Q&A: Absa Group

Absa Group’s head of enterprise development, Kgalaletso Tlhoaele, on youth entrepreneurship and providing small companies with access to finance

Q&A: Absa Group

Q: Why should more SA youth be interested in becoming entrepreneurs?
A: With corporate downsizing and therefore a constrained uptake in creating more jobs, it makes sense for the youth to venture into their own businesses and take advantage, particularly, of their digital savviness as we move into the 4IR.

Spending power is shifting towards Generation Z, who have a different mindset and buying characteristics than that of prior generations. They are the new market disrupters, introducing products that talk to their own generation. They can easily start a business within, say, two weeks, with little need for infrastructure, thanks to the proliferation of social media as a business channel.

In fact, if you look at the current economy, a significant portion of new value being generated is spiked by Gen Z, most of them under 25 years of age.

Q: What is the value of SMEs and how does this impact the future economic growth of the country?
A: Currently, some 60% of employment in SA can be attributed to SMEs, which immediately indicates their current value to the SA economy. However, this does not fully account for the contribution SMEs are making in the informal economy and, if it did, that figure would likely be higher.

What corporates are beginning to realise is that doing business with an SME doesn’t mean you are dealing with an untested or unsophisticated entity. SMEs can be more agile, more efficient and quicker to respond to service needs. This could be a significant value-add to corporates’ supply chains and the broader economy.

Q: What are among the most important issues facing SMEs in the current economic climate?
A: There are a number of challenges, each equally important. One is access to markets. The prevailing economic conditions provide fewer opportunities for SME development. We have to consider that in the past two Budget speeches, the Minister of Finance highlighted the need for everyone to tighten their belts. So it’s not just the general populace that is under pressure – corporates are too. Even the public sector is downsizing.

When the country’s fiscal position is weak, it impacts particularly on SMEs, especially those in government supply chains. Given the current market situation, SMEs also have limited access to funding. Whenever there are economic headwinds, most finance houses tighten their credit requirements. For SMEs that don’t have the ability to secure loans, it is a very difficult hurdle.

Another obstacle is a lack of skills, which is crucial for the growth of individual SMEs. This may be as simple as lacking financial know-how, negotiation skills (particularly when it comes to suppliers) or difficulty undertaking presentations to secure future business.

Q: What are the major considerations related to finance models for SMEs?
A: The main one is the sustainability of an SME’s business model, which goes hand in hand with the SME’s collateral – or lack thereof. Without collateral it becomes extremely difficult for an SME to grow and develop sufficiently to make a good case for a loan or subsidy for a venture.

This is further compounded by Basel capital adequacy requirements, which are applicable to all global financial lenders. Basel was introduced in the aftermath of the 2008 financial crisis to ensure reforms that improve regulation, supervision and risk management within the banking environment.

Under Basel, now in its third derivative, the minimum capital adequacy requirement is 8% of a bank’s risk-weighted holdings. In simple terms, it means banks must hold a certain amount of capital to account for any unsecured lending. Banks are compelled to comply with the regulation. For an SME that doesn’t have the collateral to offer against a loan, conditions may be difficult to satisfy. However, SA banks are unbiased – they consider all SME funding applications, and attempt to spread the risk across their portfolios of lending.

Q: What is the best approach for an SME to take when seeking banking finance?
A: Any loan application or funding request must emphasise the sustainability of the business or the project. If the loan application is based on servicing one contract or business, they are at risk, given the dependency on one source of revenue. It is far healthier to have a broad income stream across a number of opportunities.

SMEs also need to show clarity around the skills they bring to the market. An idea or project plan must be supplemented by what is needed to   ensure delivery. If this requires the acquisition of new skills, the applicant must be clear about how those will be acquired, or how to compensate for not having them.

It’s all well and good suggesting that the business has a jack-of-all-trades ability, but it is crucial that they are able to address all business operation requirements, inclusive of management.

Q: What sort of understanding should SMEs have about their financials when seeking a loan?
A: I cannot emphasise enough the importance of having up-to-date financial statements, if only so that the business owner has an understanding of their current business status. Monthly management accounts will provide clear warning signals that the business may be heading into distress.

Yet it is quite common to find that most small businesses don’t have this culture. When approaching a bank, SMEs don’t need to supply audited financials (if it’s not a complex business) but they really should know the state of their balance sheet, such as whether they have more assets than liabilities, which indicates solvency.

The more complex the operation, the more financial detail is required. There are quite a few avenues that provide assistance for SMEs that don’t have in-depth financial capabilities. At Absa, for example, we have an internal Enterprise Business Development Support facility, or we can refer the SME owner to the Department of Trade and Industry, which also has similar facilities.

Q: Are SMEs funded entirely, or is such funding a percentage?
A: It would be irresponsible of any bank to provide a 100% loan or funding. There should be a contribution by the entrepreneur to indicate commitment. This may be in the form of a guarantee but this is not necessarily a substitute for collateral. In most instances, banks can provide up to between 80% and 90% of the funding.

Any balance that the contributor puts forward must also be separate from their personal assets – in other words, they should not offer their home in support, because if the business defaults there is a social impact. Legislation is very clear on protecting consumers.

Q: Are there trending SME businesses that banks favour?
A: As much as we enjoy the introduction of current, contemporary and relevant businesses, there are certain fundamentals that must be considered. Each sector of trade has its own unique characteristics. While it may be something new or trendy, we cannot be caught up in the euphoria of the loan applicant. We remain objective and work to proven formulas that will show a clear indication of the potential. Let’s consider rural businesses, such as a spaza shop, for example. If an SME owner intends to open a spaza shop, we have to estimate and be realistic about the risk. Would it be competing with entities that have bigger buying power? Would it be entering into price wars with similar retailers?

What we like is collaborative partnerships with producers or manufacturers of fast-moving consumer goods because it lessens an SME’s exposure to the aggressive and competitive retail market.

Q: Regardless of the genre of business, where can SMEs find support in acquiring skills required to ensure development of the enterprise?
A: Absa provides a number of programmes through its Enterprise Business Development Support facility but to a limited scale, given how vast our SME lending portfolio is. Because we can’t reach them all, it is important for other players in the corporate environment to contribute and share the responsibility as per the different sector transformation codes and charters.

We believe that the B-BBEE Act also provides enormous opportunities for corporates to advance programmes – specifically the training of SME owners and their employees.

Q: Does Absa include SMEs within its own supply chain of services?
A: Absolutely, and we see this as critical for any corporate citizen embracing the transformation process and BEE codes. We comprehensively apply this countrywide, ensuring that broadly as many of our outsourced services as possible are directed at SMEs – be that technical services, marketing, couriers and so on.

Between 2017 and 2018, Absa invested some R400 million in our supplier development programme. Our SME lending book has shown healthy growth. Including an SME within our supply chain, which is monitored by an after-care service once a loan is granted – as is the case with all Absa SME loans – is a vital component of SME sustainability.

It’s not in anyone’s best interest to ignore these entrepreneurs. With a bit of help and encouragement, they may become the corporate leaders of tomorrow and provide employment to those in need.

By Kerry Dimmer
Illustration: Hanlie Huisamen