Over the past decade, South African SMEs have experienced significant growth due to socio-economic factors. The SME sector plays a crucial role in the South African economy, contributing ~40% of the country’s GDP1 and employing between 50%-60% of the labour force2.
The global financial crisis of 2008-2009 had lingering effects on South Africa’s economy, leading to a greater emphasis on supporting local businesses to spur economic recovery. Additionally, the advent of technology and digital platforms has enabled SMEs to reach a wider customer base, improve operational efficiencies, and innovate product offerings.
The COVID-19 pandemic introduced unprecedented challenges for SMEs, contributing to financial strain and business closures. Despite these setbacks, COVID-19 also accelerated digital transformation, with many SMEs adopting e-commerce and digital payment solutions to sustain their operations, highlighting their resilience and adaptability.
Despite the growth and importance of SMEs, access to funding remains a significant barrier to their development and sustainability. Traditional banks tend to view SMEs as high-risk borrowers due to their lack of collateral, limited credit history, and perceived instability. This risk aversion leads to stringent lending criteria and low approval rates for SME loans.
Growth of SME lenders
In response to the funding gap, the SME lending market has seen the emergence and growth of non-bank finance providers, namely fintech companies, and peer-to-peer (P2P) lending platforms. These lenders employ innovative approaches to assess credit risk and provide tailored financial products to SMEs.
Non-bank finance providers have capitalised on the opportunity to bank the underserved SME market by offering loans with flexible terms. These lenders often utilise alternative data sources, such as mobile phone usage, transaction history, and social media activity, to effectively evaluate the creditworthiness of borrowers3. This approach enables them to extend credit to bankable SMEs that would otherwise not meet the stringent criteria for bank funding.
The opportunities in the SME lending market are substantial, namely:
- High demand for credit: the growth of SMEs creates a demand for alternative financing;
- Technological advancements: technology intervention in SME lending has lowered barriers to funding and enhances credit assessment and monitoring; and
- Regulatory support: regulation is evolving to support the growth of FinTech and alternative lending.
Relevant investments made by Tamela Capital Partners
Retail Capital a division of TymeBank Tamela Capital Partners’ (“Tamela”) entry into SME lending was through its inaugural investment under the Tamela Mezzanine Debt Fund I (“Fund I”), where mezzanine debt was provided to Retail Capital (established in 2011) and its shareholder, Como Capital. Retail Capital provides funding to SMEs via an online platform through merchant cash advance and asset finance. Since its inception, Retail Capital has advanced R10-billion in funding to more than 70 000 businesses, of which 40% are women-owned and 70% are return customers. Retail Capital was acquired by TymeBank in September 2022, facilitating an early exit of Retail Capital and Como Capital by Fund I. Both investments generated returns in excess of their respective target IRRs, demonstrating a compelling investment thesis for SME lending.
Bridgement Business Finance Simplified Fund I’s second investment in SME lending was concluded in November 2024 with an investment in Bridgement. Bridgement was established in 2016 and provides funding by leveraging technology through its proprietary risk management and finance systems. Since its inception, Bridgement has disbursed more than R1-billion to SMEs and has supported more than 50 000 SMEs. By virtue of being entrepreneurs themselves and understanding the funding needs of a growing business, Bridgement offers a range of products that adequately address working capital funding and cash flow needs for SMEs.
How does SME lending address societal needs?
1. Simple and effective application process: the application process is conducted online, completed within minutes and approved/denied within a day. Key information about the business is required, including bank statements, while some information can be sourced from the applicant’s digital footprint.
2. Low transaction costs: the application process is free and available to anyone with access to the internet and/or a smartphone – which, given a mobile penetration rate of 187%4, is a meaningful proportion of the population.
3. Compatible credit protections: the nature of collateral required from SMEs is commensurate to the quantum and tenor of the loan. Additionally, there are also options of unsecured lending for short-term bridging facilities.
4. Real-time monitoring of the debtors’ book: successful SME lenders are supported by rigorous risk management systems. This technology enables real-time financial reporting which provides a current and accurate view of borrower behaviour, enabling early intervention where required. The agility offered by the technology is an advantage to traditional bank funding which relies on the proactiveness of borrowers or systems that flag late/non-payment after the fact.
Although Tamela has reached the end of Fund I’s investment period, we continue to receive a deluge of investment requests from SME lenders, which we will continue to evaluate with intent, under Tamela Mezz Fund II.
For more information contact Kabelo Malepe/Thato Tsita on +27 11 783 4907 or kabelo@tamela.co.za/ thato@tamela.co.za.