Ukwanda Growth Partners offer Investment Readiness services aimed at preparing businesses to attract investment by devel your business case from a common funding application into an attractive investment offer that will appeal to investors and financiers.
The Challenge of SMME Access to Finance in South Africa
The challenge of access to finance for small and medium sized enterprises (SME) is one that is of great importance to economies throughout the world, particularly in developing countries.
SMEs are generally considered to be an important sector in most economies because of their significant contribution to GDP and employment. Of great importance to the growth of SMEs, among other things, is access to finance.
This issue of access to finance for SMEs has also been of considerable concern in South Africa for many years. Over the years there have been many initiatives to address this important matter. One such initiative was a research by Finfind (an online platform that matches the seekers of business finance with appropriate funders). In 2018 Finfind issued their inaugural research report on Access to Finance for SMMEs in South Africa (sponsored by the SA SME Fund).
Below are the key findings of the research.
In July 2018 Finfind released their Inaugural South African SMME Access to Finance Report.
The purpose of the Report was to ‘map the landscape of providers and seekers of SMME funding in South Africa to identify the access to finance challenges, gaps, opportunities and potential solutions in order to promote increased funding success in this sector’
The key findings of the report are follows:
1. Credit gap is significant
The report provides estimates of the SMME credit gap in South Africa of between R86 billion and R346 billion.
2. High risk market to fund
The stage of business growth impacts significantly on the perceived risk of lending. The higher risks and costs associated with funding this sector remain a deterrent for funders. Greater adoption of fintech solutions is needed to drive down the high transactional costs associated with processing large volumes of smaller size funding applications.
3. Start-ups and micro businesses in the formal sector are underserved
The micro businesses in the formal sector represent the largest funding gap. They include early stage SMMEs that battle to meet the traditional credit risk assessment requirements. These are considered very high risk funding prospects that few funders have an appetite to serve. Innovative funding models are required to service this section of the SMME market.
4. SMMEs lack the knowledge needed to raise funding
Many SMMEs lack strong finance skills and struggle with financial literacy, financial planning and management. They also lack funding knowledge.
Most SMMEs do not know who the funders are, what the different types of finance are, or which of these fit their funding need, and what the qualifying criteria are. They waste a lot of time and effort approaching the wrong funders, applying for funding products that do not match their needs, or for funding they do not qualify for.
5. Low human capital and lack of skills are a barrier to accessing finance
For many start-up and early-stage businesses, raising the skills levels necessary to secure funding is a barrier to accessing finance.
6. Finance readiness is a challenge for SMMEs
Many SMMEs who are eligible for funding (i.e. have viable business models, match available finance products, and have the necessary security) are still unable to secure the finance they need, due to their lack of finance readiness i.e. they are unable to produce the financial documentation required by funders to assess bankability and affordability, in order to approve their funding applications. These documents include up-to-date management accounts, latest financial statements, budgets, forecasts and tax clearance certificates, amongst others.
7. New credit scoring and risk assessment models are needed
Two of the key (traditional) instruments used by funders to assess SMME lending risk, namely credit records and collateral, represent a major hindrance to SMMEs securing funding. Alternate/innovative credit scoring models that are designed specifically for this target market need to be developed. These would enable more accurate assessment of the risks in this market.
8. Data gaps
Although this survey provided a lot of insight into the issue at hand, there are a number of questions that still remain unanswered.
The Growth of Investment Readiness Programmes Globally
As many global studies have revealed, there is often a mismatch between what funders are looking for and the SMME investment opportunities they are presented with. For instance, according to one OECD / European Commission discussion paper, “Investors are frustrated by the low quality of the investment opportunities that they see and so are unable to invest as frequently or as much as they would like.”
This general scenario led to the establishment of numerous Investment Readiness programmes in countries such as Australia and the UK. These programmes complement supply-side efforts that address access to finance for small businesses, with demand-side interventions to enhance the quality of deal flow. According to a World Bank Group study, “lack of investment readiness compromises the effectiveness of supply-side interventions such as the creation of public-private seed or VC funds.”
Investment Readiness programmes have been employed in countries such as the UK for many years. Ukwanda has for an example studied Investment Readiness projects that were being piloted in the UK as far back as 2002.
In the recent past, there has been some growth in the establishment of investment readiness programmes in the African continent especially in East Africa. These are largely led by foreign organisations such as USAID, British Council and Bid Network (Netherlands).
