It is almost every day that we hear how hard it is for small African businesses to access financing. Even in all the investment hotspots of the continent, landing capital for a small to a midsize enterprise is as herculean as pushing a boulder up a hill. A firm from Denmark is trying to fix the problem differently. GrowthBond.
The lack of funding results in millions of SMEs being forced to go out of business within a few months of beginning operations. This lack calls into question how well domestic capital markets are serving the needs of companies that form the bulk of Africa’s business universe.
Comprising the backbone of Africa’s economy, SMEs account for approximately 90 percent of all companies. They provide 80 percent of the continent’s employment. In Nigeria, the example is more extreme; SMEs comprise 96 percent of the country’s businesses, compared with 53 percent in the US and 65 percent for countries in Europe.
The bottom line is Africa’s economy will not be where it is now without Small and Medium-size Enterprises. Nevertheless, these businesses do not have it all good in terms of cash they need to break even.
A study conducted by Investisseurs & Partenaires found that 40 percent of SMEs in Africa identified the primary factor constraining their growth as accessing finance.
Some estimates put the current funding gap at more than USD 140 Bn. There are many reasons for this gap, such as the lack of collateral demanded by traditional financial institutions. In Kenya alone, almost half a million small enterprises fail annually as a result of the tough business environment.
Thinking of the problem in the light of online businesses, GrowthBond is bringing an unusual offer for African SMEs. The Danish fintech company is providing revenue-based financing for Facebook ads to small businesses.
Not just that, but the initiative is also connecting these online businesses to digital experts to increase their chances of getting a return on investment.
SMEs in Africa usually hit a rough patch when trying to prove their creditworthiness and demonstrate a market opportunity. This, which leaves them short of needed financing, is what GrowthBond has looked into. For one, the company is evaluating businesses based on their Facebook Business accounts.
“Traditional banks are unable to serve these small businesses because it’s almost impossible to evaluate the risk/opportunity and provide small loans with low margins, compared to larger loans for big businesses with high margins and less risk,” GrowthBond founder & CEO Ferdinand Kjaerulff, told WeeTracker.
Kjaerulff, who is also the co-founded Copenhagen-based ed-tech startup Coderstrust, said: “We aim to give small business owners an alternative to expensive bank loans and raising venture capital, which is close to impossible in most emerging markets. We’re taking a fixed 20% commission on each loan. The repayment comes in 5 installments: companies pay as they grow”.
How It Works
It is no hoax that social media advertising is one of the most effective ways to grow a business. With the swelling numbers of internet users in Africa and many tactics on for experimenting, there’s more than an opportunity for such businesses to hit the ground running.
Noticing the fast-growing social media audience, marketers are rapidly reallocating traditional media budgets towards social media advertising.
In 2017, social media ad spends rose by more than 70 percent, while the revenue in the 2018 realm was forecast at USD 67 Mn. For 2019, it was predicted that the global spend will grow 20 percent, reaching a record USD 84 Bn. According to data from Zenith – a Publicis Media-owned media agency – social media ads will account for 13 percent of the total global ad spend.
In fact, 2019 is supposedly the first year that social media ad spends finally outperforms print ad spend. The growth of the spend is attributable to small, growing businesses adding budgets in order to take advantage of the targeting and localization capabilities offered by platforms such as Facebook. Therefore, it is easy to see why this firm came all this way to help African SMEs do better ads and grow their ventures.
The average first loan size is USD 100, while the second loan is USD 1 K. 80 percent of the loan covers Facebook advertising costs, with the 20 percent going to the marketing experts that make sure the adverts produce the best results.
Loans & Freelance
While traditional financial institutions would only give loans and hold on to collateral, GrowthBond also provides education. It also employs local specialists who provide marketing services for funded companies. Having loaned to over 1000 companies in Nigeria, Kenya and The Gambia, GrowthBond aims to finance 60,000 companies by 2022.
The freelance space and micro-loaning intersect when GrowthBond decided to train local freelancers to service local SMEs, rather than international ones. Discussing this, the founder disclosed that the firm has educated around 200 freelancers who now work for funded companies as marketing experts.
The freelance space and micro-loaning intersects when GrowthBond decided to train local freelancers to service local SMEs, rather than international ones. Discussing this, the founder disclosed that the firm has educated around 200 freelancers who now work for funded companies as marketing experts.
40 Percent For Ads
There are several companies in emerging countries that offer non-dilutive capital for young startups. But none of them offer full marketing assistance for running online ads. Whereas, 40 percent of the raised capital is usually spent on online marketing.
“Apart from the loan, each company is provided with a marketing expert from our ecosystem that works on each case and develops the most effective marketing strategy and executes it. This way we ensure that the loan helps businesses to grow and increase profit,” says Kjaerulf.
Now we’re enforcing more strategic partnerships in Kenya and Nigeria and running some tests campaigns in other markets, e.g. Tanzania and Ethiopia and at the same time,” Arina Zhukova, GrowthBond’s Communications Manager, told WeeTracker.
GrowthBond comes from a country with strong institutions to enforce contracts. But the advertising costs in Denmark are very expensive. Whereas in African countries, online marketing costs are much lower, but there are not many companies that can help with marketing, financial organizations can’t accommodate small businesses.