Sustainability in the small to medium-sized enterprise (SME) sector is closely aligned with consumer confidence and spending. In this regard, 2018 was a mixed bag. With the nation caught up in “Ramaphoria', consumer confidence skyrocketed in the first quarter of 2018.
However, reality has since set in and the start of 2019 stands in stark contrast to last year. The country experienced a significant dip in consumer confidence in Q3 2018 under the combined effects of political uncertainty, a weakening rand, rising interest rates, a technical recession, rising unemployment and the filter-through effects of rising taxation and above-inflation price escalations.
The result is a constrained economic environment struggling to find the traction needed to grow. Retail has been especially hard hit, with sectors such as fashion fairing worse than most as consumers' disposable income has dwindled.
Yet, trade continues to prop up the economy, accounting for a 15% share of nominal GDP (Q3 2017, Stats SA). The important question is where a rise in spending will come from in 2019 with increased fuel prices, an increase in the VAT rate and a possible increase in electricity tariffs putting disposable income under pressure.
This will drive a shift in consumer spending patterns, which will significantly impact on SMEs. Add to this scenario a global slowdown in economic activity and we have all the factors necessary for a perfect economic storm.
What this means, potentially, for SMEs is lower revenue, at least in the first half of the year until after the elections. While traditional lenders have never fully supported the SME sector in South Africa due to their inherent risk aversion, a lack of sufficient data to underwrite the business and the costs associated with servicing this type of clientele, all lenders will likely implement stricter risk management processes in a higher interest rate and slow growth environment.
Businesses will find themselves in a difficult position, which is why it pays to partner with a lender that takes a micro view of businesses when extending credit, rather than paints all clients according to the same macroeconomic outlook.
While Cash Flow Capital (CFC) is acutely aware of the macroeconomic trends and their implications, we understand that in a tighter economic environment, small businesses need access to finance to remain sustainable.
In this regard, we assess every application on an individual basis, considering the fundamentals of each business to come to a decision. For instance, while the retail fashion sector is taking a beating, there will always be standout performers that offer something unique or innovative. These are the entrepreneurs who will weather the economic storm and we want to help them succeed against the odds.
We also leverage intelligent technologies and rely on the scalability of these automated systems to keep costs down, while our predictive credit scoring analytics mitigates our risk exposure. In this way we're able to identify the businesses that both require and can afford the loans needed to bolster cash flow, purchase stock or fund expansion.
And our entrenched risk management processes and procedures also ensure that while the Reserve Bank's interest rate cycle is now on an upward trajectory, we don't expect our lending rates to change in the short-term.
There is, of course, also the best-case scenario to consider. If this year's elections deliver a positive outcome, where the ruling party receives a majority mandate, the country should benefit from the resultant stability and, hopefully, greater policy certainty.
If that happens, we should see more investment flowing into South Africa. This could strengthen the rand and will give the Reserve Bank more scope to keep interest rates steady, which should bolster consumer spending.
Either way, small business owners will require funding. The key to their long-term success and sustainability is partnering with a lender that has their best interests in mind and aim to deliver a fair outcome for all parties by balancing risk and affordability, rather than simply boosting their books no matter the risk. And CFC is that partner. We always aim to do the client justice, which is evident in our low default rate. We understand that our success is closely aligned with the success of our clients, and we want to be the catalyst for that prosperity.