Business dynamics have changed fundamentally and today, transparency has never been more important to a successful business model. The ‘need to know’ concept is being broken down by savvier, more skeptical consumers and small businesses and a fundamentally connected economy which demands that transparency extends beyond personal interactions, to become a core business pillar.
In fact, today, transparency is critical across all business sectors and the financial services industry is certainly no different. If we consider that some researchers have estimated that, in South Africa, small and medium-sized enterprises make up 91% of formalised businesses, provide employment to about 60% of the labour force, and total economic output accounts for roughly 34% of GDP, its concerning that access to finance is the number one challenge faced by SMEs in South Africa. The appetite is certainly there. According to FinFind between October 2015 and March 2017, 77571 small businesses visited the site (66% new vs 34% returning visits) looking for financial support.
One has to therefore wonder – if the appetite is there, is there a disjoint between regulation and actions? Is the right information being disclosed for educated financial decision making? Or are small businesses being remiss and irresponsible in terms of their financial requirements? Or is it a combination of a number of factors?
The financial industry in South Africa is well developed and is rapidly evolving in response to regulatory changes, economic pressures, technological advances and digital/mobile innovation. Despite this however, there are notable gaps in the market, ones that point to the need for more personalised and affordable offerings – especially for small business and an emerging informal sector, which typically points to previously, unbanked individuals. This has led to the emergence of non-traditional financial providers providing alternative funding solutions (such as unsecured loans, merchant cash advances, revolving credit facilities etc.) to small businesses. However, given that this is still a relatively new model, the governance, transparency and treatment of customers, needs to be, and should be, regulated. What’s more, it points to the need for education – based on transparency and easy to understand material. Many small business finance seekers don’t understand the different loan products and what is required of them, while the primary problem from a lenders’ perspective is that they are looking for viable business models.
Businesses clearly need to understand the following in the context of applying for a financial product:
- What the product is and how it works – including all fees and charges, as well as the total amount should be disclosed in a clear and transparent way to ensure it is easily understood and that the benefits are clear, and in no way misleading.
- Clearly understand the typical product features and how the funding and repayment process works, the frequency of payments, and the amount of each payment.
- Understand the contract – the terms, as well as finer details such as settlement discounts and contract termination.
What’s more, all marketing and promotional material needs to be clear – clearly stating the key features, benefits and risks associated with each lending proposition so that small businesses can compare products to see what suits their requirements and make an informed decision based on risk and reward. Equally important, is for lenders to reveal all pertinent information upfront before getting the signature on the dotted line – so that there is no confusion later.
The SME Finance Sector represents one of the largest untapped market segments – and as there are new and various lenders out there competing to deliver and gain market share, many are also exploiting the market. Having a Best Practices Association – such as the SASFA – that encourages transparent and responsible lending in the unregulated SME Finance Sector will go a long way to providing small businesses with the peace of mind they need, that they are engaging with lenders who are committed to providing this transparency and conforming to best practices.
And such disclosure and commitment is exactly what the industry needs!