Faster finance can help merchants transform survival capital into opportunity capital
South African retailers have increased their usage of credit financing over the past eight years, but only a few sub-sectors of the market are effectively using the capital they borrow to drive the growth of their businesses. That’s according to new research from the Bureau of Market Research (BMR), conducted on behalf of Capital Connect, a fintech that offers fast and flexible business funding to South African retailers.
The BMR’s research reveals that growth in credit extension to the retail market (64% in nominal terms) as a whole between March 2015 and March 2023 has outpaced the growth of retail incomes (49% in nominal terms). This indicates that many retail categories are using credit to keep their heads above water, rather than to innovate and grow their businesses. Even more worryingly, the relationship between retail growth and credit extension growth is becoming weaker over time.
“South African business owners often cite a lack of accessible and affordable finance is often cited as one of the major barriers to growing their businesses. However, our analysis shows that credit extension to businesses in current price terms grew by 60% between 2015 and 2023, while business interest in credit also grew by about the same amount,” says Professor Carel van Aardt, Professor and Research Director at Unisa’s Bureau of Market Research.
“This suggests that retailers in many sectors are making sub-optimal use of credit to drive higher levels of growth through gearing. There are, however, wide differences between different segments of the retail market, with close correlation between income growth and credit extension in the general dealer, specialised food, beverages & tobacco retailers, and pharmaceutical & medical sectors, showing these segments are using credit to grow.”
Growth in credit extension outpaces retail incomes growth in key sectors
The relationship between income growth and credit extension is much weaker in the following sectors: household furniture, appliances & equipment; clothing, textiles & footwear; and hardware, glass and paint. This indicates that these businesses are struggling to harness credit as a significant contributor to retail income growth—suggesting that they’re tapping into survival capital rather than growth capital.
Gerhard Le Roux, Head of Capital Growth at Capital Connect, says that credit is a vital lifeline and growth catalyst for retail businesses around the world. Quick access to affordable and flexible finance is vital in every stage of a retailer’s lifecycle, from starting up operations to fueling growth and accessing operating capital to thrive through tough times.
“Leading retailers should be using financing to innovate, expand revenues and outsmart their competitors—not just to survive. A survey of our retail customer base last year found they named access to cash flow as their biggest challenge. This indicates retailers need access to faster, more flexible and more affordable funding to drive growth,” says Le Roux.
Opportunity capital: The key to driving growth
According to Le Roux, some ways to use opportunity capital to grow a retail business include:
- Managing cash flow better to ensure a consistent supply of inventory.
- Using credit to procure inventory in bulk, take advantage of discounts, and negotiate favorable terms with suppliers. This allows retailers to maintain optimal stock levels, offer a wide range of products and respond rapidly to customer demands.
- Expanding retail operations. Retailers can use opportunity capital to open new stores, renovate existing ones, purchase warehouse space or invest in marketing and promotions.
- Adapt to consumer trends—whether by implementing new technologies such as point of sales systems or ecommerce capabilities, upgrading store layouts, purchasing delivery vehicles, or diversifying product offerings.
- By having quick access to credit, retailers can pay suppliers promptly and negotiate better terms, such as extended payment periods or bulk purchase discounts. The benefits include better pricing, and increased flexibility in managing inventory levels.
Says Le Roux: “Our experience suggests that many merchants find that traditional lenders are reluctant to approve loans for business growth and that their underwriting processes take so long that the opportunity is often gone by the time a loan is approved. Fintech lenders are addressing this gap by offering fast access to capital.
“With Capital Connect, you can apply for a loan of up to R5 million from our app and the funds will be in your bank account within 24 hours, so that you never miss out on a business opportunity. That’s real growth capital that can help you take your business to new heights of performance and profitability.”