A meeting of businesswomen in Nairobi. PHOTO | DIANA NGILA
At the centre of the Africa renaissance narrative is a beehive
of activities by high growth small and medium enterprises (SMEs) that
are steered by aggressive and visionary entrepreneurs.
These
are small and medium size businesses that are focused on their
long-term sustainability in the market and scalability of their business
models.
In addition, these are the same businesses
creating employment for our youth and developing solutions to our local
social challenges; hence contributing significantly to our economic
development as a nation. Unfortunately, most of these businesses are
cash trapped and cannot grow as fast as they should without external
capital injection.
Their first obvious source of
funding is their operating cash inflows. However, these are spent before
they are earned. Most high growth SMEs are at a stage whereby they are
increasing their internal operations at an accelerated rate in order to
meet their growing customer demands.
This means that all their cash inflows in any particular month
are always budgeted for the following month’s operating costs before
they land into the business bank accounts.
Production
costs, salaries and wages and other office overheads in most cases
consume all the cash inflows the business generates at any given month.
As one of our clients puts it, this has turned them into mere “clearing
and forwarding agents” within the money circulation system in the
economy.
Due to their thirst for more cash injection to
keep operations running, most high growth SMEs find themselves running
into the bank overdraft rat race. The cost of the overdrafts
notwithstanding, this second option for funding business operations in
high growth SMEs is not sustainable for two reasons.
First,
there is always a limit as to how much the SME can borrow which in most
cases is way below the business cash needs. Second, bank overdrafts are
only suitable for short-term working capital needs, hence leaving the
SMEs still struggling to get funding for their long-term capital
expenditure needs.
Most banks have SME banking which
should ideally be more SME friendly and help in providing long-term debt
funding to high growth businesses. However, the experience for most of
our SME clients has not been glamourous on that end.
Besides
the collateral question which is a perennial thorn in the flesh of
SMEs; the capping of interest rates further clouded hopes when banks
turned their focus to government papers and corporate lending.
The
result has been a shrinking stream of debt capital injected into SMEs;
their large numbers and huge business potential for commercial banks
notwithstanding.
With microfinance institutions (MFIs)
having lower lending capacity, high growth SMEs are left with one more
source of funding to inject life into their businesses and maintain
accelerated growth rates.
Individual and institutional
investors are the shining stars at the end of the dark financial tunnel
that many high growth SMEs in Kenya have found themselves in.
By
individual investors, I mean people with surplus income or savings that
they can inject into a business as debt, equity or mezzanine capital.
Traditionally,
this has been a slot left for high net worth individuals. However, we
are witnessing more middle class individuals joining the bandwagon by
investing seed capital into businesses they like. Though crawling, the
growing number of individual investors in SMEs is demystifying the
conventional angel investor misconceptions.
Institutional
investors, on the other hand, are organised companies that pool funds
for the purposes of investing in businesses. In the typical SME finance
world, these would be your traditional venture capital firms and
registered investment companies.
However, the tide is
changing and saccos and other community savings groups are starting to
invest in high growth SMEs with proven scalable and sustainable business
models.
The new breed of investors including middle
class individuals, saccos and chamas have not however fully embraced
investment in SMEs due to the perceived high risk and the long-term
nature of the investments.
To build their confidence,
an aggressive awareness creation and education on opportunities
presented by investing in high growth SMEs should be carried out by
relevant market intermediaries.
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