State plan to help SMMEs get loans

Government says movable assets such as livestock and vehicles could be used to secure funding




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● Small, medium and micro enterprises (SMMEs) could offer livestock, vehicles and furniture to financial institutions as security for loans to expand their operations — if the government has its way. The department of small business development has unveiled a plan to allow such businesses increased access to credit by introducing a register of movable assets they can present as collateral when seeking funding. According to the department, while most small businesses do not have the fixed property lenders prefer as collateral, they may have valuable movable assets they can offer to boost their chances of obtaining funding. This proposal is outlined in a draft SMME and co-operative funding policy document gazetted by the department two weeks ago. It is available for public comment. “A movable asset register with a supporting legal framework would provide a legal and institutional framework that will record the ownership and use of movable assets as collateral for small enterprise finance and make it possible for credit providers to make a legal claim on such collateral should the borrower default,” the document says. SMMEs have a low survival rate in South Africa, with up to 80% failing within five years. Lack of access to finance also leaves them vulnerable to predatory lenders. Broadening of asset classes Director of entities performance at the department of small business development Phillip Phaahla told Business Times that examples of movable assets include, but are not limited to, equipment, vehicles, inventory, accounts receivable, cash and cash equivalents, and livestock. “With SMMEs and movable assets, the intention is to broaden the asset classes as security for loans. We want to also use equipment, where if you buy equipment that can also serve as security.” Phaahla said the department also plans to expand an existing credit guarantee system to incentivise financiers to become involved in helping SMMEs grow. He said among issues raised by SMMEs is the challenge of keeping financial records, something that deters financiers. “When we started conceptualising this, we gauged the appetite of financiers to see if it would be supported. They said yes, but we are not only bringing this reform. We are also derisking SMMEs so they stand a better chance of honouring their debt obligations. “The implementation of the SMMEs and Co-operatives Funding Policy is expected to contribute significantly to the reduction or elimination of the prevailing credit gap that is estimated by the Inaugural South African SMME Access to Finance Report (2017) to be in the region of R346bn,” he added. Managing Executive for SME Banking at African Bank, Zizipho Nyanga, said that while the proposal is positive, there are other interventions the government could consider. “Another consideration to make in looking at this asset register is the value of the assets listed there. The value of those assets is usually taken into account in determining the adequacy of the collateral required by funders. There are some initiatives that government already has in place, which could improve chances of SMEs getting funding, an example is the loan guarantee which can assist entrepreneurs who might have a viable business but may lack collateral,” said Nyanga. The Khula scheme is backed by the Small Enterprise Finance Agency and the department. The document also notes challenges SMMEs and co-operatives experience with low savings and under-insurance. It says archaic definitions for SMMEs, including those related to turnover, ownership structure and legal status, have left many businesses uncovered and unsupported. Insurance cover The National Credit Act defines SMMEs with assets or turnover below R1m as consumers, leading to consumer-type information being gathered for these enterprises. “Insurance provides a cushion against costly and unforeseen events and is therefore important for SMMEs, but only 33% of South African SMMEs report having some form of insurance cover for their business,” the document says. Business Unity South Africa CEO Cas Coovadia said lenders need to be able to extract movable assets so they can be verified. He said if the system is to appeal to the funding market, there needs to be transparency and honesty from SMMEs. “This isn’t a new idea. We discussed this with DTI [the department of trade & industry] a year ago. SMEs, by and large, will not have accumulated immovable assets they can raise as collateral. We needed to look at ways they can raise assets. This needs a thorough and real-time system and mechanisms.” Coovadia added that SMMEs need a range of non-financial support from the government to thrive, such as human resources guidance and an understanding of laws affecting business. CEO of Spartan SME Finance Kumaran Padayachee said the proposal was “commendable” and he suspected it would have “varying impact” in the SMME sector. “Given that implementation is always the key difficulty, I would suggest eliminating most of the low-impact interventions. Some include partnering with other role players, [such as the] private sector. This ... allows for leveraging capacity and resources to ultimately aid implementation.” He said that while the policy is forwardthinking, it has been shown in markets such as Malawi to not materially affect lending rates. He said its potential boils down to how well designed its support systems are and if it is adopted by all role players. ‘Little discipline’ CEO and chief economist at Antswisa Transaction Advisory Miyelani Mkhabela said while the policy proposals are good, the risk associated with allowing movable assets to be raised as capital may deter the finance sector from buying into such a register. “It is always risky to use movable assets as collateral. You will find little discipline in movable assets. Among immovable assets, there are things like title deeds and secure sets of ownership. For movable assets it would be trickier,” Mkhabela said. Thommie Burger of JTB Consulting said the proposal for a movable asset register as collateral for funding is a notable initiative that attempts to address the challenges faced in accessing funding. “Considering the SMME landscape in South Africa, where accessing funding remains a significant hurdle, the proposed policy has the potential to alleviate some of the obstacles faced by small businesses.” Burger added that traditional collateral requirements set by financial institutions often pose difficulties for SMMEs, and by allowing movable assets to be used as collateral the policy aimed to expand eligible collateral, potentially improving SMMEs’ prospects of obtaining funding. However, Burger warned of pitfalls and challenges that may arise during implementation of this policy, including related gaps, continued loan risk and other external challenges. “Ensuring the proper registration, valuation and monitoring of movable assets may require a robust and efficient administrative infrastructure to avoid misuse or manipulation. Assessing the value and risk associated with movable assets can be complex and subjective.” He added that the policy should consider external challenges SMMEs face, such as load-shedding and other economic uncertainties. It is vital to address the potential implementation challenges to ensure the policy’s effectiveness. DA MP Hendrik Kruger said his party is unhappy with the document and he will register his dissatisfaction with the policy at the portfolio committee on small business development. “One would have thought that it would propose or include strategies to strengthen partnerships with the private sector, especially commercial banks. “The policy must propose interventions or proposals that will make it easy for that to happen,” he said.