Even though some media have correctly reported on the failings of the government’s loan guarantee scheme, the focus should instead be on how it can be more optimally structured. Ultimately, the intention behind the scheme is to deliver funding as effectively as possible to those small businesses who need it most during the COVID-19 pandemic.
Under terms of the scheme, distressed business can apply for bank loans provided they meet certain criteria. Between them, government and commercial banks are sharing the risks of these loans. However, banks can ask for security or surety as they see fit and are not obligated to provide the loan. Furthermore, they must use their own risk assessment services to evaluate the merits of each application. This is understandable given the nature of the loans. But while the concept of the scheme is good in principle, it does not account for the conservative nature of banks.
After all, these are institutions that take deposits from the public and need to ensure they protect this capital. As highly regulated entities, banks are focused on protecting the depositors from risk at all costs. This, and the fact that they do not fully understand the nuances of how SMEs differ from larger traditional organisations, combine resulting in them not being the ideal vehicle for these loans.
With only R10.6 billion of the allocated R200 billion distributed by the end of last month, more must be done to get funds to those SMEs that are teetering on the edge of survival thanks to the lockdown. According to some reports, banks received approximately 34 000 applications and rejected 37% of those. So, when compared to the Sukuma Relief Programme (driven by the Rupert family and Remgro Limited) that quickly become oversubscribed thanks to loans being paid out within seven days, government must reconsider its approach to the loan guarantee scheme.
Alternative financing solutions providers such as Preference Capital and others who specialise in the SME market, provide a unique perspective on funding small businesses in the country. Of course, these organisations are also regulated but the difference is their focus is on driving growth in a segment of the market that has become vital to the economic stability of the country.
For example, the credit criteria these financiers use are more tailored to the SME market. It is centred on getting funds as quickly as possible to those who need it most considering how cash flow is king. No SME can afford to wait three months to get funding. The livelihoods of the employees and even the longevity of the business depends on a robust cash flow cycle.
The question is if government would ever consider putting part of the management of the fund in the hands of non-banks. Certainly, these alternative financing companies could have tailored their solutions for business grants and the government loan scheme more easily than the more conservative banks. By their nature, these businesses are more aggressive and would have dispersed the funds equally aggressively.
Fundamentally, the government needs to work closer with those entities who understand the SME market and can aid in their own understanding of the unique needs and challenges of small businesses. If anything, the lockdown will bring this into the spotlight with lessons to be learnt for future growth.