Financial Sector Programme

Financial Institutions’ Hurdles to SME Financing

 In the last quarter of 2009, USAID’s Financial Sector Program, in partnership with The Banking Association South Africa, undertook a survey to identify what hurdles finance providers face when financing SME's and to propose solutions or interventions, if needed, to facilitate provision of business development services to SME's.

This report documents the rationale, methodology and results of the survey. Twenty-seven financial institutions (FI's) including banks, private funds and DFI's were approached, of which, 18 participated. Two thousand, nine hundred and seventy-seven (2977) senior executives, credit managers and loan officers involved in SME financing from participating institutions were included in a database from which a random sample of 683 candidates were drawn to participate in an online questionnaire. One hundred and seventy-nine (179) participants completed the survey, a response rate of 26%.

The Survey Focused on:

  • Overall success rate of SME finance applications
  • SME financing evaluation criteria
  • Reasons for declining finance
  • Services offered to assist access to SME finance or promote bankability of SMEs
  • Interventions required to improve or promote access to SME finance.

Survey questions related to specific categories of SME's defined in terms of annual turnover based on the definition used by The Banking Association. The categories used were start-ups, micro enterprises with an annual turnover less than R500k per annum, very small enterprises between R500k and R2,5 million per annum, small enterprises between R2,5 million and R10 million per annum, and medium enterprises between R10 million and R20 million per annum.

Hurdles SME Finance - Survey Results

The survey results show that the majority of institutions fund all categories of SME's. However, unlike lower end SMEs, SME's with higher turnover required less ancillary support prior to becoming a candidate for finance and enjoyed higher approval rates.

The SME’s financial status or ability to repay the loan (cash flow) and contribution to the deal were the most important financing evaluation criteria. In addition, finance institutions require solid financial records and statements, a winning sales pitch, good business skills and plans (that SMEs understand) and expert knowledge.

Age and educational qualifications are less important for FIs, who are also tolerant of issues that can be addressed or fixed, such as FICA compliance, correct paperwork submissions, and accurate costing and pricing.

To ensure more successful applications and increase market share, FIs felt more appropriate evaluation criteria is required, particularly in the case of collateral. In addition, more lenient application assessments, willingness to take more risk, provision of advice and support, and offering innovative, more appropriate and inclusive products that provide improved cost and value for SMEs would provide more scope for successful finance.

The majority of FIs provide support such as information, advisory services and referral services to third party business support and coaching/consulting/mentoring. However successful, a need for grading would provide more confidence in a referral system.

FIs felt SMEs could ensure successful financing by conducting thorough research in target markets or fields, focusing on viable business plan submissions, and if appropriate to clean up credit records, develop financial statements and business skills. This result suggests greater potential for influence by consultants/coaches and mentors.


Interventions to help SMEs overcome financing hurdles should include assistance to evaluate their own financial status and conduct risk assessments before approaching FIs. Pre-finance application services that focus on one-on-one assistance as well as mentoring and training to help; reduce risk status, prepare and understand financial statements, draft proposals and business plans, and develop business skills, particularly in finance management, understanding cash-flow and the market.

To make SMEs more bankable, FIs are already offering these services in one form or another, either in-house or outsourced to a third party. However, if the quality of third party services – or providers – were assured through grading it would go a long way to assist SMEs to become more bankable. Still, it is equally important that some form of facilitation in the market match SME needs to mentors and experts. Therefore, the opportunity exists to link graded consultants to FIs, who in turn, will facilitate referrals to clients.

These services should be provided on a case basis to help SMEs understand their own businesses and the needs of the FIs. Facilitating access to finance is a huge need, which could significantly help FIs overcome financing hurdles if relevant to both SME and FI.

FI comments made it clear that the financing model is inappropriate for this market dominated by previously disadvantaged entrepreneurs. Even though they could be qualified and potentially successful, these entrepreneurs have limited resources and are not business or financially savvy. The survey suggests significant need for FIs to develop different and more appropriate models for evaluating risk and individuals, as well as more suitable products.

SME Info


related information 

© The Banking Association South Africa 2019