There is no doubt that small business is one of South Africa’s catalysts for achieving economic growth and development – government has prioritise entrepreneurship and the advancement of SMEs, and along with its departmental initiatives, other institutions are also seeing the value of helping SMEs reach their potential.
Small businesses need both financial and non-financial assistance, and while there are a number of resources available such as business advice, tips for marketing and administration support, financial assistance can be challenging for some small business owners.
Cash flow seems to be the main challenge faced by small businesses, especially in their first few years of operation. Getting contracts to supply products is often easier than delivering on them – often small businesses have to wait 30 days before their invoices are paid. If the business does not have an account at their supplier, or the cash on hand to fund the costs while they wait for the invoice to be paid, they might have to turn down the deal. Obtaining a bank loan is also not always viable, as the company might not yet have built up a credit record.
There is, however, a solution that does not involve or entering into loans agreements over long periods of time, with suppliers or financial institutions. Invoice discounting, sometimes referred to as SME funding, is a tool that helps small businesses pay their supplier invoices on time, and in so doing, be able to commit to client contracts, and thereby build their business.
It’s a simple process – once an SME has a purchase order from their client, they provide the SME funder with the invoice from their supplier. The funder pays the supplier, allowing the SME to deliver the product to the client, and once the client pays the SME, is the SME is liable to pay the funder.
The knock-on benefits from a simple process like invoice discounting are huge, and extend further than just the SME, for whom the obvious benefits are the ability to accept deals, improved cash flow, and the opportunity to build a good reputation with suppliers. Invoice discounting also benefits the larger economy – bigger companies can now make use of SMEs, many of whom have a good BEE status, which they are mandated to do according to South Africa’s BEE codes. These small businesses now have the opportunity to grow beyond their financial constraints, and become operations that themselves can start to support smaller businesses – and so the cycle of business development continues.
According to the SME Growth Index, smaller companies in South Africa are showing stagnation in both turnover and employment growth. Tools such as invoice discounting can help stop this trend, and encourage SME growth in our economy again.