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How non-commercial lenders are doing more for SMEs in South Africa

For the whole world 2020 was a year of challenges, hardship and unease but at the same time it was an opportunity to unite and show our resilience as the entire world was being torn apart by the Coronavirus. The impact of the pandemic was clear to see and has had a devastating effect on small and medium sized enterprises.

South Africa spent the best part of 4 months in hard and semi-hard lockdown respectively, which, with stringent measures imposed, kept everyone at home, causing uncertainty with all business-related activities ceasing, and the country coming to a standstill with no answers as to how, or when, we would get through the COVID-19 pandemic. The immediate effects saw consumer spending drying up, and revenues falling, which threatened the livelihoods of an estimated 60% of businesses. Even heading into 2021, many SMEs still remain in vulnerable positions.

According to a Mckinsey report on South African businesses, it is estimated that small and medium-sized enterprises (SMEs) make up roughly 98.5% of all local businesses and therefore play an integral role in keeping the country’s economy afloat.[[1]](https://www.mckinsey.com/featured-insights/middle-east-and-africa/a-credit-lifeline-how-banks-can-serve-smes-in-south-africa-better) However, as has been the debate for a number of years, due to a lack of financing received from financial institutions these SMEs have continuously struggled to grow and make an impact on the country's economy. Furthermore, as a result of the pandemic, many small businesses have been forced to shut down and even if they have been able to continue, they are unsure and do not know what is next for them. That is why going into the new year it is important to continue helping these SMEs survive and give them the opportunity to thrive and succeed, in an already frail economy.

Even before the pandemic started there have been lasting financing challenges facing SMEs in South Africa. According to a survey conducted in 2018, only 6% of SMEs reported that they received government funding. [[2]](https://smesouthafrica.co.za/south-africas-smes-landscape-report/) There are multiple factors both from the SME side as well as the commercial side.

Given the current economic circumstances, one of the biggest challenges for SMEs is that they may not want to leverage their business as this may result in failure to repay money borrowed. Another factor is the increased competition amongst SMEs themselves, which has also played a role as a lot of the industries are saturated in which these businesses operate. Finally, there have also been alternative forms of relief from commercial institutions. These include; various types of loans, payment holidays and grants.

From a financial institutions’ point of view, if a SME does not have banking relationships with any of the banks, they will unfortunately not be considered for funding. Furthermore, the handful of SMEs that are able to obtain funding from these institutions must also meet the right credit score requirements which most banks put in place. The result of these models tends to place a huge burden on SMEs, limiting or eliminating their access to finance.

In the same Mckinsey report they also identified a large discrepancy in who receives government funding. Larger SMEs who have the operational capacity to meet the credit criteria of the financial institutions are more likely to receive commercial funding. Moreover, smaller SMEs who have limited access to bank lending facilities are also likely to be given assistance as they are most likely to be able to obtain other forms of government relief. [[3]](https://www.mckinsey.com/featured-insights/middle-east-and-africa/a-credit-lifeline-how-banks-can-serve-smes-in-south-africa-better) That leaves those remaining businesses that aren’t large but also, they are not small. So, what about this missing middle?

With a large majority of SMEs falling into the missing middle category, this is where non-commercial lenders have stepped in, especially over the past year. We know traditional banks have neglected this segment of the market for years and so the rise of these lenders has grown in order to combat the increased demand for funding for SMEs. These nonbank players have been able to develop and implement credit models that have proven to be cost-efficient and successful. These non-commercial lenders have been able to create new ways to help SMEs, especially those said to be in the missing middle.

Payabill is one of these nonbank players that have stepped up to the challenge of providing for the missing middle category. At Payabill, we enable SMEs to increase their buying power by letting them create their own payment terms with their trading partners and suppliers. We are accredited with leading suppliers and we can assist in helping you carry the burden of what has been undoubtedly the toughest year your business has had to face. Through our local and international trade finance options as well as our asset finance alternative we want to help you get off to the best possible start in 2021. To apply for funding click here.

Even though 2020 was not the year everyone was hoping for, it is important not to let yourself feel like you have been defeated by 2020. However, it is also a time to take proactive steps to keep your business going, maintain your market presence and most importantly to ensure that your business structure is in order to survive and prepare for a successful business year in 2021.