Small and medium-sized entities (SMEs) are urged to embrace credit bureaus as a vital tool in expanding their businesses.
Glen Bals, senior executive: business information at Experian South Africa, says too few of South Africa’s estimated 400 000 SME owners are aware of the importance of keeping their records updated and of understanding the components of those records.
“Small companies rely heavily on trade credit yet they often don’t fully understand how critical it is for them to create an environment conducive to them receiving trade credit,” says Bals. “After all, in most cases the more information about your business that vests in a bureau, the better your credit rating and better you can trade.”
He draws attention to the occasions that SMEs were turned down when they sought trade credit.
“By being actively aware of the need to nurture their ratings, this need not happen. It is vital for them to manage their credit profiles positively.”
In a macro sense, this was crucial; given especially the widespread acknowledgement that SMEs promoted employment and that they are considered the backbone of the economy.
“But that addresses what we are going to do for our clients; it doesn’t address an understanding of the SME conundrum.”
In South Africa, says Bals, Experian defined an SME as a small, owner-managed company with fewer than three directors, who were also shareholders; and one with an annual turnover of less than R7,5-million.
The banks face challenges when it came to fully understanding SME risk and arriving at lending decisions based on that understanding. Bals says banks generally sought the answers to two questions:
* What is your profitability?
* What assets can we take as security?
“Large businesses generally have either substantial profit or assets to offer as a security. But in a small business, the proprietor often doesn’t in his private capacity have enough security. The only thing he has in his trading business is his debtors’ book. And banks seldom advance more than 40% of the book.
“That’s why SMEs may find it difficult to get finance from banks. They don’t have the security to offer and they don’t have the profitability.”
Bals suggests that this is why government wants to work with the bureaus; to help finance the nation’s small concerns and help them gain access to trade credit.
The state’s criteria would be a lot less stringent than those of the banks. “They can take more risk because for them it is not a commercial proposition.”
He identifies as a “significant” SME hurdle big companies’ reluctance to pay more money for information on SMEs because, relatively speaking, they did not earn large returns from these entities.
“They are willing to pay for information on larger companies, because that’s where most of their business activity takes place.”
That was why, unless SMEs self-promote, they may find it difficult to make headway. “A large entity might pay R100 for information on an SME, whereas for a large business they would be quite prepared to pay R1 000. That’s where the problem lies. And unless SMEs promote themselves, this problem will continue.”
He is, nevertheless, optimistic that the situation will start to improve with the growing use of innovative SME assessment tools now on offer to the industry as well as a focus on increasing awareness by SME’s to build their credit profiles.