SMEs’ unmet credit need estimated at R86bn to R346bn

MELITTA NGALONKULU: It cannot be denied that late payments are a threat to small businesses, and this leads to many SMEs (small and medium-sized enterprises) in the country not being able to pay off their creditors on time. At the end of last year Xero, the global small business platform, released research that revealed that SMEs are each owed R99 800 in late payments.

Today we are joined by Daniel Goldberg, the CEO of Bridgement, one of the high-growth fintechs operating in South Africa, focused on improving access to finance and cash flow for entrepreneurs. The innovative solutions allow entrepreneurs to survive late payments from clients and focus on growth. Hello, Daniel, great to have you on the show.

DANIEL GOLDBERG: Hi there, it’s great to be with you today.

MELITTA NGALONKULU: Daniel, with an estimated 2.5 million SMEs in the country, this means that the national scale of late payments could equate to R249.5 billion. What solutions would you say are needed to change this?

DANIEL GOLDBERG: It’s a good question and I think that the answer really depends on what type of SMEs we’re talking about here and what sectors or industries we’re looking at. At the 1 000-foot view, if we’re looking at the total SME population, 2.5 million SMEs, there are lots of different estimates on how many SMEs there are in the country and it depends on [if you are] including informal businesses, one-man-bands, informal traders, or are you limiting it to formal businesses, businesses that are registered with SARS and so on? Obviously that number comes down significantly if you are.

But regardless of what that number is, if it’s 700 000 or if it’s 2.5 million, SMEs play a critical part in our economy. They contribute a significant portion to GDP. They certainly could be contributing a larger portion and I think South Africa underperforms slightly compared to other countries around the world, in that SMEs aren’t contributing as much as they potentially could be. But they, nevertheless, are critical to the economy and they are incredibly critical to employment and job creation.

MELITTA NGALONKULU: How does this in turn affect small businesses in paying off their creditors?

DANIEL GOLDBERG: When SMEs are struggling with late payments that means that they have invoices that they have raised that are overdue – that’s money that’s owed to them. …while they’re waiting for it, that means they don’t have that money to pay their own creditors, to pay Sars, to pay employees and anyone else who they might owe money to. So it can make it very difficult for an SME to grow and sometimes even just to survive when they’re struggling with late payments and their customers are taking too long to pay their invoices.

SME finance needs not met by the banks

MELITTA NGALONKULU: Would you say that SMEs are keen on sourcing funding to pay off their debt, due to late payments from their clients?

DANIEL GOLDBERG: Absolutely, we see this left, right and centre. My company, Bridgement, being a fintech lending company, we provide SME finance. We see a massive need for finance from SMEs that’s unfortunately not being met by the traditional banks. This problem, this unmet need for credit amongst SMEs, is estimated at anywhere as large as from R86 billion up to R346 billion. That’s a huge number and the truth is that R346 billion probably includes a lot of businesses that might want funding but might not be fundable, they may have unrealistic requests or needs for credit. But, nevertheless, even on the lower side of that estimate, R86 billion is required by SMEs, that is a huge problem and that’s a problem that we’re working very hard every day to solve, leveraging technology and data science to simplify access to finance for SMEs.

MELITTA NGALONKULU: You’ve mentioned that Bridgement offers SMEs assistance when they need finance, what percentage of interest could they actually be looking at?

DANIEL GOLDBERG: First of all, we don’t actually charge interest, we offer a type of finance referred to as invoice finance, also known as invoice discounting, debtor finance, factoring and so on. We’ve created a new way of doing invoice finance that is much better suited to smaller businesses that might not necessarily have invoices to blue chip companies and so we have built some technology that integrates into their accounting software like Xero, Sage, QuickBooks [and then we] import all their invoices at a click of a button, assesses and then determines what finance we can give them. So then to go back to your question, the way our service works is that when we advance funds based on an invoice to an SME we charge them a clearing fee. We charge them essentially an advance fee, which can range from anywhere around 1.7% per month, up to about 3% per month on a simple basis. We find that the opportunity and the value that we unlock for SMEs by unlocking the funds that are tied up in their unpaid invoices only helps them grow because with getting those funds in quicker means that they can generate more revenue quicker, they can buy more stock and turn stock quicker, sell more, take on more projects, hire more people to service more clients and so on. So we see that our finance helps SMEs massively in growing their businesses and sometimes in also surviving if they are experiencing a significant cash flow shortage.

‘We’ve been able to get funding to a business within 90 minutes’

MELITTA NGALONKULU: How many days would you say that it actually does take for SMEs to decide to go and seek funding once they realise that their clients are not paying them?

