Understanding risk in retail
While many South African retailers may be basking in the afterglow of season sales, it’s still a depressed economy out there, with a growing number of independent stores turning off the lights, particularly as banks balk at financing retail initiatives.
A report published last year by KPMG (Stay within the guardrails – Top retail risks 2018) notes that the sector underwent huge disruption over the past decade due to the phenomenal growth of online platforms and the impact that these have had on how consumers shop and what they expect from retailers.
“In fact, becoming a disruptor these days has become crucial for many operations to stay in business, for both online and brick-and-mortar retailers,” believes Retail Capital Head of Treasury Alex Appleby, a company that provides alternative financing to traditional business loans.
But with disruption comes a high level of risk that many financiers still don’t understand, especially when it comes to SME businesses.
“However, for our company, it’s all about backing the jockey. We believe in people who believe in themselves. SMEs are disruptors by nature, challenging the status quo of big retailers to remain relevant.”
“Globally, there has been much written in the media about brands downsizing and moving online given the growth of disruption within the retail sector. At Retail Capital it’s all about supporting the SMEs who have had the foresight to do this and tailoring a financial solution to meet their business objectives, while assisting them to face risk with the right tools.”
One of the biggest stumbling blocks for many SMEs these days is access to growth capital, especially in a market where consumer spending is subdued, turnover is flat and operating costs are on the rise.
Another risk SMEs face is in terms of the longevity of business many traditional funders require in order to consider loans in the first place. SMEs with a short track record in business, or without a strong balance sheet, are therefore often perceived high risk and face limited access to credit. According to Appleby, this is one of the biggest challenges facing SMEs in South Africa, which presents an opportunity for alternative lenders to close this gap in such an under-serviced market.
“Financial institutions place enormous reliance on those balance sheets, and then in turn embark on lengthy turnaround times when considering loans, when many SME owners actually require quick action and access to funds,” shares Appleby. “Therefore, while information on a business’s viability will be critical to any lender, SME funders such as Retail Capital rely on utilising innovative technology to assess credit risk.
“However, even businesses that don’t have expansion in mind, but that do well in terms of their customers, can run into financial constraints when they face a short-term liquidity gap. Typically, this ‘gap’ can range from one to two months when SMEs are faced, for example, with delays in stock shipments, late customer payments, disputes or even unforeseen external factors. Keeping on top of your cash flow requirements and plugging short-term liquidity gaps are crucial to maintaining business.
“These financial character traits are crucial to remaining innovative and adaptable in the retail environment.”
However, SMEs must be sharply aware of assessing a suitable alternative lender as its another risk factor and Appleby believes it comes down to a company’s track record and disclosure.
“Business owners are fortunate today to have so many business and social media platforms at their disposal to assist in their due diligence for assessing responsible and reputable lenders. You must do your homework,” he strongly advises.
Questions like: How long has the business been around? Does it have a transparent fee structure? Is there a customer complaints hotline? And is the funder registered with an industry body, such as The South African SME Finance Association (SASFA)?
SASFA is a self-regulating industry body that has developed industry standards to ensure SMEs are fairly treated and the reputation and sustainability of the unregulated SME finance sector is maintained. Retail Capital was one of its founding members of the association, and all members are required to uphold the Code of Conduct of the association.
“The bottom line is that retail is still good business, particularly for SMEs and understanding the risk factors they face, as a financier, can result in excellent long-term partnerships,” concludes Appleby.