Corporate Survival Bootcamp: Avoid These Mistakes to Stay Healthy and Strong
Statistics SA estimates that 11% of the country’s small businesses have disappeared as a result of the Covid closures. Of the remaining 2.3 million businesses, only 30% are in the formal market, the rest are informal.
“It’s a problem for the country because SMEs are the main driver of employment in the country,” says Jonathan Goldberg, CEO of SME finance group Preference Capital. “These companies need support, and they have always been shunned by traditional financing houses.”
The pain inflicted by Covid is reflected in data from Statistics SA which shows unemployment hit a record high of 35.3% earlier this year. The SME sector has been hardest hit by the Covid economic contraction, and many of those entrepreneurs who have closed may take years to re-enter the market. Similarly, jobs lost due to business closures will not be easily recovered.
“Unfortunately the impact of the Covid shutdowns will be felt for years to come. I’m happy to say that our SME clients have had a higher than average survival rate as we were able to help them with financing when they needed it most and getting their financial house in order,” Goldberg says.
“Many of these business closures that we have seen could have been avoided.
“That’s why our clients have a higher survival rate. We help them control their cash flow and put their balance sheets in order, in a responsible way.
Traditional banks are ill-equipped to serve the SME sector, which is a niche Preference Capital decided to enter when it was founded in 2014.
Goldberg points to two main problems with the traditional SME banking approach:
- Banks are not well equipped to serve small businesses. A prime example is the cost of providing loans, given the onerous and costly regulatory compliances they are subject to. According to Goldberg: “It’s not profitable for the banks to give loans to ‘small’ businesses of say R250,000 because of the structure and regulation of the banks. It makes much more economic sense for them to lend larger sums of money and this inevitably brings them into the big business sector. This leaves the SME sector largely ignored. With Covid, banks have moved up the risk ladder, and that has left a void for people like us serving the SME sector. Take trade finance, for example. We consider a trade finance deal of R7-8m to be a good deal for us, but the banks won’t really look at it. So I see the banks creating competition for themselves through their approach to the SME sector. »
- When things go wrong, banks often jump to liquidate, with little effort to find more creative solutions to the problem. “When things go wrong with us, because we’re not a traditional bank, we can fix it with a phone call,” Goldberg adds. “We can offer repayment holidays and do all sorts of magic to reduce pressure on the customer’s cash flow. It depends on the personal relationship. As long as the customer stays in communication and we understand what is going on, we can find a good solution to their cash flow issues. Banks have nothing like this degree of flexibility.
The realization that banks were not suited to serving the SME sector created the void in the market now filled by Preference Capital, which brings a mix of skills – from high-level business advisory to traditional banking, to risk assessment and industry specialists – for an SME sector normally starving for this kind of talent.
“Advice is essential in what we do. Of course, funding is key, but it’s how that funding is applied in the business and when it’s applied that we are able to help,” says Goldberg.
Preference Capital was created to offer a full range of financial solutions to SMEs, ranging from asset financing, short-term business financing, invoice and purchase order financing, trade financing and management. cash flow risks.
“Selling” money is not like selling computers
“When you’re selling a computer, you’re spoiled for choice, and you won’t make a big mistake going one way or the other,” Goldberg adds. “When you offer money, it’s different. Some people need equity in the business rather than debt, and they might be better off getting it from family or friends. In other cases, short-term working capital or commercial financing is needed. It’s important that the business doesn’t become too dependent on debt and that’s something we assess up front: whether a business can afford to pay down debt and not demand constant renewals of debt. »
Most Preference Capital clients have pre-existing relationships with major banks, many have some sort of credit facility with them. It looks like the banks are serving their SME customers, but it’s the nature of the credit that’s the problem, says Goldberg. “For example, the business may have an accounts receivable book of R10 million and the bank grants the business an overdraft of R1 million. It doesn’t really help the business owner, but he’ll take it anyway. What may be more appropriate in this case is invoice financing.
Speed is essential
A common complaint against banks is the time they take to process a loan application and the amount of information required. Approval for a bank loan can take four to six months.
“We try to make sure we get the money to our customers within two to three days of getting the information we need,” says Goldberg.
How Preference Capital is disrupting the SME finance market
“You can come to us for two things: financing and interpersonal relations, and that is the key. Our customers have someone on the phone that they know quite well. Our relationship manager understands your business at the deepest level. Communication is the most important factor in any relationship, and the worst part is when someone owes money and keeps quiet. We want the communication channel to remain open. If the customer has a problem, we can always make an arrangement that works for both parties.
Presented by Preference Capital.
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