DANIEL GOLDBERG: It’s a good question, if you look at the traditional space, the numbers, the stats that are thrown around usually are that it can take an SME anywhere from around three to five weeks to obtain a business loan at a traditional bank, for example. Now, if you’re a small business owner and it’s the twenty-fourth of the month and you’ve got salaries to pay the next day, and you unfortunately don’t have the funds to pay those salaries or perhaps you need to pay SARS, otherwise you’re going to incur a huge penalty, you incur a 10% penalty immediately when you miss your SARS payments, you don’t have that time, you can’t wait three to five weeks. So that’s really what Bridgement has aimed to solve is we essentially try and get SMEs funding as quickly as possible. So our record to date is we’ve been able to get funding to a business within 90 minutes, that’s 90 minutes from the time that they first apply to the time that the funds land in their account. So that is a world apart from going the traditional route. Now, of course, that’s not every client, some clients take longer than usual but the point is that with fintech we are able to offer funding a lot quicker and solve those immediate and urgent needs that SME owners are experiencing

MELITTA NGALONKULU: Ninety minutes is incredibly impressive.

DANIEL GOLDBERG: Eventually we’ll get it down to a few minutes.

MELITTA NGALONKULU: When it comes to the government, obviously we cannot deny that they are the greatest culprit when it comes to late payments. I know that recently they are proposing that SMEs can actually start charging interest for late payments. Do you think that’s the solution and will it actually solve anything?

DANIEL GOLDBERG: Look, in the absence of anything else I will take it, it’s helpful. But, let’s be honest here, a small business that’s supplying government, that has issued an invoice and that invoice is overdue, charging interest on that invoice is not going to encourage government to pay. It’s not really going to incentivise government to pay because my understanding is that one of the biggest problems for SMEs not getting paid on time by government is corruption, it’s people looking for a bribe or whatever it is, some sort of payment on the side in order for their invoice to get paid, which is really crazy, but unfortunately charging interest on that invoice I don’t believe is going to solve the root cause of the problem. A business owner can charge interest for days but if his business goes under it doesn’t help, and an invoice not being paid, especially if it’s a big one or it represents a significant portion of their revenue, it can potentially take a business down.

MELITTA NGALONKULU: Would you say that our corporates are any better when it comes to paying SMEs on time?

DANIEL GOLDBERG: I don’t think corporates are necessarily any better, I think the reason why government pays SME suppliers late is that it might be different to when we are looking at the private sector and the SME is supplying a large corporate, the reasons might be different but I don’t think the corporates are much better. We’ve seen some really crazy stuff out there, it’s often referred to as supply chain bullying, which essentially just means that large corporates will have many small businesses, many SMEs supplying them and they bully them, they bully them into accepting payment terms that are very difficult to survive on. If you look across the total SME population, on average you are looking at invoice payment terms of around 30 to 60 days. But actually that’s just an average and if you look at the private sector and you look at SMEs supplying large corporates, some of these large corporates are making SMEs wait 90 days, 120 days, 150 days, we’ve seen up to 180 days before, which is really absurd. I cannot understand how any SME can survive operating while waiting that long to get paid on invoices. Unfortunately it’s something that corporates do because of the power disparity, it’s a disparity in power in the relationship between the small business that’s supplying this large corporate and there’s not much the small business can do about it, it’s not like they can really go to the large corporate and try to negotiate better payment terms, in most situations the corporates will prescribe what their payment terms are and the suppliers will have to accept them. If they don’t, then the corporate will go elsewhere and find another supplier. So it makes it very difficult, we had one client that was a manufacturer that was suppling one of the large retail chains in South Africa and one day they received an email that their payment terms were going up from 90 days to 120 days and that caused significant pressure on that business’s cash flow. It made it very difficult for that business to continue growing and taking on more orders because so much of its revenue or funds expected was tied up in unpaid invoices. We had another client that was supplying literally one of the largest brands in the world and the SME was an event organiser and they had won a huge multi-million rand contract to run this event for this large multi-national corporate and when they got the contract after they won it, they got the payment terms and they saw that they were going to have to wait 120 days after the event happened to get paid. Now, if anyone is in event organising, you probably know that you have to put down deposits well before the event. If you are hiring a speaker you might have to pay them or partially pay them ahead of the event and so on. So effectively this event organiser was having to put down money well before the event and then only get paid 120 days after the event, so it’s actually even worse than 120 days because they had to put down deposits and things well before the event. They had to essentially finance about an eight-month gap between putting down funds or putting down deposits initially and actually getting paid on that event. They looked at this and eventually decided that they actually couldn’t survive it, an eight-month period to wait for payment on an invoice is probably impossible for most SMEs to survive. They’ve got bills to pay, you incur the costs up front, you’ve got salaries to pay, you’ve got rent to pay, you’ve got to pay tax, you’ve got VAT payments and so on, you’ve got your own suppliers that you need to pay and all that you are having to pay well before you get paid for the event 120 days after the event. It’s incredibly difficult for small business owners. I think for small business owners that are trading or supplying with other small businesses or other SMEs, then it’s a little different because there isn’t the power disparity in the relationship, it’s not like one party in the relationship can prescribe all the terms, in those scenarios you have a bit more say and then you can negotiate payment terms. Bridgement actually has a couple of blog posts on some of the top tips for how to get paid quicker on your invoices and how to deal with late paying clients.

MELITTA NGALONKULU: That was Daniel Goldberg, the CEO of Bridgement.