Looking for Credit First Know What Lenders Are Looking For

By Emmanuel Sinclair, Vice President of Diversified Markets for TransUnion Africa

One of the biggest challenges facing South Africa’s SMMEs right now is accessing credit in a tough economy. Credit is fundamental to the success of the SMME sector and lenders alike, but many lenders are taking a conservative view in the face of volatile economic conditions and a lack of data on small businesses.

According to the OECD’s Financing SMEs and Entrepreneurs 2022 publication, there are around 2.6 million micro, small and medium enterprises (SMEs) in South Africa, of which only 37% are considered formal. Of these, 54% are micro-enterprises, and 15% are in rural areas. Many are people conducting some sort of business through sheer necessity, and who have no alternative sources of income. Two out of three have no employees. And that’s the first challenger for lenders: while most consumers have credit profiles, many small businesses don’t, which make it difficult to assess their risk.

The fact is that lenders want to lend money to SMMEs, but the sector comes with unique requirements around risk. Lenders will generally try to predict when businesses are going to pay late, or not at all – but they need time to make informed decisions based on data, and time is often in short supply.

For many lenders, solid credit decisions are built on the framework of the 5Cs, which allows them to manage credit risk appropriately across all segments and business sizes. If you, as an SMME, align yourself to this framework, you’re could be exponentially increasing your chances of accessing credit.

Cash flow

As an SMME looking for funding, can you demonstrate to lenders that your business generates enough cash flow to repay your borrowings? Here, it’s important to differentiate between the operating cash flow and your investment cash flow, which should be used exclusively to grow the business. If your business is using funding to cover your operating costs, that’s a major red flag to lenders.

Capital

Lenders will always look at where an SMME is using its capital, and whether it is able to make any contribution itself towards a potential investment. A good indicator of whether it’s safe to lend to an SMME is how much skin the founders or owners have in the game. If you can show effective capital use, you’re a better risk.

Collateral

This is a familiar challenge for every SMME owner: they don’t always have collateral. But the fact is that collateral remains a key mitigator of risk. How can you show your potential lenders what collateral can be easily liquidated? Make sure you know the value and quality of hard assets like inventory, property and equipment, as opposed to intangible assets like goodwill, which are harder to realise.

Character

Character is essentially a lender’s opinion of a borrower’s general trustworthiness and credibility. And establishing character doesn’t have to be subjective. For more established SMMEs, a lender’s Know Your Customer (KYC) process will quickly uncover your credit history, credentials, references, reputation, and

your previous interactions with lenders and their customers. The key here is to be forthcoming with quality information, which all helps set a calculated risk for a lender.

Conditions

What industry is your business in? What is the state of the economy, and how does it affect that sector? Is the business growing or battling? Who are your competitors, and what is the state of your supplier and customer relationships? By having clear, substantiated answers to these questions, you help paint a better picture of your ability as an SMME to repay your loans moving forward.

The bottom line is that it’s critical for SMMEs to know how lenders assess their suitability for credit, and have that information easily available, for you to access the credit you need to grow your business in tough times.

For more information visit: https://www.transunion.co.za/business