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 South Africa 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 needed to unlock this kind of growth.
Our Current Funding Landscape
The SAICA SME report states that “according to SME’s, the main reasons for business failure are overwhelmingly cash flow related”. A business of any size and in any industry needs financial stability to operate sustainably. Aiming to expand is an even more complex objective that requires SME’s to raise growth finance.
But how can SME’s 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 SME’s “start with too little capital, they collect debtors late, are subject to bad debts and that overheads are too high”.
Government expects that 90% of new jobs will come from SMEs. Therefore large businesses and the public sector need to realise that SMEs will be crucial for growth of the fiscus as well as the private sector’s turnover.
The tough criteria, vast amounts of paperwork, high interest rates and general unwillingness to lend out money have given traditional funding institutions a bad name among entrepreneurs.
One of the key developments in this area has been the rise of peer-to-peer lending. To quote Wikipedia,
“peer-to-peer lending (P2P lending) is the practice of lending money to unrelated individuals (or companies), called “peers”, without going through a traditional financial intermediary such as bank or other financial institution.”
Peer-to-peer lending platforms could be the answer to providing affordable funding to SMEs. In quoting interest rates to borrowers, the answer lies in the margin. Peer-to-peer lending, being online-based, eliminates many of the high overhead drivers of traditional funding institutions, like 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!
Read more about getting your business funded fast on RainFin – an online lending marketplace.
Score cards that are designed to determine each borrower’s creditworthiness by looking at its financial health and expected future cash flows assist peer-to-peer 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.
Section 12J and Venture Capital
This and other exciting new ways of getting funded are working their way into the market to offer innovative solutions to the company that’s ready for growth.
Section 12J allows investors in a SARS registered Venture Capital Company a 100% tax deduction for their investment. On a 41% tax bracket, this means that an investor only has a 59% exposure on his money, but with 100% of the upside. This serves as government’s mechanism to channel high net worth individuals’ investment portfolio’s into young companies.
The launch of Grovest VCC’s latest fund called 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.
Getting Businesses Ready for Funding
Money is available. It is up to founders to make sure that they are ready for funding. Businesses that have their house in order can prove sustainability and growth as well as a unique value proposition just need to keep knocking.
Read more about getting your tech startup ready for funding.
As a country, we have so much riding on the success of SMEs. Seeing more and more disruption in the funding landscape fuels our opportunity to create a sustainable SA with inclusive growth and enough jobs for the hands of our people.
At Outsourced CFO we like to get involved with your business in a hands-on way. We do not simply consult with you and move on. Our aim is to help your business navigate its financial function and business environment successfully. Contact us today.
About Louw Barnardt
Louw Barnardt is the co-founder and MD of Outsourced CFO, a financial management boutique of Chartered Accountants that assists private company clients in gaining access to innovative funding solutions. Outsourced CFO carries fundraising mandates from leading venture capital companies, peer-to-peer lending platforms and financial institutions and has assisted numerous private companies to unlock funding and scale.