Article on Small Business by Thulani Masebenza

When people think about the world’s most challenging environments, they tend to think of places like Mount Everest or the Sahara Desert.

When people think about the world’s most challenging environments, they tend to think of places like Mount Everest or the Sahara Desert. Which are some of the most unforgiving places in the world and are environments which make it difficult for anyone to survive in. When we think of these unforgiving environments, we don’t tend to think of the small business scene in South Africa. That is, until you consider the survival rates for small businesses in this country or the challenges they f

Every year roughly 100 000 new small businesses in South Africa are started. Each of them started with optimism and a vision of delivering products or services to consumers. However, in only 24 months 50% of these newly formed businesses would’ve already failed. Five years later only 25 000 of them are still in existence, as about 75% of them would have failed during this time. Sadly, being forced to close down their operations. The failure rate for small businesses and entrepreneurs in South Africa is extremely high. I sometimes wonder whether it’s an exaggeration to say attempting to the challenge of hiking up Mount Everest is safer or has a higher chance of success than starting a business in this country. The challenges or reasons of failure vary such as; struggling to access clients or markets, lack of guidance or business mentorship but one challenge outweighs them all. The inability to access finance or capital. If surviving the small business environment is tough, then failing to get access to capital is equal to death. Cash is like oxygen for a business and without this oxygen, a business dies a slow death. If businesses are unable to grow cash by selling more products or services or face operational issues which affect cash-flow the route most take is to raise funding, which will increase cash in the business. The problem in South Africa is that not enough small businesses can access this vital cash which they need to survive. To paint a picture of how large the problem is and the total size of funding that small to medium sized businesses are trying to access. We can use some of the research done by FinFind in their ‘Inaugural South African SMME Access to Finance Report’. In the report they highlight the funding gap in South Africa is estimated to be between R86 billion and R346 billion. The gap between what small businesses are requesting versus what they are able to get is extremely large.

The first thing which we can immediately see, there is an extraordinary amount of money requested by small business owners, R40 billion in total. Micro enterprises make up almost 80% of these requests. The second thing which we can notice from this data is that 44% of these requests are less than R250 000. There is clearly a bottleneck which exists, as there is a large number of small businesses looking to access finance but are unable to access it. It is estimated that roughly 75% of small businesses that seek funding are rejected.

As part of the AlphaCode Explore program we’ve been exploring why this problem exists. Most of the blame is placed on financial services providers and lenders, for having credit assessment models which don’t match small business owners needs. As much as there is some truth to this, through research, surveys and interviews we’ve actually found the majority of the problem lies with small businesses. At the centre of this problem is the fact that most small business owners are unable to provide the necessary information about their businesses to financial services providers or lenders.

Lenders need this information to determine the bankability, affordability and willingness to repay a loan. The lender needs to determine the bankability of the business to ensure that it will continue to generate cash in the future, the businesses affordability is essentially the ability to repay and not default on a loan and willingness to pay is checking that they pay their other obligations or monthly instalments. The most common documents which lenders use to assess these three factors are; bank statements, financial statements, ID documents of owners, management accounts and company registration information. Most lenders specifically focus on bank statements and financial statements.

The majority of micro small business owners are banked and can produce bank statements, but most can’t produce financial statements for lenders because they don’t have an accountant, or they don’t use accounting software. This makes it difficult for micro small business owners to provide this information which lenders are looking for. Not because they don’t have it, but because this information is captured physically in other forms. As many manage their businesses using black books to track sales or inventory, Croxley paper books to write invoices and cash-on-hand is recorded in notebooks. This information which lenders are looking for does exists, just not in the form which they typically receive it. As most lenders have online application channels or would require this information to be presented in the format of financial statements. What we’ve found is that most small businesses would have a greater chance of accessing capital if there was a solution which would help them transpose this information.

In general, there are just not enough solutions out there to serve the endless list of challenges which South African small businesses face. This is also highlighted in the problem of access to finance. There are roughly 318 funders in South Africa’s ecosystem, this includes both public and private institutions. This means there is more than enough supply of capital, collectively these institutions offer about 495 funding products. However, out of all these products which exist only about 65 offer support to small businesses in preparing their funding applications or assist them with funding readiness.

