Exploratory Study of Finance Accessibility for Small Retailers: The Financial Institutions’ View

Exploratory Study of Finance Accessibility for Small Retailers Schmidt, H. J.1; Mason, R. B.2; Bruwer, J. P.2 & Aspeling, J.2 1Koblenz University of Applied Sciences, Germany 2Cape Peninsula University of Technology, South Africa University of Zululand MBALI Conference July 06-08, 2016 Richards Bay, South Africa July 2016 Schmidt, Mason, Bruwer, Aspeling 1 Agenda Background and methodology Main results Limitations and recommendations for future studies July 2016 Schmidt, Mason, Bruwer, Aspeling 2 The wholesale & retail sector in SA • Significant component of the SA economy contributing up to 35% to the national GDP (Sibindi and Aren, 2015) • Major employer with about 30 000 tax-registered retail enterprises which employ an estimated 20% of the SA workforce (Ndungu and Theron, 2008; Steyn, 2013; Statistics South Africa, 2015) • About 86% of registered retail firms are classified as small and micro enterprises July 2016 Schmidt, Mason, Bruwer, Aspeling 3 Literature review shows limited access to fi a i g oppo tu ities fo “A “MME’s Source Extract Orobia et al., 2013 Taking into account that SA SMMEs’ daily volume of transactions varies, their net income (in most cases) cannot be guaranteed to repay debt (external financing). There are many financing opportunities available to SA SMMEs however these entities do not “cash in” on these opportunities due to extensive red tape. The biggest support which cooperatives and/or small businesses require in all nine provinces of SA is that of financing. The lack of finance is one of government’s greatest challenges for co-operatives and/or small businesses. Financing opportunities are available to SA SMMEs however, access is generally granted to those business entities that can guarantee returns on investments. The lack of financial support is a limiting factor which adversely impacts on the sustainability of cooperatives and/or small businesses. Lekhanya and Mason, 2014 Nkonki-Mandleni and Anim, 2014 Department of Trade and Industry, 2015 Jere et al., 2015 Kanyane and Ilorah, 2015 See also Chibanda et al., 2009; Beck et al., 2009; Grimm and Richter, 2006; Kauffmann, 2005 July 2016 Schmidt, Mason, Bruwer, Aspeling 4 Research gap and question • It is ot lea as to hat o stitutes the a ie limited access to financing opportunities • Is it based on real phenomena or merely on the result of personal perceptions? • Too little is known about the potentially differing perceptions of finance providers and finance seekers on finance accessibility What does the a ie li ited a ess to fi a i g oppo tu ities e tail f o the pe spe ti es of fi a e providers and finance seekers in the context of SA s all etaile s? July 2016 Schmidt, Mason, Bruwer, Aspeling 5 Research design • Exploratory study  Qualitative approach • Personal interviews • The research methodology was influenced by grounded theory (Glaser and Strauss, 1967) in terms of a simultaneous collection and analysis of (qualitative) data and a creation of analytic codes and categories, inspired by pre-existing conceptualisations but, finally, developed from the data (Charmaz, 2006) July 2016 Schmidt, Mason, Bruwer, Aspeling 6 Sample Finance providers • N = 16 • Seven bank managers from five different banks, three financial managers from two different financial institutions, two managers based in a governmental agency, two independent financial advisors and two retailing experts • Interview time: Ø 30 min July 2016 Small retailers • N = 20 • Owners of small retail businesses (five and 50 full time employees) and representatives of the upper management • Broad range of retail segments • Interview time: Ø 18 min Schmidt, Mason, Bruwer, Aspeling 7 Agenda Background and methodology Main results Limitations and recommendations for future studies July 2016 Schmidt, Mason, Bruwer, Aspeling 8 There are many challenges for SA small retailers, among them access to finance. I thi k the iggest halle ge that a usi ess has is … the finance for SMEs, you know. July 2016 I the last ouple of ea s spe ifi all , it’s ee e difficult to get finance for small businesses in South Africa. Schmidt, Mason, Bruwer, Aspeling 9 Though, plenty of finance opportunities are available … I do elie e the e’s a lot of money made available by the financial institutions but like I said, it’s pu el the a ess a d the requirements that the retailer has to meet in order to obtain that finance. July 2016 Ca ’t thi k of thei a es ut o a dail asis, I’ ei g offered loans probably at a 25% repayment. Schmidt, Mason, Bruwer, Aspeling 10 … access to finance is difficult for SA small retailers … Oka , a ess to fu ds, it is a p o le . I’ ot goi g to lie