, typically for growth, working capital, or equipment finance. Is this perhaps why in a recent study only one percent of SMEs that started with fewer than five employees were found to have grown to employ 10 people or more?

‘By using outdated risk methodologies for SME finance, funders are unable to better assess whether each business owner qualifies for a loan’

Aside from basic business skills, I would argue that a lack of finance – especially affordable short-term financing – is the main killer of South Africans’ entrepreneurial spirit.

Quick cash is king

For smaller businesses, cash is king. Bigger companies can predict their revenue and make fairly accurate estimations of their cashflow at any given time.

Smaller businesses don’t have that luxury – for them to survive and grow, they need to be able to take advantage of emerging opportunities at short notice. Quite often, first mover advantage can make or break a small business’ success.

In one recent example, a small supplier to the mining industry was asked to fulfil a large order at short notice. By being able to quickly access finance, he could fulfil the order and grow his business to the next level. The business continues to grow to this day.

Short-term finance is also critical to overcome the inevitable bumps on the road to success. If, for example, a key client fails to pay his invoice on time, a small business owner may be unable to pay salaries, which in turn has a knock-on effect on productivity, output, sales, and revenue. This can easily escalate to a crisis; in some cases, the business will fail outright.

The ability to access short term finance quickly and within an affordable repayment structure is critical to supporting business owners through these unexpected (but largely unavoidable) crises.

Outdated risk methodologies

Small business owners have, until recently, had to rely on banks, loan sharks, family members or friends to access short-term capital.

Banks generally take a dim view to unsecured lending: the approval process for an overdraft facility alone can take as long as three months, by which time a small business may have had to shut doors or suffer significant financial losses.

Part of the issue is the culture of risk aversion that is so prevalent in South Africa. Banks are far more likely to approve the purchase of a luxury vehicle – a depreciating asset – than offer an unsecured loan to a small business to accelerate its growth and enable it to take advantage of quick opportunities to scale. And when short-term unsecured funds are awarded, the often-ridiculous interest rates erode profit margins and can sink a business.

By using outdated risk methodologies that rely heavily on manual processes – like most banks do – they are unable to develop a holistic understanding of an individual business owner’s level of qualification for a loan. This is directly holding back the growth and potential of our SME sector.

The only way to overcome this is by using technology.

Technology fast-tracking support

Having a comprehensive data set on business owners applying for a loan enables lenders to run advanced analytics to fully understand that applicant’s risk profile. Feeding the data into machine learning algorithms further enables lenders to get accurate behavioural data that can inform whether they are suitable for a loan, and what the repayment terms should be.

It’s one thing to say the customer is credit worthy — it’s quite another to say the customer is worthy for a specific amount, and this is how they should repay it based on their behaviour and profile. This level of personalisation is impossible to do manually.

A technology-first company can evaluate extensive transactional data gained from online banking profiles, payment gateways, and accounting platforms, and pair this data with credit profiles from SA’s comprehensive credit bureaus.

By taking a macro look at specific industries and broader economic trends, and combining this with the applicant’s profile, tech-first lenders can make informed decisions over whether to approve loans based on actual data, instead of antiquated processes that are little more than box-ticking exercises.

For example, as a digital provider of short-term funding to South African SMEs, Lulalend offers convenience and ease of use through a 24/7 online platform that provides a seamless customer experience. And by cutting out branch networks and huge sales teams, the cost of providing the loans are lower, which enables us to offer lower rates to customers.

To support South Africa’s small businesses, a new approach is required that looks at actual data instead of outdated processes. Without access to finance, 70% to 80% of SMEs will fail. This is something our country simply can’t afford.