In South Africa, Investment Readiness programmes are limited to short term training programmes and workshops rather than multiyear programmes Ukwanda has observed in Europe, Australia and East Africa.
Ukwanda Investment Readiness Services
Ukwanda currently offers Investment Readiness Services to Small and Medium Sized Enterprises on a consulting and advisory basis. These services are aimed at assisting SMEs to access business financing. For many SMEs, raising capital exposes them to challenges outside their core capabilities and business activity – it is not something they do often. This is where Ukwanda is able to help.
Our services are able to address 5 out of the 8 challenges identified in the Finfind research in the following ways:
1. Dealing with Challenge of Financial Readiness
This goes to the heart of our service offering where we assist businesses that are eligible for funding but find it difficult access because of lack of investment readiness. Unfortunately it is not the role of many financing institutions (and rightly so) to prepare funding applicants to be finance ready.
While most financing institutions go to great lengths to make funding accessible and the funding application process as easy as possible, many would be qualifying SMEs still ‘fall through the cracks’ for various reasons beyond the control of financing institutions and SMEs. Ukwanda’s services are needed for this reason.
Our deep understanding of the business funding requirements enable us to help SMEs to properly prepare not only for fund raising but also for life with an external investor.
2. Dealing with Lack of Strong Financial Skills and Funding Knowledge
Our services focus on providing the necessary planning and financial modelling skills that many businesses often lack. We also provide guidance on capital structure decisions and the appropriate fund raising strategies to employ.
3. Dealing with Low Human Capital and Lack of Skills to Create Sustainable Businesses
Our processes look beyond the capital raising need but at the health and sustainability of the business as a whole. Before we consider the appropriate capital raising strategy, we seek to ensure that the business employs best practise in the critical areas such as – business model design, financial management, capital structuring, critical skills management, marketing & sales and operations.
4. Dealing with High Risk Market
Our investment readiness interventions are always aimed at de-risking the business as far as possible to attract investment from funders. Some interventions result in delaying the capital raising need and employing alternative funding and bootstrapping strategies.
5. Dealing with the Credit Gap
The result of our successful interventions is enabling SMEs that would not have been able to raise funding, to get funded thereby reducing the credit gap.
What You Get From Ukwanda’s Investment Readiness Service
Ukwanda’s Investment Readiness services are aimed at preparing you and your business to attract investment by.
- Developing your business case from a common funding application into an attractive investment offer that will appeal to investors and financiers.
- Preparing a compelling information memorandum and investment proposal.
- Developing complete financial models with all the necessary analyses that investors want to see.
- Exploring the many available financing options beyond the obvious. We have deeply studied various financing options available to businesses beyond traditional funding methods.
- Refining and polishing your business and investment pitch.
- Developing a clear workable funding and capital raising strategies for your business.
- Shortlisting appropriate target investors and making the capital raising process efficient.
- Matching your business with specific investors that are suitable for your needs.
- Making you familiar with investor criteria.
- Preparing you for a life with an external investor on board.
Why Engage Ukwanda Growth Partners
Probably the biggest advantage of working with Ukwanda is our Intimate Knowledge of the South African Business Financing Landscape. It allows us to save our clients a lot of time and effort by preparing them well. The following demonstrate this knowledge.
Experience of our Professionals
We fully understand various funder’s requirements, and processes. Our professionals have not only dealt with many different funding organisations over the years but have worked in some of the funding organisations reviewing business plans and funding applications.
SA Business Funding Directory
Over and above our experience with and in financing institutions, we have studied the South African business funding landscape.
Ukwanda Growth Partners authored and published the following g Business Funding Directories:
South African Business Funding Directory 2014|2015 – Profiling 49 funding organisations and 145 funding products.
South African Business Funding Directory 2016|2017 – Profiling 129 funding organisations and almost 330 funding products.
The funding directories attracted wide interest from entrepreneurs and small businesses. Some organisations even requested to make the directory available on their websites including:
- Sable Accelerator Network,
- Green Cape,
- Kruger Lowveld Chamber of Business and Tourism, and
- Middelburg Chamber of Commerce & Industry
Historic Relationships with Funding Institutions
In addition Ukwanda has previously been in the following panels of preferred service providers
- Industrial Development Corporation – Preferred Service Providers for the Business Support Programme.
- Department of Trade and Industry & later Department of Small Business Development – Network Facilitator for the Black Business Supplier Development Programme.
These relationships expanded our knowledge of funder requirements.