Start-up funding poser

IS IT fair to expect a bank to provide an end-to-end funding solution to support small businesses?

That was the question I asked myself after I met with heads of the various small banking units within the First National Bank group.

Genuine full-spectrum small business banking requires an institution that funds start-ups, expansion, debtor financing and working capital for an established or growing small enterprise, as well as asset financing for vehicles and property.

Before some of you start jumping up and down and complaining about how nasty the banks are because they declined to support your start-up idea, let's take into consideration what that entails.

Lending to start-ups is hugely time-consuming and risky. Chances of failure are extremely high - probably eight out of 10 - and very high resources are needed in terms of manpower and supervision to ensure that the small business gets its best start in life.

Logically, banks are going to shy away from supporting small firm start-ups until they start developing something of a track record. That leaves a funding gap when one considers the emphasis the country has on developing small- and medium-sized enterprises (SMEs) as a way of tackling unemployment.

Infrastructure not in place

Compounding the problem is that we as a country have a very small and specialised venture capital sector and the investment return for angel investors (non-formal lenders) in South Africa is often unappealing - particularly in the smaller scale start-up lending. In a nutshell, this is a country that wants to promote start-ups without necessarily having the infrastructure in place to promote them.

Yes, we have seen the emergence of some funds focused on start-ups such as Khula and the Innovation Fund, but far more depth is needed in this segment of the economy to make it grow.

The question that begs to be asked is whether this is a banking sector issue or a bigger structural one.

Government has started to provide tax incentives to the venture capital sector for smaller investments (under R1m), which is a positive move. Could these be extended to angel investors, who would then be incentivised to take lower returns because of their gain on the tax side?

Ditch BEE brownie points for SME scorecard

What about tax or municipal rate breaks for small business mentors in their personal capacity, or incubators which provide shared resources for small firm start-ups?

Could a portion of the funds which have been allocated toward skills development in a sector be better utilised if they were managed by an industry body (non- government) to support entrepreneurs in that sector?

South Africa also doesn't have structures in place to allow for the promotion of social lending to assist small businesses. A year ago I bashed a small business called AngelMoola, not totally understanding why an enterprise of its nature is important.

If you look at the success of the Kiva initiative - where lenders can support SMEs around the globe for $25 - we could be missing an opportunity to really develop genuine grassroots businesses.

On a lighter note, black economic empowerment is so last season - why can't we have scorecards for corporates supporting small business if it is such an important part of the economy?

Don't worry - I haven't gone soft. I still think banks have a role to play in the development of small business, but laying the blame at their door for not supporting start-ups is perhaps a little disingenuous when there are steps beyond mere funding access which could be taken to promote the sector.

- Fin24.com