Small businesses are a critical component of the African economy, they make up 90% of all private firms, contribute more than 50% to employment rates and almost 40% of GDP in African countries. Globally there is recognition of the importance of small business to stimulate growth, create jobs and help alleviate poverty, and even more so in the wake of economic recovery from the pandemic. The discussion by panelists from business, finance, SMEs emphasised the critical need for access to finance as one of the most important (yet missing) levers for small business growth. The question that was posed is how can finance be unlocked for small suppliers and can we see inclusive economic growth without this?
As financial markets become more risk-averse, confirmed market access and confirmed purchase orders are increasingly a requirement for small businesses needing to access finance, yet small suppliers often struggle to penetrate or create markets, creating a no-win scenario. Small suppliers cannot compete with existing big business because they lack access to the working capital (and investment finance) to serve these markets.
This is an area where supplier development can play a pivotal role; where markets exist but linkages do not. Big businesses seeking to develop inclusive supply chains that allocate procurement spend and resources to develop, support and enable access to small suppliers make an immediate impact on the growth of those suppliers. Holistic strategies ideally unlock necessary capital required as the small, well-performing suppliers grows.
Funders can help small suppliers directly, and partner with corporates wanting to provide procurement finance. For example, ProfitShare, a counter-intuitive Fintech business, partners with SMEs to support them through the risks of delivering to corporates, by walking them through the steep learning curve. A good contract or purchase order will give SMEs access to this service, that grows SMEs to independence and bankable business viability within a year. Another corporate assists with debt collection to manage their own credit risk, mentoring SMEs to pay on time to protect their credit and run their businesses in a mature and disciplined way. Studies show that SMEs grow within a few years of partnering with a corporate supplier.
Pavati Plastics MD, Mthobisi Nhleko is a success story and example of a winning SME / corporate / funding partnership. Their key to unlocking value was having a corporate champion, who understood the business, vision and people and then advocated for them, using their business influence. Entrepreneurs need to develop quality relationships to build trust with these strategic partners, who invest time and money in their development and growth.
Investors look for an entrepreneur who has integrity, resilience, commitment and self-discipline to communicate, network and find the right partnerships. SMEs need to focus on the basics to build a sustainable business that has proper financial records, business model and systems and functions well. They need margins that cover costs, diversified customers and a cashflow plan. Entrepreneurs need to package their business case for investment well, and not give up too easily, but demonstrate grit and patience, to develop key relationships and partnerships. Then matching their business with right the funder, with the help of a champion becomes a natural progression.
As we emerge from the pandemic, we need an environment where SMEs can thrive, contributing to economic revival. The scorecard initiated corporate supplier development, but it has taken on larger proportions that support a localised strategic vision and is an enabler for growing strong businesses in supply chain. We need to be part of growth across the continent to create opportunities for entrepreneurs and SMEs beyond South Africa’s borders. We have to grow our supplier base to replace imports with a domino effect to boost our economy with the ultimate objective of becoming an exporter.
Key learning points
- Corporates and investors partner with the entrepreneur who has the right qualities, integrity and grit.
- SMEs need to get the fundamentals right, consistently, over time, to build a sustainable business and the rest will follow.
- SMEs need support to develop skills and capacity, access to markets and funding, in that order.
- SMEs need a champion to help them gain access to markets, capital and unlock value.
- SMEs can be developed into sustainable businesses, through quality relationships with key stakeholders, over time.
- Corporates and funders must collaborate with the SME to determine the best fit solutions for their business and find innovative ways to support the business.
- SME supplier development benefits all stakeholders to recover our economy.
- We can build our economy towards being an exporter, by growing the supply chain ecosystem.
To join the 2021 Absa Business Day Supplier Development Awards, an initiative of Arena Holdings, Cold Press Media and Fetola, and be part of this dynamic network of people changing the future of South Africa visit www.sdawards.co.za