How to fix the SME funding challenge

The SME Business Funding Model Can be Fixed – Here’s What it Will Take

Much has been said about the SME funding model and how it is not really designed in favour of SMEs.

The problem with such assertions is that the term “SMEs” refers to a very broad group of businesses at different stages of business life cycle, as such funding designed for a specific type of SME will not be applicable to another SME, thus creating the perception that there is no funding available.

Contrary to popular perceptions there are a lot of resources available for SMEs that could classify as funding

In our work supporting local organisations around 83 countries in developing SME support ecosystems we have seen a lot of what works and what doesn’t. Working on an international scale also allows one to get a better perspective of the local offerings and shortcomings. Here is some observations about the South African funding landscape for SMEs:

1. Contrary to popular perception there are a lot of resources available for SMEs that could classify as funding, if the definition of ‘funding’ is not limited to just a cash injection. Funding a business often is about resources, knowledge, networks, support structures, space (office and industrial), mentoring, value chain integrations, etc. The fact that most SMEs are just shouting out for cash is in my view based on an SME not having a clear understanding of what they really need to succeed.

2. Actual “cash on the table” funding for SMEs is indeed limited, but it depends very much on where the business finds itself in terms of life cycle. Angel and VC funding is basically non-existent compared to the demand for it (though in fairness the picture isn’t rosier in other countries).

3. When we have asked entrepreneurs what they would use funding for, the ‘shopping list’ often includes items that are either not really that necessary (e.g. a powerful new laptop or a new vehicle that could be gotten for half the price or leased from companies with spare capacity) or misconception driven (e.g. I need to hire an expensive sales team when current sales efforts are not showing any results to justify that expansion in resources). Many times what entrepreneurs need funding for (up to 70% of the funding amount) is actually available for free or almost for free in the market (e.g. spare warehousing space, incubation space, mentoring, IP advisory services, etc).

Banks are often labelled the ‘bad’ guys in the funding spectrum

4. Banks are often labelled the ‘bad’ guys in the funding spectrum, but the risk profile of SMEs, according to a bank’s risk allocation, often makes it a mismatch. A bank is not there to risk capital (at least shouldn’t) that was allocated for safekeeping by the stakeholders (unless it was specifically mandated – such as an ESD or VC fund). That’s not to say bank should be let off easily. Their banking fees and usefulness in the business to business space is really antiquated and new entrants such as Old Mutual, Capitec, YOCO and offerings based on blockchain technologies (which basically allow for trust to be created between traders) will quickly replace the bigger, slower organisations.

5. There is substantial development funding available from corporates and governments. The issue with this funding is that it is often perceived to be spread too thin (e.g for township entrepreneurs) which leads to disappointment when funding is not achieved as well as criticism that it is self-serving for the corporates offering it (e.g. the corporate wants to invest in suppliers who will benefit them while at the same time getting tax credit for it). Initiatives such as 12J will help in addressing this even if at this stage the managers of such initiatives are still, too often, chasing the same high growth potential opportunities.

6. Too many support structures in the SME space are offered “just because”, with support initiatives often making a good profit by taking a cut from the funds. I personally have no problem with expertise and effort being rewarded, but I rarely find clear outcome-based initiatives. Examples of these are the plethora of incubators which allow entrepreneurs to use their resources for prolonged periods without expecting specific outcomes and targets.

Access to markets has been found to be even more crucial than access to funding many times. Without clients there is no access to funding

7. On a personal observation level, the South African SME support ecosystem is too focused on funding, mentoring and incubation initiatives and not enough on access to markets (which is what we do, if you’ll forgive the plug). Access to markets has been found to be even more crucial than access to funding many times. Without clients there is no access to funding.

8. Mentoring and access to skills (which I consider a powerful investment in an SME) is often too generic and high level. There really is no point teaching an entrepreneur about advanced budgeting etc. when they are just starting out. Skills should be taught in conjunction with actual client projects rather than at a high level e.g. don’t teach about social media and marketing, but rather help the SME to set up their social media according to what – at their business stage – actually needs (e.g. leads generation versus branding – too many social media pages for SMEs have no call to action and are just about building a brand, which is nice, but not [useful] when each lead counts for an SME).

9. There is no perfect SME support ecosystem and will never be. The perfect SME support ecosystem is too vague and open-ended to be acceptable to governments or corporates. The perfect SME ecosystem is a flat structure that allows SMEs to connect with each other and resources in a democratic way and not based on access to networks. Such a ecosystem requires incredible stakeholder flexibility which is difficult to get buy in from in more institutionalised organisations.

10. The future of work is B2B2SME. A substantial proportion of GDP is thanks to SMEs. Close to 70% of all jobs are thanks to SMEs. The myth that government and corporates are driving South African growth is outdated but still exists thanks to coordinated voices and lobbying by larger organisations. We don’t have to create SMEs. They are already there and actively trading. What we need to do is to get out of the way and make it easier for them to be able to do business with each other and with the world. That said, Govt has an incredibly crucial role in creating the enabling ecosystem for SMEs to thrive (see my post on a phenomenal book that clarifies the role of govt in the SME ecosystem at https://www.dhirubhai.net/posts/york-zucchi_just-finished-prof-mazzucatos-excellent-activity-6671799518142480388-IaGp)

From my article that was published at https://www.smesouthafrica.co.za/south-africas-business-funding-model-can-be-fixed-heres-what-it-will-take/