Just before the onset of the pandemic, entrepreneur Amelia du Preez, the owner of Kalinda Trading in Centurion (makers of Monkey Nut peanut butter), became a client of SME financiers Business Partners Limited (BPL), and received funding to purchase a property for a new processing factory. Commercial difficulties brought on by the pandemic were compounded by illness, but with BPL’s assistance – access to consulting, training, technical assistance and mentorship services provided by a database of industry specialists, property brokers and management service providers – Du Preez was connected with a consultancy firm that helped her streamline her operations and equipped her with the tools and knowledge she needed to weather the economic turbulence, systematising her processes, reviewing employee roles and responsibilities, and improving the company’s reporting structure. As a result, Kalinda Trading managed to save 32 jobs during the COVID-19 period.

‘Being successful as a small business owner in South Africa relies heavily on your ability to make quick decisions,’ says Du Preez. ‘Unlike our larger counterparts who may have more time on their side, we need the ability to make instant decisions that can ultimately be make-or-break moments for the business. During these times, having access to accurate, real-time data is essential – that’s what [this assistance] afforded us.’

This one example is illustrative of the need for funders to support and upskill small businesses with mentorship, technical expertise and guidance, increasing the odds of eventual expansion, and a mutually beneficial relationship into the (successful) future.

In the wake of recent multiple challenges, SMEs in SA are under unprecedented pressure. Conversely, it is precisely during these challenging times that we rely on SMEs to stabilise the economy and drive growth.

The proliferation of SMEs over the past 10 years has been lower than the country’s economic growth, yet their contribution towards SA’s gross value added (equal to GDP before taxes and subsidies) increased from 18% in 2010 to 40% in 2020, according to a 2022 report by the Organisation for Economic Co-operation and Development. In 2022, small formal businesses generated 30% of total employment, 32% of all waged employment (including informal and domestic work), and half of waged work in the formal private sector.

The SME sector has largely recovered from the disruptions and setbacks caused by the pandemic and has adapted somewhat to load shedding, but it still faces the same challenges as before – skills shortages; rising inflation;lack of access to infrastructure, technology and markets; and limited financial resources.

Access to funding in order to expand or stabilise their business – and the requisite skills – is probably the biggest challenge facing SMEs right now. While the industry waits for government to establish its R10 billion fund to support SME growth, it’s up to the private sector to fill the gap… Encouragingly, there appears to be no shortage of irons in the fire.

International business-funding company Swoop recently announced its official launch in SA. ‘SMEs are often either too small for the commercial banks, which consider them too risky, or too big for start-up loans and grant support. They are the “missing middle”, yet they are the backbone of South Africa’s economy and a major contributor to SA’s GDP – 40% – and employment – 46%,’ says Swoop COO and co-founder Ciaran Burke. ‘There are an estimated 2.6 million SMMEs in South Africa, and yet, according to a recent survey, only 6% reported they received government funding and 9% that they received funding from private sources. Furthermore, recent studies show that 88% of South African SME owners indicated a need for either some or a lot of funding-related support. As with its other markets, Swoop’s mission in South Africa is to provide a one-stop shop for SMEs, making the process of securing funding easier, clearer and more successful.’

Swoop originated in the Irish and the UK markets in 2018, where it is now the largest SME-funding platform in those markets, winning Digital Broker of the Year in 2023. It has since launched in the US, Canada, Australia and, now, SA, where, the fintech company says, it has already provided funding to numerous SA businesses in the retail, logistics, agriculture, construction and hospitality sectors, and aims to enable the disbursement of more than R500 million in funding in 2024.

Targets for 2024 include expanding its funding products into the thousands, ranging from term loans to working capital finance, invoice factoring to supplier finance, cash advances to asset finance, and equity investments to grants.

‘By using digital technology to collect accurate data and matching SMEs with suitable lenders, investors and grant providers, Swoop is able to fill the gap for SMEs, and help them find the capital they need quickly,’ says Burke. ‘We believe that South Africa has some of the best SMEs in the world, driven by innovation, resourcefulness and resilience. Data and credit access has been a challenge in South Africa historically, but fintech solutions are on the way, with a proliferation of digital payment providers, non-banking lenders, and open banking solutions.

‘Swoop brings together accounting software connections, banking integrations and other advanced tech solutions to help SMEs find the capital they need.’

By assisting SA SMEs obtain access to finance, Burke believes Swoop will help transform the economy and make significant inroads into the seemingly intractable problem of widespread unemployment, while showcasing how SA businesses are global leaders across a number of sectors.

‘We see financial education as a key driver to achieving a fertile environment for SMEs to flourish. This is why we will continue to invest in free educational content for South African SMEs to access, to help demystify funding products, credit scoring and financial terminology that can often be a barrier to accessing finance. South African customers can access this content via our knowledge hub, where we will continue to add further free resources. Additionally, we have chosen to partner in-market with the global leader in accounting software and business solutions, Sage, so that we can work together to help SMEs understand their financial position better from their data.’

Another locally established (and SA’s first) SME banking fintech firm is LulaLend, which recently rebranded as simply Lula and, along with the name change, has launched a range of first-to-market services ‘poised to redefine the SME banking landscape’.

In February last year, the company secured $35 million in series B funding, led by global impact investor Lightrock, and plans for this investment to benefit both formal and informal SMEs in SA ‘whose financial needs remain grossly underserved’, and service the surging demand for the fast access to working capital.

‘Our focus for the coming year is to continue supporting new and existing SMEs with the capital they need to grow, through both our direct and partnership channels,’ says Lula CEO Trevor Gosling. ‘Added to that, we are scaling up adoption of our Lula banking platform, which was recently launched. Our banking platform offers SMEs the tools and services necessary to make running their businesses easier and increases the likelihood of their success.’

While Lula seeks to support SMEs overlooked by traditional funding models, not all applicants are guaranteed to be successful.

‘First and foremost, we are focused on responsible lending – that means that, while we are acutely aware and incredibly proud of the positive impact that our funding has on our SMEs, we are also conscious of the fact that debt funding for some businesses is not always appropriate,’ says Gosling. ‘However, to ensure we give every business the best opportunity for funding and growth, we use unique scoring algorithms and alternative data to assess risk, which is unlike traditional lenders which tend to rely on an analogue approach and previous credit history. This means if you haven’t had funding before, that’s not going to count against you getting funding from us.

‘SMEs are often unable to access funding as a result of banks requiring loads of security and collateral, which few of our SMEs in South Africa have the ability to provide – our funding at Lula is unsecured, which means two things. First, they have a greater chance of receiving funding and, second, our funding can be provided significantly faster than traditional banks, which enables SMEs to respond rapidly to their immediate cash flow demands.’

While it may seem that challenges and setbacks with regard to funding for SMEs proliferate in equal proportion to both public and private efforts to address the gaps, what should not be overlooked is the resilience and ingenuity demonstrated by SMEs – and their funders – in navigating these financial hurdles, which can often result in innovative business models, strategic partnerships and enhanced operational efficiency.

If and when this sector gains enough traction to turn the corner, it could make for an exceptionally robust economy.

By Robyn Maclarty
Image: Gallo/Getty Images