The state of business financing in South Africa

The state of business financing in South Africa – and a strategic solution for SMEs

South Africa’s economy has experienced a period of low growth since 2011 due to declining commodity prices, political uncertainty and a range of other factors. This has created a challenging environment for small businesses, although their contribution to the economy remains vital, both in terms of the revenue they generate and the jobs they create.

Despite the nation’s advanced banking system, access to business financing in South Africa remains a major stumbling block for SMEs. These smaller enterprises often find it difficult to access bank loans, overdraft facilities and other bank finance due to a chequered credit history or a lack of (what banks deem) suitable collateral.

This means that, compared to many other countries around the world, South African businesses find it particularly difficult to access much-needed working capital from banks and other traditional financial services institutions.

Bank lending to SMEs is low in SA

According to the 2017 OECD Economic Survey of South Africa1, bank lending to small and medium-size enterprises accounts for 26% of business lending in the country. This figure is low, compared to 31% in Australia, 35% in Sweden and Turkey, 37% in Norway, 38% in Thailand, 39% in Brazil, 40% in New Zealand, 45% in Malaysia, 54% in Spain, 63% in China, 64% in Ireland, 65% in Japan and 81% in Portugal, to mention but a few comparable stats.

In this environment, it can be easy for smaller businesses to grow frustrated and even disheartened when they need funding but bank loans and overdraft facilities are not the only forms of funding available to SMEs. Another type of business financing in South Africa is debtor finance or factoring.

What is debtor finance or factoring?

This form of funding is designed to meet the working capital needs of many types of businesses, including both SMEs and larger corporations. Factoring is a type of debtor finance that enables companies to raise funds against their accounts receivable, providing working capital to grow the business or capitalise on trade discounts.

When weighing up different types of business financing in South Africa, debtor finance or factoring is a good fit for both growing businesses as well as companies with seasonal turnover needing a cash injection to keep cash flow positive during quieter months.

Many business use factoring as a solution to fund the operational cycle – in other words, to access the cash needed to bridge the time from incurring of costs to receiving payment. This often happens when customers ask for (or the industry demands) credit terms of 60, 90 or even 120 days; and the business does not have the cash flow to cover the months without money flowing in.

What sets factoring apart from other forms of business financing in South Africa?

    In addition to the advantages already mentioned, factoring:
  • provides companies with a scalable financing option that is linked to turnover rather than fixed assets, such as property
  • does not require business owners to give up equity or control
  • is dependent on the creditworthiness of the business’s debtors rather than the business’s own credit score
  • is available very quickly, allowing businesses to access working capital while they need it

Why partner with Merchant Factors?

As the only truly independent debtor finance institution in South Africa, Merchant Factors can offer businesses the shortest turnaround time in the industry from application to pay-out.

Another advantage of choosing Merchant Factors, is the comprehensive and professional debtor administration service that it offers to all factoring clients. Traditional bank loans do not come with this added benefit but Merchant Factors offers valuable back-office support - acting as a credit controller and administering the sales ledger for its clients. Merchant Factors can conduct credit checks, phone debtors for payments due, send reminders and final demands, handle receipting and reconciliations, and even help clients to liaise with attorneys if it becomes necessary to institute legal action. This allows clients to spend less time chasing payments and more time generating new business.

For fast, flexible financing – contact Merchant Factors today.

Finance beyond the Numbers.