Boost for crowdfunded businesses in South Africa

Imagine how lucrative and efficient your stokvel could be if more people on your street could participate - empowering you to go online to do business‚ invest and borrow money through crowdfunding.

In an alternative funding benchmarking report by the Cambridge Centre for Alternative Finance‚ published last month‚ South Africa was identified as the potential leader in the growth of online and peer-to-peer lending models in Africa. Peer-to-peer lending is the practice of lending money‚ at a profit margin‚ through online services that match borrowers and lenders.

In 2015 South Africa represented 18% of the total African online alternative finance market‚ raising over $15-million. Kenya was the only African country ahead of it with $16.7-million raised.

Unlike its neighbouring African countries‚ South Africa's online alternative finance market focused more on business activity and less on charitable causes.

“In 2015‚ the vast majority of the South African market activity‚ which was $13.8-million‚ came from peer-to-peer consumer and business lending‚ with the remaining $1.2-million spread across microfinance‚ donation-based and reward-based crowdfunding‚” the report said.

The report also found that in Africa 90% of online alternative finance was originated from platforms headquartered outside of the continent.

Local IT solutions firm Khonology has now partnered with UK-based company White Label Crowdfunding to develop bespoke crowdfunding platforms for entrepreneurs locally.

“There is a real-world opportunity across the business sector‚ where the excessively stringent lending criteria of banks hinder start-ups and small growing businesses. The cost of banking in Africa is rather high‚ and crowdfunding and peer-to-peer [lending] offer alternatives for both communities and businesses‚” said Khonology's Africa Nkosi.

“Traditionally‚ if you want to raise capital to start a business or launch a new product‚ you would need to pack up your business plan‚ have collateral to raise funds for a prototype‚ and then advertise your idea around to banks or wealthy individuals. With crowdfunding it's much easier for entrepreneurs to get an opportunity [to approach] interested parties.”

Khonology's partnership with WLCF will provide entrepreneurs with a website to showcase and share their business pitch with a wide network of accredited investors.

Nkosi believes that with the technology in place‚ entrepreneurs will be able to develop non-traditional financial services‚ like stokvels‚ online with a wider reach.

One entrepreneur working with the company to launch his start-up‚ which will provide small black-owned enterprises with working capital‚ is Simo Mcunu.

“A lot of companies have invoices that haven't cleared. We want to offer businesses advances on those invoices and give them a cash injection.” These cash injections will be raised through crowdfunding at a profit margin for the individuals or businesses pumping in the cash.

Mcunu believes this is the future of business.

“In future people will no longer go to banks but will go the crowd instead. Crowdfunding can solve a lot of problems we face in the finance industry. Crowdfunding is a tool for transformation.”

Ian Cruikshanks‚ chief economist at the South African Institute of Race Relations‚ said crowdfunding has had its successes and failures in South Africa but could help satisfy the country's investment demand.

“A lot of projects are not acceptable to banks‚ so part of the demand comes from those projects that are not bankable.”

Through crowdfunding‚ entrepreneurs can reach centres of capital outside South Africa and investors that have a greater appetite for risk than a bank would have‚ Cruikshanks said.

“It's a participation‚ not a gift. Some of these projects get thousands of participants. It's a question of the perception of risk. With crowdfunded projects the risk can be spread across participants.”

Cruikshanks said‚ however‚ that with the country's recent sovereign credit rating downgrade to junk status‚ it will be more difficult to attract any kind of investment‚ be it through traditional or alternative methods.