Are they the latest asset managers on the block?
This writeup is a sequel to a piece I wrote earlier titled ‘Unconventional sources of capital for SMEs’. In my opinion, this article has become important as over the past few years, traditional financial services providers have seen a huge disruption in their space.
From the strong emergence and push by private investing counterparts, to now technology-enabled platforms that make some of their services as easy as a piece of cake. To most recently, the advent of more players creating various non-financial related solutions offering a bundled package that includes financial services solutions to support their customers, further shrinking the market for the big banks.
It is difficult to ignore the variations in funding solutions we have seen over the years. Hence, it is important to highlight a few alternate platforms, I recently discovered, that are disrupting the space and improving financial inclusion across the world and particularly in Africa. As you can imagine, with anything worthy of its standing there would be improvements, so I expect to continue to update this article in different forms in the future.
In plain English, Alternative finance is any form of financing for a business or individual that doesn’t come from mainstream providers — banks. We call it Alternative finance today, who knows if it would be called Revolution ‘Revo’ Finance in another decade- another rejig of the current dynamic status quo.
I will highlight three types of alternative financing that have sprung out, particularly in frontier markets. And I am particularly intrigued because of its focus on consumer-driven sectors and the ripple effect for manufacturing, industrial goods, and their economic impact — employment, GDP growth, etc; there is a need to fully service their markets.
Firstly, Asset Financing is very important especially for certain consumer goods sectors and typically they are highly capital intensive. Loosely speaking, there are two types of asset finance. One is funding secured against assets, it is called asset refinance, which uses the prized items in your business as security or collateral for a loan. The other type of asset finance includes products like hire purchase and equipment leasing, which is designed for funding new and used assets like machinery and vehicles. There are many capital providers within alternative business funding with different models for supporting small businesses e.g. Untapped Global with its smart asset financing model. Your revenue model will determine the kind of funding support that suits your business.
This second one is quite interesting, although I haven’t seen as many use cases in my immediate environment. Merchant cash advances (MCA), picture this, your customers pay you via card terminals what MCA does is to get you a cash sum based on future card sales, generally up to a month’s revenue. Although MCA providers typically say it is not a loan, it is fast, straightforward, and a good fit for small and growing businesses with low-value transactions- retail shops, juice bars, cafes, etc.
These providers get a slice of your future sales as a merchant as the repayments are sometimes taken at source, making it simple and hands-off for busy company owners. It sounds like something the traditional banks should do right, but they typically don’t, so you have to seek out some of these providers- such as Square Capital, PayPal working capital both offer solely to their users, and there are independent providers such as Rapid Finance.
Lastly, Invoice Financing- this funding option I found very fascinating as well as it solves receivables problems for small businesses that transact with bigger corporations. It is a great way to unlock the cash in your invoices, especially if you have large outstanding invoices, big projects, or established clients.
The lender effectively buys your unpaid invoices, so you have most of the sales proceeds right away. Once your customer pays the invoice, you get the remaining balance minus the lender’s fee and some capital providers pay up everything as well. There are a few other subcategories within invoice finance, like factoring and discounting. Finding the right solution for you is key as different products are suitable for different businesses. Overall, it is a useful way to manage cash flow if your business trades on credit and regularly invoices other companies.
With entrepreneurship being the backbone of any economy, the role small businesses play is crucial; and we will continue to see many more unique financing structures away from the traditional models that will continue to disrupt the financing space. A fresh asset managers crew! The risks exist and may be daunting so do the opportunities, however, small businesses need the financing boost, and the opportunities in frontier markets such as Africa remain.
These kinds of unique models that support consumer-driven sectors — manufacturing, agriculture, etc (I call them the backbone sectors)that represent a significant portion of the earning population are what we need to drive scalable productivity to reap outsized gains in this part of the world.
PS: I plan to keep updating this topic as I discover more innovative financing solutions adapted to the African context.
