It’s now a lot easier and faster for SA’s small businesses to access funding thanks to the influence of fintech. These fintech combine technology and data analytics to provide funding to businesses while also driving financial inclusion.
According to the National Credit Regulator, most small businesses do not last more than two years due to their inability to access funding. The rise of these fintech entities help not only the small business owner but the economy, says Idan Jaan, CEO and co-founder of Fundrr, a fintech providing funding for small businesses.
As the co-founder of Fundrr, Jaan says he has witnessed how the fintech industry has evolved over the last few years. “Fintech pioneers recognised that innovation was desperately needed to serve the needs of business. The funding gap was getting bigger and businesses had increased cash flow pressure due to economic instability.”
Fintech business funding has transformed borrowing for the better, he says. Other trends include credit scoring that drives financial inclusion, the speed of funding approvals and how fintechs are muscling in on the territory of banks.
- Credit scoring that drives financial inclusion
Jaan says when South African business owners apply for funding from traditional financial institutions, the banks assess a number of factors, including liquidity, current ratios, credit scores, debtors’ book and creditors’ book. This is a problem for early-stage businesses as they might not be able to provide all this information.
During the pandemic, banks wanted to ease their funding criteria and help businesses with funds backed by government via the ‘Covid Loan Guarantee Scheme’ that ran until July 2021. As part of this scheme, the banks reported figures that illustrate the scale of the funding problem.
By the end of June 2021, banks declined 56% of applications due to businesses ‘not meeting the banks’ risk criteria’, while 82% of the approved loans went to enterprises with a turnover of up to R20m, with an average loan value R1.22 million.
“Fortunately, emerging fintech business funders are providing solutions and are evolving beyond traditional credit scores by doing a more holistic assessment of creditworthiness with real-time, API driven, analysis of other data points.”
This helps to unlock capital for more businesses in South Africa that were hindered by old-school metrics currently used by formal financial institutions. Jaan says Fundrr’s average funded business has a turnover of R100 000 per month, which shows the underserved gap in the market that fintech is trying to fill.
A good example of innovation is how some fintech funders allow clients to connect their bank accounts and accounting platforms to allow instant access and overview of the business finances to drive financial inclusion.
- Speed is everything
Advancements in data analytics are not just improving how business funders assess creditworthiness, but it also rapidly speeds the process of getting capital.
“Accessing funding shouldn’t take as long as it has in a world driven by instant gratification. Businesses can now apply and are approved for unrestrictive lines of capital within hours, a stark contrast to traditional bank loans that can still take weeks.”
These fintech solutions enable entrepreneurs and other cash-strapped businesses to respond quickly to market conditions and opportunities by offering access to finance exactly when they need it, Jaan adds.
- Stepping on the banks’ toes
South Africans are beginning to trust fintech and with the increased trust comes increased adoption. A recent study by McKinsey indicated that South Africa has the highest penetration of fintech on the African continent, where around 94% of the population has access to the internet and mobile phone penetration sits at 100%.
“We see this at Fundrr, where over 80% of all our applications are done online using a smartphone outside working hours. Over recent years, the fintech business funding landscape has evolved and as much as I am a big fan of the South African banking system, it is evident that in this area, we are eating their lunch.”
Internationally it looks as if banks and fintech are either going to join forces or there will be cross-sector acquisitions, Jaan believes.
- How your business can use fintech for funding
According to Jaan, using fintech platforms such as Fundrr to access funding for your business offers a number of benefits.
“When it comes to taking short-term funding, more flexibility and transparency, especially for smaller businesses, can mean the difference between success and failure.”
The successes of these startups will help uplift the economy. “At Fundrr we are continuously revisiting our processes and building our technology to make funding for small business owners easier, less cumbersome and more flexible.”
Fundrr also went through a difficult time as many other businesses did during the pandemic as demand for funding increased and clients’ ability to pay decreased during the first hard lockdown.
However, Fundrr attracted an investor and grew its book by over 500% during the past year, disbursing 316% more per month than in the previous year.
The digital-only business quadrupled its team and is on track to disburse R100 million in funding to SMEs in the coming year. The immediate service, transparency and ease of applying has translated into a retention rate of 80%, with 4 in 5 businesses returning for additional loans.