A solution to the small business finance gap

A solution to the small business finance gap


Cash flow squeeze? Invoice factoring may be able to assist you! Small and medium enterprises (SMEs) are the driving force behind job creation in South Africa, where they provide employment to a significant portion of the population. According to the Business Partners SME Index for the fourth quarter of 2016, almost half – 47% – of local SMEs had hired new staff members in the past 12 months.1

Small businesses are also heavyweight contributors to the nation’s economic development. A study on the small, medium and micro enterprise (SMME) sector of South Africa commissioned by the Small Enterprise Development Agency (SEDA) found that SMMEs can act as “key drivers of economic growth, innovation and job creation.”

The study gauged the extent to which this sector contributes towards GVA (GDP before taxes and subsidies) and found that SMMEs were responsible for 18% of GVA in the fourth quarter of 2010. Notably, this contribution increased over the years to reach 22% by the second quarter of 2015.2

How can we ensure that this upward trend continues?

For small businesses to continue stimulating economic growth and creating jobs in the current lukewarm economic climate, there are several factors which will need to be addressed. One significant challenge that many local SMEs face is limited access to business finance.

When the 2016 National Small Business Survey was conducted, interviewing more than 17,950 organisations across the country, the findings indicate that a lack of funding and/or insufficient cash flow is the biggest obstacle in the path to growth for this important sector.3

How can SMEs bridge this funding gap?

As economic expansion slows, some banks are becoming more risk-averse and it can be difficult for smaller businesses to access traditional loans and overdraft finance from these organisations. Equity financing is another option, but this can mean losing ownership or control of the business – a situation that many business owners want to avoid after the effort of building an enterprise from the ground up.

An alternative – and innovative – funding mechanism available to SMEs is asset-backed finance. This involves funding that can be backed by a range of corporate assets, including invoices. For companies that sell on an outright basis, accept credit terms not exceeding 120 days and deal business-to-business only, invoice factoring is an ideal way to access the working capital that is needed to fund the operational cycle, cover other everyday business expenses and keep growth plans on track.

When a business factors its invoices, it sells these to a financial services provider, ideally a specialised factoring company. This company then provides the business with funding that is secured against debtor balances outstanding; and takes over the responsibility of managing the sales ledger.

How invoice factoring benefits SMEs

Provided the small business chooses a reputable and experienced factoring company, invoice finance can unlock a range of advantages.

    These include:
  • A much-needed cash injection to meet payroll, rent, tax payments and other operational expenses
  • Working capital for business growth
  • Access to finance without compromising equity or control
  • A financial agreement that scales with the business, due to it being based on accounts receivable rather than bricks and mortar
  • The freedom to focus on profit-generating tasks while the factoring company chases invoice payments
  • The ability to pay suppliers promptly and capitalise on purchase discounts
  • A chance to build better relationships with suppliers and other stakeholders

All these benefits contribute to the long-term financial well-being of the business, which is good news for the SME sector and ultimately, the broader economy.

Choosing the right financier

Merchant Factors is an industry leader in servicing growing businesses in South Africa and beyond with innovative and flexible financing tools.

Since 1988, the company has been providing asset-based finance to growing businesses as an alternative (or supplementary facility) to traditional bank loans and overdrafts. Today, Merchant Factors is a well-established debtor finance institution that has successfully assisted over 2,000 businesses in achieving their unique financial goals.

One major advantage that Merchant Factors offers its clients is the fastest turnaround time in the industry from application to pay-out. This is made possible by its position as the only truly independent debtor finance institution in South Africa.

For fast, flexible invoice financing – contact Merchant Factors.

Finance beyond the Numbers.