MARK BARNES: To grow the economy, give small businesses access to capital

Capital is always available; just not always at the right price. You’ll find that the more you need it, the less affordable you’ll find it to be.

There’s a tipping point, where it simply doesn’t make sense to borrow money; where credit becomes a destroyer, not an enabler. If the yield on the assets you’re borrowing money to finance (net of the costs you have to incur to earn that yield) is less than the cost of borrowings, it simply won’t work, from day one.

It should, therefore, be obvious that in an economy where inflation is less than 5% and the prime rate is at 7,25%, the all-in borrowing rates of 40%+ charged on the street to the “unbankable” simply won’t cut it. These debt providers end up owning your business without buying the shares.

The blunt debt instruments that small, emerging, growing enterprises have to cope with simply aren’t fit for purpose. These businesses have to rely on access to equity capital (or at least guarantees) from friends and family to shore up the security required to get a reasonably priced loan — defeating the enabling limited liability principle for which the legal company entity was created in the first place, severely limiting risk-growth potential.

There are separate pools of differentiated, purpose appropriate capital (ranging from equity to secured debt) available, but these separate suppliers have to look after themselves and don’t benefit from sharing risk and returns among them.

I would argue that the weighted aggregate cost of these component parts of capital is more expensive than the same package would be if one provider participated at all levels, in some mix of capital — specific and appropriate to the assets and income profiles of the borrower, at a point in time. Where the small business finds itself on the enterprise maturity curve is a vital input to the blended capital cost it can bear.

There simply isn’t a one-size-fits-all funding solution for small businesses, and our formal banking system has enough to eat in the established economy not to have to bother with this market. As a result, small businesses access credit that cripples, in the informal markets, and aren’t invited to play in competitively priced capital markets such as the JSE.

How about if we do what Uber did, and take the solution to the customers, instead of requiring them to queue up to come and get it? Taking affordable capital (in the right mix) to where it is required is just the first step towards igniting our ailing, divided economy. What is also really required is affordable access to the necessary services and business functionalities used by big business, at the right price. The cost per unit of consumption for “business infrastructure” services is highest for the smallest business units. Those who need it most can least afford it.

Solving this dilemma will create or save jobs. Employed people (who pay Unemployment Insurance Fund contributions and tax and spend money and support others) are an asset to the economy; unemployed people are a liability for whom support has to be provided by the state.

As we find solutions for funding small business, we create new economic ecosystems with increased aggregate purchasing power, economies of scale and the ability to enter into long-term contracts at the wholesale price.

It should, therefore, be clear that we need to divert capital away from established business into the young, growing, business sector, if we are to address economic issues on the ground, instead of circulating the dividends at the top of the capital pyramid.

If capital isn’t creating jobs where you are deploying it, send it somewhere else. If we don’t move out of the comfort zones of established business, it’ll have no customers to whom to sell its products anyway. An investment in the small business sector is an investment in big business — surely that much is obvious?

• Barnes, a former SA Post Office CEO, has had more than 30 years of experience in various capacities in the financial sector