8 Ugly Truths on How Small Business Financing Will Change in SA after COVID-19

Small Business Financing is already one of the most difficult challenges to SMEs operating in South Africa.

Nearly nine months later, and we can all agree that the COVID-19 pandemic has changed the way small businesses handle their finances. Stay-at-home orders and limited office occupancy have forced businesses to completely transform the way they operate. With 2021 hopefully the year in which we slowly begin to return to everyday life, I want to believe that things will once again shift to reflect the chancing Small Business Financing Environment.

How will the way businesses seek small business financing change?

Small Business Financing Change #1: Delays in Seeking Financing

We are still in the throes of the pandemic and will be for some time (even with the talks of a new vaccine being rolled out in places like the UK), so making firm predictions about the future is difficult. That said, one of the big long-term changes we expect to see because of the pandemic is greater hesitancy among entrepreneurs and small businesses to seek financing early in the business lifecycle. You might call it an increased willingness to “bootstrap” — to invest the cash and resources available to you and your partners or team in your growth, rather than give up too much control (and expose yourself to financial shocks like the one we are currently living through) early on.

Small Business Financing Change #2: Stricter Standards for Credit

Small business owners are not using financing to sustain an unprofitable business in the hopes that it will turn around. The owners are cutting all expenses first. If the business is doing well on an accrual basis but not on a cash basis, usually due to a delay in getting paid, then owners are setting up a business line of credit. Banks have really tightened up their lending standards for business. You must have solid collateral to back up your business loan or line of credit along with a very good financial history to be approved. Many small businesses are going to survive or grow based on reinvesting profits instead of using business financing. This is not a bad thing. It often makes a business stronger.

Small Business Financing Change #3: Government Assistance Will Stay

The myriad of government funding options available to businesses in South Africa is here to stay. I think funding programmes offered by the IDC, NEF, ADBSA, etc. will be a huge catalyst for the economy and be around for the foreseeable future. Most government funding options have great terms (interest rates of prime or lower, moratorium periods, etc.) and will more than likely be utilised by a lot of very smart people to keep their businesses moving forward during these unprecedented times.

Small Business Financing Change #4: Getting Creative with Offers

Getting creative with the services and products offered is a practice that will continue well beyond the COVID-19 crisis. The pandemic has proved that flexibility and quick decision making is possible for businesses that traditionally offer limited options. The key to future financing will come down to how willing and how quickly businesses are able to roll out new offers to adapt to changes in demand.

Small Business Financing Change #5: Heightened Awareness of Alternatives

There has been an avalanche of financing options to help small businesses make it through the crisis. Grants, credits, donations, low-interest loans – the list goes on. If anything, small business owners have gone through an intensive on-the-job training period where the outcome is more awareness about alternative money options. I think you will see more small businesses think about researching local programs and resources offered in their community as a way to bootstrap a business. By leaning on local financing, and specialist financing (like Retail Capital), small businesses may be able to extend the runway to get a new business started.

Small Business Financing Change #6: Offering New Products or Services

Many small businesses have already started pivoting or diversifying their products and services to generate an additional stream of income. I believe this trend will continue to grow. For instance, many of my clients have launched digital products like e-courses and training webinars to cash in on the increasing popularity of digital learning. Plus, I think small businesses will now be more cautious about how they spend their money. They are going to implement strong emergency or bailout plans to help them stay afloat in times of crisis.

Small Business Financing Change #7: Budgeting for Emergencies

Creating a budget around COVID-19 supplies will continue for the near future. The pandemic caused many businesses to have to adjust their budgets to ensure that they have masks, gloves, and proper sanitation methods to keep their customers safe. Seeing as the pandemic is ongoing (for the short-term at least), those supplies will continue to have space in the budgets of small businesses for months to come. In any case, it is an overall good practice to keep money supply for extra unexpected expenses.

Small Business Financing Change #8: Changes in Payment Plan Terms

Many small businesses prior to the COVID-19 crisis were not very aware of the credit terms that they offered to their customers or, conversely, their suppliers offered to them. As cash flow has become tight, businesses have started to offer less generous terms to their customers. For example, payment in fifty days versus sixty days or having larger penalties for late payment. Likewise, many businesses are starting to take advantage of the late payment terms offered by suppliers. Paying 1% or 2% per month in late fees to suppliers may not appear to be a good financial option. In short, as the commercial credit market gets tighter, trade credit becomes more important. And so too does Trade Financing.

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