Banks 'obstruct small firms'

Johannesburg - The onerous sureties and financial demands banks impose on entrepreneurs are holding back the establishment of new small businesses in SA.

That's the view of a number of leading South African entrepreneurs, who spoke to Fin24.com this week.

"The banking sector in South Africa is anti-competitive and as a result dictates the terms of any financing entrepreneurs receive, especially SMEs (small- and medium-sized enterprises)," said Vinny Lingham, founder of IT firm Yola.

Rory Mackay, who started a business in the financial services and vehicle leasing sector three years ago, has first-hand experience of the frustrations of trying to get business finance.

"South African banks have it completely backward," Mackay said.

"When I went out looking for financing the only questions the banks wanted to ask were whether I had revenue and what I would put up for surety - but if I had revenue, I wouldn't have been coming to them for financing to start the business."

Lingham and others believe that SA should follow the example of the US, where business owners are able to source finance with limited assets.

According to a Standard Bank representative, the average aspirant franchisee would need to put down about 40% of the investment in a franchise. This equates to between R250 000 and R400 000 for reputable franchise chains - beyond the reach of most would-be entrepreneurs.

Lingham believes that personal surety demands from banks should be "outlawed" for smaller businesses to stimulate growth in the sector.

But Itumeleng Kgaboesele, CEO of unlisted investment holding company Sphere Holdings, said the comparison with the US is misplaced.

"An important difference between South Africa and the US is the amount of venture capital money available to entrepreneurs."

Instead, Kgaboesele - who is also head of the South African chapter of the Entrepreneurs Organisation, a global body aimed at developing entrepreneurs - believes financiers should encourage education and the hands-on mentorship of small business owners as a way of reducing risk.

He points to the success of the franchise industry in South Africa as an example of mentorship from a strong franchisor being a significant boost.

Brett Commaille, CEO of venture capital firm Invenfin, thinks banks should allow local representatives greater freedom to evaluate entrepreneurs.

"There needs to be a shift in the thinking of the banks that gives the sales or business consultants the freedom to be entrepreneurial."

This, he said, will let them get to know the business and lend to the entrepreneur from an asset pool that possibly has a higher risk classification.

- Fin24.com