Hard to Start

Hard to start
By Larry Claasen and Sibonelo Radebe

Why is it easier to get a credit card out of a bank than to get a loan to start up a business ?
This question puzzles researchers into small businesses. "Though there seem to be sufficient funds available, it remains difficult to access these funds, especially for start-ups," says the 2006 SA Global Entrepreneurship Monitor (GEM).

GEM found that banks and financial institutions fund only 25% of all start-up businesses. It comes down to understanding cashflow, says Sean Temlett, an entrepreneurship & marketing lecturer at Wits Business School. Temlett says banks are good at making judg ments on past and present cashflow but do not have the skills to assess future cashflow.

WHAT IT MEANSBanks struggle to profitably lend to small businessGovernment considering retail lending to fill the gaps

This inability to assess the profitability of a start-up company is the main reason Temlett says banks should not be funding entrepreneurs. "They should not be there. They don't understand," he says.

Temlett says venture capitalists are the only people with the skills to make judgments on future cashflow, but they look only at companies where millions of rand are to be invested.
Realising the gap left by the banks, government has established a number of state-administered small business development & finance institutions.

These include the National Empowerment Fund, Umsobomvu Youth Fund, Khula Micro Finance Apex Fund, Small Enterprise Development Agency (Seda) and to a lesser extent the Industrial Development Corporation.

Introduced with much fanfare, these entities have also not lived up to their promise. They have been subjected to endless restructuring. G overnment appears to be seeking to extend the focus of some from a wholesale base to a mass retail base.

Following i n the footsteps of Seda and Khula, Umsobomvu announced at a conference last week it plans to expand its retail network to 121 offices spread across the country and with a particular focus on the rural areas. It represents a shift in emphasis from providing support to private-sector institutions to service small business to one of direct small business servicing.
Umsobomvu CEO Malose Kekana says the entity will not splash out its funds on setting up infrastructure and on overheads but will rely on the support of local government. Some of its existing offices are already housed for free in local government offices, he says.
For businesses that don't succeed through state and bank channels, Temlett recommends that entrepreneurs go and knock on the door of large corporations to obtain funding and support.

Under the black economic empowerment codes of good practice and the various empowerment charters, companies are recognised for supporting the development of small businesses.
Temlett points out that this kind of support often ties in to a company's strategy of outsourcing noncore business functions. He gives the example of some companies' decision to treat their truck-drivers as subcontractors.

The banks may not have the necessary skills but they are under pressure to fund black entrepreneurs. The financial sector charter commits banks to spend R5bn on black-owned small businesses by 2008.

So how do banks go about funding small businesses when they do not have the expertise to do so? So far, banks have attempted to address the risks through mentorships. First National Bank (FNB) insists that entrepreneurs have mentors - usually retired businessmen - to provide them with guidance in running the business, says FNB CE Michael Jordaan.

Absa, Nedbank and Standard Bank are offering specialist financial packages that come with an advisory service.

The banks, however, are even more reluctant in the case of smaller loans. It's not economically viable for them to grant loans of between R10 000 and R250 000, says Jo Schwenke, MD of Business Partners, a venture capital firm. He says this funding "gap" is because any loan over R10 000 requires a lengthy and costly due-diligence study that makes it too expensive to grant a loan for less than R250 000.

This gap is one of the reasons the DTI wants to turn its wholesale loan scheme, Khula Enterprise Finance, into a retail bank that will grant loans directly to the public. Khula currently provides guarantees for the loans made by banks to small businesses.

Schwenke says Business Partners is trying to deal with the gap by developing, in partnership with Harvard University, an automated due-diligence system that assesses businesses in a matter of days.

There are no short cuts in tackling the difficulties of funding small businesses, says Melt van der Spuy, director of business support at Standard Bank.

It requires constant monitoring of cashflow and activities inside the business. Factors like the health of the business owner and whether the company has lost a major contract must be monitored. For banks, funding small businesses is "onerous and expensive", he says.
The banks don't expect to make money out of small businesses anytime soon. "We see our involvement with them as the beginning of a long-term relationship," says Donovan Steenkamp, Absa's GM of customer value proposition for small business.

But entrepreneurs are a sneaky lot. Jordaan thinks they are somehow getting round the formal process of getting funding from banks: "I would not be surprised if some credit card debt is going into small businesses."