Small and medium enterprises (SMEs) account for almost half of South Africa’s gross domestic product (GDP), up to half the formal wage bill, and some 60% of private sector employment. So, most banks feel it is important to find ways to give SMEs access to finance to increase the positive effect they have on the national economy.
Related: How to Fund your Small Business
The trouble is, though, that banks are strictly regulated, because they are responsible for the billions of rands entrusted to them by individuals and businesses. In other words, like SMEs, banks play a vital role in the economy. They cannot put themselves at risk by lending money to small businesses that might fail.
As a result, they have standard processes and procedures for assessing the credit readiness of a business and how likely it is to repay what it borrows.
Get credit ready
“As the bank for entrepreneurs, we focus on making access to credit possible and, therefore, take different approaches to helping SMEs get to credit readiness,” says Ethel Nyembe, Head of Small Enterprise at Standard Bank.
“We believe that credit is only one element of an SME’s financial responsibilities. So, it should not become a burden to the business. For that reason, our Small Enterprise unit offers basic affordable banking services that enable small businesses to build financial records and capacity.
We then add to these services, tools, such as our small business portal, that enable SME owners and managers to build their financial management capabilities.
“We also provide our SME customers with credit solutions that range from simple overdrafts and asset (vehicle) financing, to working capital and property finance services. These are complemented by payment, investment, risk management and cash management solutions designed to help them improve their credit worthiness.
“More than 90 of our relationship managers around the country are trained to provide these services. It’s worth taking the time to talk to them to understand what you need to do to help us help you.”
Get the 5 C’s in place
Another way of doing this is to follow the bank framework of the ‘five Cs of getting ready for credit:
- The first C is for ‘character’ and relates to your personal records, behaviours and attitudes. You need to show a good record of repaying debt, a good record in the industry in which you operate (including qualifications, certification, industry networks, and customer base), how committed you are to your business in terms of the time and money you have invested, and how much business management capability you have.
- Then there’s ‘capacity’. This relates to your business’ ability to repay specific amounts at specific times. Can you afford the new debt? How strong is your cash flow? How reliable is your income and will there be money in the bank on the day you need to make repayments?
- ‘Capital’ refers to how much your business is worth in rand terms, how much you and other investors have put into the business, and whether you have other means of settling your debt if the business cannot.
- ‘Collateral’ is about the assets you agree to use to repay the bank if your business cannot.
- The last C, ‘conditions’, takes into account external factors that could affect your business. Environmental conditions refer to the general state of your industry and the area where you trade, consumer demand, the state of the national economy, your competition, and the banks’ risk appetite as a result of all these factors. ‘Conditions’ also includes the purpose for which you need finance. You need to show that the loan will be used to develop the business instead of getting it out of trouble.
“Any owner of an SME who comes to us with as many of the five Cs in place as possible already demonstrates that they are serious about their business and about interacting with the bank responsibly,” says Nyembe. “It’s a great way to start a business banking relationship with us.”