about that, for the first year. July 2016 The the a ks ake it e diffi ult fo ou. … Ba ks do ’t a t to o o o e to people. Schmidt, Mason, Bruwer, Aspeling 11 … espe iall he the a e sta t-ups. “o if ou’ e a o plete e sta t up, ou’ e goi g to fi d it incredibly difficult. But if ou’ e ee a le to st uggle through and have the persistence and the courage to be successful for two years, ou’ e p o a l good e ough to be successful for the next two years. July 2016 U less ou as a e business) can put surety down, ou’ e ot goi g to get o e , no chance. Schmidt, Mason, Bruwer, Aspeling 12 Fa to s that li it s all etaile ’s a ilit to access available finance are his poor financial k o ledge … No, it’s the fi a ial instruments that are available that a lot of small businesses do ’t u de sta d a d do ’t know how to actually utilise a d that’s he e e go to the market and we educate them to a large extent. July 2016 We’ e ot e o di g e e thi g the a e’ e supposed to record it. We are not doing the right t a sa tio s he e the ’ e supposed to e. “o it’s su h things that make us look like e do ’t eall ualif fo funding. Schmidt, Mason, Bruwer, Aspeling 13 … requirements and standards that are set by a ks a d othe fi a ial i stitutio s … Ja, in terms of the NCA as well, you know you need to prove affordability and you can only prove affordability if ou’ e got a good t a k record. July 2016 But ith e e ause I had to use this house, I mean if I did ’t ha e the house as the ollate al the I ould ’t ha e got anything, you see. Because I mean when you go to the bank you ask for a loan or something. They will ask for a collateral. Schmidt, Mason, Bruwer, Aspeling 14 … osts of a essi g fi a e … The e ui e e ts that a e needed are way too complicated for a small retailer to attend to themselves and therefore require the input or the assistance by an expert, such as an accountant or a company that is specialising in d afti g of usi ess pla s. … A d that is ostl itself. It’s uite costly. It could end up between 10 000 or even up to 20 000 Rand of costs for the retailer before they even obtain the finance. July 2016 “o that’s he e o ou eed a professional to do that recording fo ou, hi h ou do ’t ha e that money to pay that professional to do it. Schmidt, Mason, Bruwer, Aspeling 15 … s all usi ess o e s’ pe so alit a d e t ep e eu ial spi it … • A lot of the gu s ill sa , I do ’t a t to. I do ’t a t to sig pe so al su et a d the e a ’t gi e the the funding. • The iggest o sta le is maybe still that if I start a s all, s all usi ess, I’ scared to go to the bank. July 2016 • • I just hate o i g o e . I’d athe get i to o boat and row my own boat. You’ e o l got o e pe so to blame then. Schmidt, Mason, Bruwer, Aspeling 16 … a d the appli atio p o ess itself. I so e ases the Relatio ship Managers or the Business Managers are not experienced. So you come to them with a very good proposal for a business but it depends on their u de sta di g of hat ou’ e sa i g because they have to sell that idea to someone else and in most cases, the ’ e ot a le to do that. The as a result, the loan is not approved, it was declined based on the motivation written by the Relationship Manager. July 2016 If I tell ou, it took e o ths, 12 months to finally get them to agree to loaning me an amount of money that is laughable. Schmidt, Mason, Bruwer, Aspeling 17 Governmental agencies could play an important role, but do not always perform well. “o I thi k that’s o e of a internal problem. I don't know, I cannot speculate what it is. Pe haps, it’s i f ast u tu e, systems or staff training. It could also be marketing but regardless, I think they have a huge, important role to play and they do have the means to do it and I think there have been improvements. July 2016 … the asi all said that I’ the o g olou , I’ the o g age a d I’ the o g se . … – You never tried? – No. … I looked at it and made my own decision that the chances of us getting anything from them would be very, very slim … . Schmidt, Mason, Bruwer, Aspeling 18 Overview of results (1/2) Question Is finance a major growth obstacle? Finance providers Access to finance is a problem for start-ups. For established businesses, access to finance is not a major growth obstacle. There is plenty of finance from various sources available. Finance seekers Access to finance is one of the most important barriers to future growth. Knowledge about available finance is too limited to have an overview of available finance opportunities. Are there limitations The financial knowledge of The smaller the business is, the more within the education of small retail business owners is limited is the financial knowledge of small retailers that hinder generally very limited, which the owner. Financial