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African Businesses Need More Than Credit To Grow

Small and medium-sized businesses in Africa drive much of the economic growth on the continent. They provide up to 80 percent of jobs and function as major drivers of economic growth. Sub-Saharan Africa alone has 44 million small- and medium-sized businesses, which are offline and, often, cash-strapped. For these businesses to survive, grow, create more jobs, and deepen economic growth, they need access to capital.

Sixty-five million firms, representing 40% of small businesses in developing countries, need to borrow money each year—a need that runs into $5.2 trillion, according to estimates from the International Finance Corporation.

Some businesses avoid taking out loans with banks because the process can be tedious or impossible, especially if they are informal and do not have adequate records of their earnings.

Sometimes the problem is the high interest rates charged by banks—sometimes 20% or more in some countries. However, even when these businesses approach microfinance banks or digital lending platforms, they are sometimes charged even higher interest rates, making it difficult to repay these loans.

Ultimately, this discourage them from getting loans.

Credit, But With Other Facilities

In Africa, when motorbike riders do not have the finance to purchase a bike for their ride-hailing business, they rent one and pay high daily or weekly rates or monthly to the owners; then spend years paying installmentally if they want to own the bikes. Similarly, truck drivers acquire trucks in whatever way they can—borrowing, renting, or owning them. But before they can embark on a journey, they need money upfront to finance the long and arduous trip—buy diesel, insurance, and lunch for the law enforcement agents they’ll meet on their way. After scaling these hurdles, they still have to wait weeks and months before receiving payment from these cargo owners.

Motorcycle-based MAX and truck-based Kobo360 started as logistics providers to deliver packages to consumers. But they soon discovered that their model would not work if their transporters did not own motorbikes or could not finance their trip.

To solve this problem for the drivers and bike riders, MAX and Kobo360 not only offered them credit but also installed a Buy Now, Pay Later mode. . MAX and Kobo 360 purchases bikes for its riders and allows them to pay for a longer period of time.

The bikers would eventually own the bikes once they’ve completed paying the cost and some interest.

While the major solution these two companies offer is credit, they also use technology to digitise these offline businesses, providing a platform with a constant supply of customers for their drivers—which allows their drivers to complete more trips in a day.

A Recipe For Progress.

TradeDepot, a company that connects consumer goods to retailers, raised $110 million in Series B funding, to bring more retail stores to its digital platform, and digitise and expand its Buy Now, Pay Later service across the continent.

Last year, before TradeDepot raised this largest Series B by any B2B e-commerce platform in Africa, it raised $10 million in funding to expand credit offers to retailers. But instead of the huge interest rates, it offered almost a 5% monthly interest rate to the businesses that use its platform.

When it launched its credit offering, it had more than 40,000 retailers on its platform; now, it has more than 100,000.

So, instead of digitising these businesses that are surviving without access to capital, finances, access to credit without a supply network; or simply helping them digitise their businesses, TradeDepot does all three to achieve maximum impact. And with a low interest rate.T

radeDepot’s progress this year is perhaps a perfect example of what happens when you provide credit and other facilities for businesses.

Digitisation, low interest rates, and the establishment of a system where customers can pay for their purchase at a future date are important to creating a system where businesses can thrive in Africa.

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