Which is why we’re building Moya, a business management platform which connects business owners to finance based on their business’s operating history. We’re prototyping a solution which will allow small business owners to capture financial data which they’ve recorded in the past or enable them to record their day-to-day activities to help them build a credit profile which they can present to lenders. The vision is to put the ability to access finance in every business owners’ pocket.

Through engaging small business owners, we’ve found that most struggle with loan applications because of annual financial statements. Small business owners won’t go through the pain of hiring an account to produce financial statements for them, just so they can apply for a loan and this process would be too expensive for them as well. For lenders, bank statements just don’t give enough of a view of what is happening inside of a business and few will even consider offering a loan to a small business which doesn’t have financial statements. Our solution aims to close this information gap by allowing small business owners to capture financial data. This will give a more accurate picture of their business and insight into their operations when they’re applying for loans.

Surviving the small business environment is very difficult. If we use the analogy of climbing up Mount Everest and what it takes to survive that environment or reach the summit. We know that it takes more than physical readiness to survive the freezing temperature or the extreme altitude of what is known as “the death zone”. Even if you have the mental toughness of Michael Jordan, the lung capacity of Michael Phelps and the physical condition of Usain Bolt you’ll fail to reach the summit if you don’t have the essentials such as proper clothing or hiking equipment. Without these it will only take a short amount of time before you succumb to the harsh conditions of Everest.

The majority of micro small business owners are banked and can produce bank statements, but most can’t produce financial statements for lenders because they don’t have an accountant, or they don’t use accounting software. This makes it difficult for micro small business owners to provide this information which lenders are looking for. Not because they don’t have it, but because this information is captured physically in other forms. As many manage their businesses using black books to track sales or inventory, Croxley paper books to write invoices and cash-on-hand is recorded in notebooks. This information which lenders are looking for does exists, just not in the form which they typically receive it. As most lenders have online application channels or would require this information to be presented in the format of financial statements. What we’ve found is that most small businesses would have a greater chance of accessing capital if there was a solution which would help them transpose this information.

In general, there are just not enough solutions out there to serve the endless list of challenges which South African small businesses face. This is also highlighted in the problem of access to finance. There are roughly 318 funders in South Africa’s ecosystem, this includes both public and private institutions. This means there is more than enough supply of capital, collectively these institutions offer about 495 funding products. However, out of all these products which exist only about 65 offer support to small businesses in preparing their funding applications or assist them with funding readiness.

Which is why we’re building Moya, a business management platform which connects business owners to finance based on their business’s operating history. We’re prototyping a solution which will allow small business owners to capture financial data which they’ve recorded in the past or enable them to record their day-to-day activities to help them build a credit profile which they can present to lenders. The vision is to put the ability to access finance in every business owners’ pocket.

Through engaging small business owners, we’ve found that most struggle with loan applications because of annual financial statements. Small business owners won’t go through the pain of hiring an account to produce financial statements for them, just so they can apply for a loan and this process would be too expensive for them as well. For lenders, bank statements just don’t give enough of a view of what is happening inside of a business and few will even consider offering a loan to a small business which doesn’t have financial statements. Our solution aims to close this information gap by allowing small business owners to capture financial data. This will give a more accurate picture of their business and insight into their operations when they’re applying for loans.

Surviving the small business environment is very difficult. If we use the analogy of climbing up Mount Everest and what it takes to survive that environment or reach the summit. We know that it takes more than physical readiness to survive the freezing temperature or the extreme altitude of what is known as “the death zone”. Even if you have the mental toughness of Michael Jordan, the lung capacity of Michael Phelps and the physical condition of Usain Bolt you’ll fail to reach the summit if you don’t have the essentials such as proper clothing or hiking equipment. Without these it will only take a short amount of time before you succumb to the harsh conditions of Everest.

Surviving the small business environment is no different. You can have a small business run by a talented management team, offering a great product or service. However, without the necessary infrastructure which will help them run their business better it will always be a challenge. If we’re going to see small businesses thrive, create jobs and contribute significantly to South Africa’s GDP, then we’re going to have to deliver more solutions which will enable them to thrive. Small businesses really do face an uphill climb, accessing finance is not the only challenge they face in reaching the summit. If we are going to see more small businesses conquering this environment, then they’ll definitely need more solutions to help them on their journey.

This article is a repost and was first published on LinkedIn.

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