Newly launched Kisby Fund aims to raise R5bn in funding for SMEs
Covid-19 brings SME funding into focus
The Covid-19 lockdown has had a catastrophic impact on SA’s small to medium-sized enterprises (SMEs). Businesses are desperately trying to stay afloat under restrictive conditions or have lost their revenue entirely. As many as 75% of SMEs could be pushed to permanent closure by the end of the lockdown, with a projected 500,000 jobs lost.
SMEs are key to job creation, employing 47% of the workforce and contributing more than 20% of GDP. The National Development Plan has set a target for the sector to create 90% of local jobs by 2030. This will remain an ambitious, ever-shifting target if SMEs cannot overcome their biggest challenge: funding.
In a recent Business Day Dialogue with Sean Emery, Fatima Vawda and Andile Khumalo, Mark Barnes, executive chairman of the Kisby Fund – an online platform that aims to raise R5bn in funding for SMEs – said it was crucial to help SMEs secure the funding and support they need to kick-start their contribution to economic growth, especially beyond the Covid-19 pandemic.
Watch the full discussion on SMEs and launch of the Kisby Fund below:
People in employment are “an asset to the country because they pay taxes, spend money, send their kids to school and financially support others”, he said.
“An unemployed person is a liability who has to be supported by the state. If we are to address economic issues on the ground, we need to go into the lifeblood of the economy and move away from established mature capital markets and into SMEs.”
The Kisby Fund is a partnership between 4AX Debt Services, credit provider Rainfin and media company Arena Holdings to provide funding to SMEs with revenues of R10m–R1bn through an online loan platform underpinned by 4AX Debt Services.
Using fintech to assess the growth stage of a business, Kisby tailors a mixture of equity and debt instruments to offer appropriate and affordable funding for that business. Where average lending rates are prime plus 17.75%–32.75%, Kisby offers prime plus 12.5%.
During the Business Day Dialogue, Rainfin CEO Sean Emery said there had been a significant shift in SME funding, as investors realised they needed to take institutional capital from companies “in the Sandton Towers”.
“We’re seeing institutional and development capital pool together to produce better financial products for SMEs who are looking for growth capital,” he said, adding that small businesses have had to stomach exploitative capital that damaged their profitability and ability to create employment.
Emery made an example of purchase order loans that provide short-term finance for the full value of an outstanding purchase order, usually at 6% interest over the 60 days before the invoice is paid. During the lockdown, many businesses have resorted to these loans to ensure cash flow, as companies have held off on paying invoices to preserve liquidity.
“Perhaps the business owner has factored a 20% margin on the invoice but now has to sacrifice 6% of his profit,” said Emery. “Over 12 months, that’s an average of 36%. No SME should ever be that desperate to sacrifice so much of its profitability for short-term financing.”
Large banks offer little relief. They account for 20% of funding to SMEs, but their models are not designed with the small business in mind. Long lead times of up to 12 weeks, overly bureaucratic processes and irrelevant rating criteria make it difficult for SMEs to secure bank funding.
“What the market desperately needs is innovative solutions that bring fintech, SME support structures and external investors together to deal with the current funding gaps that are unique to SA as a developing economy,” said Fatima Vawda, MD of 27Four Investment Managers, which has invested in the Kisby Fund.
Mentoring is also key for small-business success, said Andile Khumalo, CEO of Khumalo.co. “The reality is that in SA, the majority of entrepreneurs are black and have historical baggage, which includes a lack of skills and financial understanding to put forward a credible application. It doesn’t mean they are not deserving of the capital, but that they require support.”
Kisby has a target of R5bn – 20% of which will be risk capital raised from impact investors such as asset fund managers, pension funds, development finance institutions, and banks, and leveraged with debt.
Khumalo argued that it was time to stop having intellectual debates about impact investing. “We need capital to play its fundamental role: generate good financial returns and help the country move forward by allowing more South Africans to be productive contributors to the economy.
“Otherwise, what is the point? How are you going to enjoy your returns in an environment that is being destroyed, or in a country where the majority of people are destitute?”
Kisby is not just for the benefit of SMEs, but an opportunity for impact investors to address real economic issues, Barnes said. “We need to direct capital from overvalued mature capital markets to SMEs that are the real growth engines on the ground.”
This article was paid for by the Kisby Fund and 4AX Debt Services.