Across Africa, financial institutions find it difficult to lend to small businesses. Start-ups and SMEs are regarded as high-risk portfolios owing to their unstable sources of income and low collateral options. This is coupled with the fact that small businesses are prone to higher operational costs making them vulnerable to collapse at infancy; hence, the reluctance on the part of commercial banks in approving loans for them.

And yet, small, and medium sized enterprises (SMEs) are the engine of growth for many economies, constituting over 90 percent of all businesses. These contribute to the socio-economic development of national economies through job creation and tax revenue. In Indonesia, which is Southeast Asia’s largest economy, for example, SMEs contribute to about 60% percent of the nation’s economy and absorb 97% of its domestic workforce.

By all measures, therefore, governments can only deal effectively with the high unemployment rate and its resultant high poverty rates on the African continent by supporting start-ups and SMEs to grow into profitable and sustainable businesses to provide jobs and contribute taxes.

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However, while there are many SMEs worldwide, only a tiny fraction of them can access financing or bank loans. COVID-19 has worsened the case for most small businesses, forcing them to close temporarily as sales of their goods and services plummeted due to the pandemic.

Since lack of access to credit, especially from commercial banks, poses a significant threat to them, technology and innovation are viable alternatives for start-ups and SMEs to consider in solving this funding challenge.

A combination of technology and financial services makes it easier for small businesses to save and to borrow at a lower cost, with digital-friendly services also that outstrip conventional banks.

Leverage online commerce to expand invoice financing

Cash inflows don’t always keep pace with expenses for most SMEs. Apart from start-ups and SMEs lacking collateral to obtain loans, some of their customers also delay in making payments for services, and this can be devastating for small businesses. However, technology is helping small companies to get another form of collateral that lending institutions can rely on to gauge a business’ creditworthiness.

This collateral is in the form of purchase invoices owed to a given SME. Invoice financing, also called accounts receivable financing, is a form of asset-based financing whereby a business receives an advance of capital in exchange for its unpaid invoices.

Many SMEs supply goods and services to governments and other institutions on credit. Therefore, small businesses can use these unpaid invoices as collateral to access funds to salvage day-to-day operations. With this plan, many start-ups and SMEs can be saved.

Use data to enhance credit analysis and worthiness

One essential aspect of technology innovation is the gathering and analysing of data for decision-making.

Financial institutions also rely heavily on available data to determine a borrower’s creditworthiness.

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Sadly, most start-ups and SMEs do not keep proper records to aid their creditworthiness. But with digitalisation, there is an abundance of tech tools to help small businesses streamline their record keeping with professional standards, and subsequently, win the trust of lending institutions. SMEs can now avail a lender of essential operational information such as income and expenditure records. The lender is then able to assess the creditworthiness of a business and make informed decisions.

Other data for boosting creditworthiness include payment of staff salaries, taxes, repayment of a previous loan, or even rent. If a business has a good history of settling bills, financial institutions will be more comfortable with giving them loans. There is no other way to prove a business’s creditworthiness other than verifiable data.

Modernise processes; reduce costly intermediaries

Many small businesses continue to rely on intermediaries for their regular transactions. Reliance on many intermediaries leads to increased costs of operations as well.

Technology, however, can seamlessly digitalise all operations, tracking and monitoring transactions from one location, thereby saving time and eliminating the cost of hiring middlemen.

When these intermediaries are eliminated, it is easier for a business to take charge of its functions.

Therefore, as a start-up or SME entrepreneur do not shy away from innovation and technology. Embrace the digital tools that will  enhance your operations so that the lending institutions can find you credit worthy and grand you funding to grow your enterprise.

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