knowledge them to access finance often leads to wrong decisions ould e so ethi g i e to ha e , about how to run the ut e t ep e eu s a ’t e fi a e opportunities? business. experts. Are the standards set by It is true that many standards Too many requirements limit the finance providers to access have to be met, but this is access to finance, especially for startfinance too high for because banks have to be ups. “pe ifi all the a k’s eed fo responsible lenders. collateral limits the access to finance. finance seekers? Are there enough finance opportunities available? July 2016 Schmidt, Mason, Bruwer, Aspeling 19 Overview of results (2/2) Question Are there limitations within the application process that hinder finance seekers to access available finance opportunities? What role do governmental agencies play in financing growth of small retailers? How do governmental agencies perform? Finance providers Finance seekers The application process for It is lengthy, admin intense and bank loans is lean, and results complicated. can be provided quickly. They definitely play an important role. Many things have been done, but there is still room for improvement. How can the relationship Small retailers are growth between finance providers engines and therefore an and seekers be described? important market. Financial institutions see themselves as partners of the retailers. July 2016 Schmidt, Mason, Bruwer, Aspeling If managed properly, they could play an important role. They act bureaucratic. Access to public funding depends too often on o e’s olou , ge de a d age. A good relationship with finance providers is essential, but it all depe ds of the a k’s lo al relationship manager. Often, banks are not trusted. 20 Recommendations • Banks and financial institutions: – Develop new approaches to pre-qualify retailers during the application process – More strongly adapt to the needs of small retailers, e.g. by developing tailored, innovative products • SA SMMEs – Improve education and financial knowledge – Improve relations with suppliers – Build up industry partnerships • Government – Improve marketing of institutions and of available funds – Find ways to support training and education of small retailers – Support the establishment of mentoring programs and of a strong business angel network in SA – Provide guarantees to finance providers that lend to small retailers July 2016 Schmidt, Mason, Bruwer, Aspeling 21 Agenda Background and methodology Main results Limitations and recommendations for future studies July 2016 Schmidt, Mason, Bruwer, Aspeling 22 Limitations of the study • Lack of representivity (Focus Western Cape) • Retailing is a very broad field that needs to be divided into numerous subcategories (Zentes et al., 2012, p. 3) • Selection of interview partners  managers interviewed and representing the perspectives of finance providers possessed high level positions • Not all retailers interviewed were actually in need of finance July 2016 Schmidt, Mason, Bruwer, Aspeling 23 Propositions for future quantitative studies (segment specific!) • “ all etaile ’s ability to access available finance depends on his knowledge about available finance and his general financial abilities. • “ all etaile ’s ability to access available finance depends on his abilities to build up and maintain relationships with the financial community and with suppliers. • “ all etaile ’s a ilit to a ess a aila le fi a e depe ds o his attitude towards growth. • The effectiveness and efficiency of programs initiated by go e e tal age ies i flue e s all etaile ’s a ilit to access available finance. July 2016 Schmidt, Mason, Bruwer, Aspeling 24 Literature • • • • • • • • • • • • • • • • • Beck, T., Fuchs, M.J. and Uy, M. 9 , Fi a e i Af i a - a hie e e ts a d halle ges , World Bank Policy Research Working Paper Series. Charmaz, K. (2006), Constructing Grounded Theory: A Practical Guide Through Qualitative Analysis, Introducing Qualitative Methods Series, Sage Publications Ltd, London. Chibanda, M., Ortmann, G.F. a d L e, M.C. 9 , I stitutio al a d go e a e fa to s i flue i g the pe fo a e of sele ted smallholder agricultural cooperatives in KwaZulu-Natal , Agrekon, Vol. 48 No. 3, pp. 293–315. Department of T ade a d I dust , “MME de elop e t fi a ial assista e , a aila le at: https://www.thedti.gov.za/financial_assistance/financial_incentives.jsp?subthemeid=8 (accessed 22 June 2015). 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Zentes, J., Swoboda, B. and Foscht, T. (2012), Handelsmanagement [Retail Management], Vahlens Handbücher der Wirtschafts- und Sozialwissenschaften, 3rd ed., Vahlen, München. July 2016 Schmidt, Mason, Bruwer, Aspeling 25 Thank you! Questions? July 2016 Schmidt, Mason, Bruwer, Aspeling 26