How digital payments may help your start-up get loans

One of the key issues that arose from the recently concluded Global Entrepreneurship Summit is the difficulty met by entrepreneurs in accessing capital.

A report released by the research and policy arm of the Tony Elumelu Foundation and the Africapitalism Institute on Africa’s entrepreneurial ecosystem said 87 per cent of start-ups struggle in obtaining seed capital.

Only three per cent of those surveyed had a commercial bank loan, while 69 per cent used personal savings to finance their business according to the Unleashing Africa’s Entrepreneurs report.

Why many entrepreneurs failed to access funding despite the rapid growth in financial inclusion and the increasingly accessible banking channels became a hot topic.

Countries such as Kenya with reliable banking systems and business infrastructures were faulted even as the entrepreneurs were challenged to play a key role in positioning their enterprises to tap funding.

Money  was all ears in this debate to find out some of the basic elements that entrepreneurs ignore and end up hurting their access to capital.

MasterCard sub-Sahara president Daniel Monehin said payment systems provide a crucial foundation for start-ups to scale up by providing ready records that are crucial when seeking financial boost.

MONEY IN THE DARK

“Many entrepreneurs were even shocked why I was attending the GES, underlining just how much they ignore the issue of payments in their start-ups. Times are gone when banks would rely on written receipts and oral explanations to understand your business. As long as transactions are digital, even the entrepreneur knows their business worth so well to know how to approach access to capital. Anything spent through cash is simply money in the dark,” Mr Monehin said.

Close to 90 per cent of the entrepreneurs are said to use cash as their primary means of transaction. Experts, however, advise that this kind of transaction does not add much value to the business when trying to access capital.

Banks and financial institutions insist on financial records as proof of the borrower’s ability to repay a loan. While most businessmen relied on manual records when applying for loans, this method is largely inaccurate and may not win the confidence of a majority of lenders.

The use of bank accounts to deposit and withdraw has also lost popularity because it has been misused by cunning traders, who deposit and withdraw the same cash severally to create an impression of a busy account and non-existent turnovers.

“With any digital payment system, it is possible to tell who you pay, how frequent you purchase from different sources, how much you buy and how much you are paid. This is a key to scoring your credit worth by reliably showing your character and capacity all at once.

The beauty of this, especially in Kenya, is that the infrastructure already exist, entrepreneurs only need to tap into it,” Mr Monehin told Money in a post GES interview.

Payment systems also opens up the business to a wide network of customers in today’s fast globalizing economy. The ability to receive or make payments through certain channels today can be the sole defining element in unlocking your growth potential. It is a key link to the international markets, which may support the credit application case in establishing the scope and scale of your business.

Even though most entrepreneurs remain averse to some forms of payments such as online and cards, the digital systems are in most cases linked to the mobile phones, providing alerts with details on the transactions made.

This makes it easy for those doubting the reality behind the new payments model.

An overriding advantage of digital payments according the experts is the security that comes with being cashlite. The security of funds provides a much needed assurance for the potential injectors of capital into your start-up that they are putting money into safe hands.

YOUR INTEGRITY, YOUR CAPITAL

The man Forbes lists as Zimbabwe’s richest, Mr Strive Masiyiwa, who was among the panelists discussing the issue of access to capital said innovation is a key driver in the way a start-up positions itself for funding.

The telco tycoon, however, believes in integrity as a key bait to hook in capital even without necessarily going to the bank. He said entrepreneurs must make integrity part of their journey by remaining ethical as he experienced during his own start-up over three decades ago.

“I only had $75 when I started my first business and I did not know where to get the other funds. My business began picking up when I realised I needed to supply so I got the goods from my suppliers to pay in a month.

Two weeks later, I approached the supplier and told him I will not be able to pay him. He asked me when I would pay and I simply answered ‘I honestly don’t know’.

He asked me to have a seat and told me nobody ever came to tell him that they would not pay days before the due date, majority would simply default. We had an agreement and he continued to supply me more as I found my foot. My integrity became my capital. The supplier later came to work for me,” Mr Masiyiwa told delegates amid loud cheers.

Key lessons drawn from the capital access debate is the need for constant innovation, part of which involves the element of payments.
Many entrepreneurs start businesses with good concepts but fail to factor in the crucial element of how they will earn the most important aspect of the business which is revenue.

“The bottom line of all these is that don’t forget how toy will get paid, getting paid can be the main game changer in your business operation and scale up as the world technology continues to advance.

I have been in Nairobi for almost a week and I have not used a single note or coin, from the taxi to hotel -- meaning those who are not on my digital channels automatically miss out of my cash, even the entire Kenyan economy hurts when money cannot be allowed in because businesses have no channels,” Mr Monehin said.

The Kenyan lending market was also said to be averse to start-ups whose past cannot be established underlining the need for entrepreneurs to try their hands in even the smallest ventures to demonstrate they are not completely green when seeking for funding.