SME Funding In A Pan-African Banking Environment: Science And An Art

Author: Jan De Kock, Head: CFM Origination, Absa Corporate and Investment Banking (CIB)

The SME funding landscape is changing, and we are seeing several new players and new products emerging in the market. Apart from driving competition, these new changes are also steering the leadership teams of banks and large funding institutions towards innovative credit approaches, quicker turnaround times for funding applications and more competitive pricing to SMEs. According to data published in 2021 by the International Finance Corporation (IFC), there is a $5.2 trillion funding gap within the over 65 million Small and Medium-Sized Enterprises (SMEs) that are operating in developing economies. As a leading Pan-African banking group, this is a statistic that we are constantly interrogating as we look for innovative ways to unlock funding for SMEs. One of the effective ways to unlock funding is to find opportunities within the ecosystems and value chains of our corporate clients and we are seeing positive developments of this in markets such as Ghana, Uganda, Kenya, Tanzania, Mozambique, Botswana and Zambia. We believe this bodes well for Intra-Africa trade down the line. 

However, as we have recently seen in the United States, lending to small or high-growth businesses is not easy in the developed world. In developing markets, it is a combination of art and science and the deals that are done well can be transformative for a sector. There is a very good example of this in Uganda.

In Uganda we have seen a brilliant success story where the Ministry of Education awarded a contract to Planet Systems Limited, a local information technology company. Under this contract Planet Systems is required to procure, install and configure computer hardware and related equipment in high schools across the country which will serve as digital teacher effectiveness and learner achievement systems. The contract allowed Planet Systems to access significant trade finance to fulfil its obligations and increase its employee base by 185 people in the process.   

Navigating the funding options of a bank can be daunting for a small business that is presented with different funding alternatives, including working capital, term finance, asset finance and trade finance. It is critical to place emphasis on the cashflow operations when preparing a funding application.  Typically, very few SMEs have a balance sheet that they can lean on or borrow against. When Enterprise and Supplier Development (ESD) teams are considering funding a transaction, their focus is on the ability of the borrowing entity to generate future cashflows to repay the loans.

It is important to remember financing can extend beyond traditional invoice clearing and debtor finance solutions, to incorporate purchase order and contract stage funding as well. SMEs typically require most of the funding at contract stage and not after work has been completed and an invoice has been delivered.  

Obtaining funding for your business goes beyond having a good idea and attractive cashflow forecasts as the bank is not only taking a credit view on the business but may also be assessing the character and standing of the owners. As such, preparing a complete document bundle for your banking partner to review is imperative.

This will include, but is not limited to: 

  • A business plan or profile, including CVs of the owners. 
  • Latest annual financial statements and management accounts.
  • Signed copies of any key contracts and new business secured.
  • 6-month bank statements for both the company and owners. 
  • Income and expense statement for the owners as well as an assets and liabilities summary. 

As mentioned earlier, SME lending is a combination of art and science, and as you can see, it requires the ability to bring together a compelling SME story, while at the same time understanding and meeting the requirements of credit committees. 

Stories like this are some of the reasons why Absa is investing significantly in post-lending SME support which focuses on improving SME cashflows that ultimately makes them more competitive and sustainable in the market.  

The value of formal SMEs in emerging economies cannot be understated as they contribute up to 40% of Gross Domestic Product (GDP) and create 7 out of 10 jobs. It is critical that we create an enabling framework for them to access funding to unlock this potential, and we take heart from the innovation we are seeing in the market at the moment.  

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