South African Small, Micro, and Medium-sized Enterprise (SMME) owners understand that obtaining business funding is imperative to business growth. However, imagine running a thriving SMME and being denied funding because of a lack of formal banking history.
For many South African SMME owners, this can be a genuine hurdle. There appears to be good news on the horizon though, with moves by lending industry players to get this barrier out of the way.
As Garth Rossiter, Chief Risk Officer at Lula says: “It is vital that SMMEs have access to reliable and responsible lenders and are able to make use of credit in a responsible manner in order to scale their enterprises”.
Considering that SMMEs contribute approximately 40% of the South African GDP, serving this exciting sector of the market is key to the overall economic growth of the country.
In order to qualify for business funding, the personal credit score and financial health of business owners can often significantly impact the eligibility of the business for funding approval.
In the context of lending, it is crucial for these owners to monitor their personal credit scores closely. They may also want to consider seeking funding from lenders who prioritise fairness, transparency, and responsible lending practices, such as Lula, or other alternative lenders who are members of the South African SMME Finance Association (SASFA).
To obtain credit scores when assessing an application for funding, Lula, like similar traditional and alternative lenders, uses credit bureaus for the necessary information. However, not all credit bureaus and lenders are the same.
In the South African economy, conventional methods of data usage when assessing credit are insufficient when it comes to serving a market that is often not represented on traditional credit bureau databases.
Many SMMEs in South Africa often lack documented records of their credit activities in the traditional sense, such as bank accounts and other credit facilities, which have been the primary means of tracking financial activity until now.
As Mladen Čolić, Head of FinTech at TransUnion Africa explains, “We use alternative data, like mobile device information, to calculate credit scores for individuals without traditional payment profiles, enabling an assessment of their creditworthiness despite limited formal economic activity.”
This new scoring method of risk assessment is good news, specifically for the underserved entrepreneurs who drive the SMME sector of the country. To unlock the potential that funding offers SMMEs for growth and progress, factors such as industry, geography, and even mobile usage and expenditure are considered. The dual impact of business and personal credit scores allows lenders to determine overall risk. Addressing both is critical for improving eligibility.
Many creative, resilient, and forward-thinking SMMEs are run by people who may not have had access to formal banking, and there must be reputable lenders who offer a platform for these SMMEs to grow and scale.
As Rossiter points out: “We’re passionate about small businesses and helping them grow. By taking into consideration factors more than just the traditional lending attributes for credit scoring, this move is opening possibilities for SMMEs to contribute to the South African economy in a much more powerful manner.”
As a personal credit score is used in the credit granting process, SMME owners considering obtaining funding for their established businesses should also pay attention to their credit health. Owners should:
- Request their credit score from credit bureaus like TransUnion (one free credit report is available per annum in accordance with the National Credit Act)
- Settle all monthly obligation payments
- Avoid overextending themselves by having too much or unaffordable debt
- Ensure their credit utilisation does not near their limit, which may be an indicator of overutilisation and thus financial stress; and
- Monitor their credit report regularly, not only to dispute any errors but to remain vigilant for potential fraudulent activity as well.
Access to funding can transform SMMEs, unlocking opportunities for innovation, investment, and expansion which extends to the lives of those employed and served by SMMEs.
Small businesses should be encouraged by the moves being made by forward-thinking lending industry players that will help them thrive and contribute to building a stronger, more inclusive economy. If everyone works towards a common goal, it will bridge gaps and drive positive change.
PERSONAL FINANCE