While financing solutions for small-and-medium enterprises (SMEs) have typically been geared towards providing growth capital for business expansion, the COVID-19 crisis has elicited a rapid shift of focus to the provision of relief finance – which requires a very different approach. In a sense, COVID-19 has therefore driven financiers to radically reinvent their approach to SME funding.
This is according to Mark Paper, Chief Operating Officer of Business Partners International (BUSINESS/PARTNERS) – the international arm of one of Africa’s leading financiers for formal small and medium owner-managed businesses – who says that the COVID-19 crisis has resulted in quicker turnaround of financing processes, driven by online data and readily-available smaller tranches of long-term working capital.
“Growth capital required an understanding of future cash flows; key insights into the market; and belief in the business owner, whereas relief capital requires smaller ticket sizes; quicker turnaround; elements of patient capital; and the due diligence to focus on whether the underlying business will remain solvent and liquid.”
Due to the current nature, timing and financing needs of SMEs amid the COVID-19 pandemic, Paper says the financier industry has been pushed to evolve in many ways. “The way we communicate and do business with our clients has had to change completely, with a faster adoption of digital solutions and a greater reliance on data-driven decision making.”
However, this environment has also presented financiers with an entirely new set of risks, he notes. “Considering that historic performance is no longer an accurate indicator of future performance, it becomes difficult to determine if and when a business will reach pre-COVID levels of performance again.
“As such, over the short and medium term, cash flow and the availability thereof is going to be even more important than it usually is, while the restructuring of expenses in order to reduce overheads and meet breakeven levels, will also be critical.
“This means that patient finance, from both new and existing financiers, will determine in many cases, the extent to which business will survive,” Paper explains.
What hasn’t changed, however, is the need for education amongst SMEs on how to apply for finance more effectively. “Financial education can never be underestimated,” says Paper. “Too often, we have received applications where the financial statements presented reflect the company as loss making and even insolvent. This is a clear indication that the business owner is not able to interpret their own financial statements for what they are, and as such is surprised and aggravated when the application is declined.
“The same can be said about good corporate citizenship and tax compliance – these areas are going to become a huge focus going forward, and if SMEs want finance, they need to understand the importance of this,” he says, noting that for SME financing to be successful, everyone needs to come to the party.
“We cannot rely on Government to solve all the country’s challenges – especially in light of their having to focus on so much with so little. If we are to successfully finance and support a thriving SME sector going forward, everyone needs to come together and develop a new deal – big business, Government, and the SMEs themselves,” Paper concludes.