Funding for SMMEs - a mismatch between supply and demand
Working in the space of SMME development, as well as social enterprise development in particular, I see a lot of the challenges that this sector faces around the world. These challenges have been generally well documented, but what is less well documented are the solutions that are needed to overcome these challenges. Part of the reason for this is that we don't fully know yet what works, nor have strong case studies showing this, and part of the reason is the solutions we do think have a strong chance are in fact complex and systemic - meaning they are difficult to implement and bring everyone on board for.
One example of such a challenge in the South African context is that of access to finance. Due in part to the B-BBEE policies, and especially the Enterprise and Supplier Development criteria, in South Africa there a is a fair bit of capital out there for SMMEs. However, while this capital used to be seen as a bit of a write-off by companies who would use it most often to make grants or very soft loans to SMMEs, the recent focus on investing these funds in a way that can generate returns has reduced the amount of this ''high risk'' capital and has made it far more conservative. This in itself is not a bad thing as SMMEs need funding at all different stages and corporates are happier when they can see ''shared value'' manifest in more direct ways. However, this does not help with the funding gap for where it is needed most – in the high risk, early stage space.
The recent FinFind SMME Access to Finance report (https://www.finfind.co.za/) shows there is an estimated SMME credit gap of between R86 billion and R346 billion in South Africa. Furthermore, 44% of all loan requests in South Africa are for under R250 000, while the bulk of funding on offer is over R1 million. This is not so surprising given that we know that lower loan amounts for example still require the same due diligence, meaning the cost of the loan to the provider in relative terms can be higher. Also, these smaller funding amount requests are often coming from riskier sources such as new businesses and early stage businesses, making them less appealing to investors. Given that the private sector’s primary goal is returns, most private sector investors have always been risk averse as a result. While impact investing and initiatives like B-BBEE have led the private sector to venture more into riskier territories, there is still not enough being done in these spaces in context such as South Africa.
Moreover, speaking with people around the world, this finance gap is not unique to South Africa. What is likely needed are partnerships and blended finance approaches where different types of grant makers and investors with different risk appetites and profiles, work together to provide financing and support at all stages of SMME development. A venture philanthropist can give a startup a grant convertible to a loan for example, and if the SMME makes it to the next stage, it can then apply for more traditional private sector funding. Another example is that of international aid organisations or governments providing guarantees for private investors willing to venture into riskier investments. This benefits the more risk averse investor as they now have more pipeline which has been de-risked by someone with a higher risk appetite. It benefits the earlier stage SMME as well as they can access different types of funding at different stages.
Of course, as mentioned previously, it is clear to see why some of these are hard to implement solutions – they require large scale collaboration, including between government and private sector, and in some emerging market contexts there are issues of trust to consider as well. Given that SMMEs are globally considered to be the biggest job creators however, we need to find a way to get over this barrier and to testing real solutions now. After all, inequality, and the disenfranchised and unemployed youth, will not wait much longer.