The psychology of money, which is entrenched by family norms and cultural taboos as we grow up, could affect entrepreneurs’ attitudes towards loans, borrowing, finance and debt – and thus contribute to the high rate of SMME failure in South Africa.
South Africans are enterprising, resilient, and willing to absorb the risk of starting up their own businesses. But they often fall short when they need to access funding that will benefit their businesses, whether it be for long-term growth or for everyday things like replenishing stock.
Our psychology of money runs deep within us and, according to Forbes research, every family has its own particular psychology that dictates what can be talked about, who should be in control, which money responsibilities are assigned to whom, and how important money is or isn’t.
Of all the emotions that become attached to money, shame is one of the most common and debilitating. On top of this, starting up a business is an incredibly complex and stressful endeavour, and many entrepreneurs feel overwhelmed by the overall responsibility, as well as the demands of filling multiple roles. In other instances, a barrier to borrowing money can be attributed to culture or religion.
“What we are seeing is that many people have a complex relationship with money, and this is impacting their willingness to apply for business funding when they need it most,” says Daniel Moritz, CFO of working capital provider Merchant Capital.
Moritz says that there is a stark difference between how South Africans and people from other countries talk and think about money. “In the United States, business owners speak openly (and quite proudly) about securing capital for their businesses, throughout the journey, in good times and bad. In contrast, South African business owners tend to speak more coyly, regardless of the circumstances. There is an unspoken fear of failure in South Africa, largely because so many people depend on our entrepreneurs for their livelihoods. As a result, entrepreneurs often turn to family for loans, or to illegitimate providers such as loan sharks.”
Loan sharks have caused a feeding frenzy for vulnerable entrepreneurs who need a cash injection for their business to survive, but who cannot access funding from family or from a bank. The perception that “if it’s not from a bank, it’s not legitimate” has started to change with fintechs and alternative lenders entering and transforming the working capital market in an honest and transparent manner. But, alternative lenders need to educate both those who have bitten by loan sharks in the past, as well as entrepreneurs who are currently facing working capital shortages.
“These beliefs and biases, whether conscious or unconscious, probably dictate the outcome of many funding decisions that entrepreneurs make,” says Moritz.
There are also any number of myths about applying for start-up funding and working capital. Many believe that a bank is the only option for a business loan, and that an impeccable credit history is the most important factor for the approval of a loan. When it comes to unsecured loans – where lenders don’t require the borrower’s property or other assets as security – many believe that only traditional banks provide such loans, and that only struggling businesses should consider unsecured funding sources.
But the reality is somewhat different, says Moritz: “The truth is that South Africa is home to a growing base of innovative unsecured loan providers, like Merchant Capital, which have tailor-made solutions to fuel small business growth. Entrepreneurs don’t have to rely solely on big banks, and your credit history is just one aspect that is taken into consideration during the application process.”
Merchant Capital is unique within this market, in that it has worked with Muslim scholars to develop a compliant business finance product for the Islamic business community. Since 2020, they have deployed over R250 million in Shari’ah-compliant funding to nearly 1 000 Muslim-owned businesses.
“Merchant Capital was started by entrepreneurs, for entrepreneurs. We know the pressures that business owners face. We know that reaching out for start-up funding or working capital can be daunting, and we understand the psychology behind this fear. We’ve made it as easy as possible for entrepreneurs across the spectrum to access the funding they need to succeed,” says Moritz.
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