Crowdfunding the solution for SMEs in South Africa?
In 2015, the South African Institute of Chartered Accountants (Saica) published the Small and Medium Enterprises (SMEs) Insights Report. The report provided meaningful insight into the depressed economic environment stifling SME growth and explored ways to improve opportunities for SMEs in South Africa. The report identified the greatest obstacle to the successful operation of sustainable and profitable SMEs as inadequate access to finance. This ultimately leads to cash-flow related problems, which are believed to be the prevailing reason for the failure of SMEs.
Traditional financial institutions are generally reluctant to serve SMEs due to the high costs associated when assessing these businesses, their volatile balance sheets and the inherent high risks involved with start-up companies1. This lack of financing for SMEs has exposed a gap in the South African lending and borrowing market, and has encouraged development in the sphere of social lending, also known as crowdfunding. Crowdfunding is an unconventional alternative method of raising capital from a large group of people by way of an online marketplace lending platform2.
Online marketplace lending in South Africa is becoming an increasingly popular alternative to traditional financial institutions3, which for years dominated the lending and borrowing market with high interest rates, rigorous red tape, excessive bank charges and inflexible attitudes. Social lending is revolutionising the manner in which SMEs and conventional corporate citizens access funding and it is disrupting traditional understanding of how money is lent and borrowed.