Abstract
This study determines the factors that affect commercial banks’ loan eligibility of small businesses in the construction industry in South Africa. A multiple case study design and six randomly selected small businesses (i.e., three unsuccessful-declined and three successful-approved loan applicants) were used in this study. The qualitative methodology was applied to interview three senior managers from a commercial bank and six senior officials of the businesses, which had undergone the assessment process. The small enterprise assets finance applications of interviewed clients’ outcomes and the credit scoring outcomes either formal complaint letters or minutes were also evaluated after the credit scoring decision had been made to obtain more in-depth data.
 The main finding of the study was that client’s relationship, background, character, collateral, capital, capacity and affordability are major factors of loan eligibility of small businesses in South Africa. Of particular importance was that, typical relationship-based term loans were based on a business relationship built over years of lending, allowing for substantial flexibility in loan terms.
Highlights
According to the South African Government’s National Development plan and policies report (2013), 90% of new jobs should be created through Small Businesses by 2030, progress has been disappointing (Mail Guardian, 2013)
According to the National Small Business Amendment Act (26 of 2003), a small business in the construction industry is a business with a total of 50 fulltime equivalent of paid employees, a total turnover of R6m and a total gross asset value
This study focused on exploring the characteristics of small businesses whose finance applications are approved or declined after going through the assessment using the credit model of a commercial bank, the applied credit criteria by commercial banks in SA
Summary
According to the South African Government’s National Development plan and policies report (2013), 90% of new jobs should be created through Small Businesses by 2030, progress has been disappointing (Mail Guardian, 2013). The World Bank (2013) adds that relative to larger firms, small businesses enhance competition, entrepreneurship, innovation, job creation and spur economy-wide efficiency; growth and poverty alleviation. Asset funding: An estimated 5% of small businesses in the construction industry have received asset finance for business expansion or growth from commercial banks, but the major challenge for commercial banks is the assessment of risk in a cost-effective manner. To this end, the commercial bank developed an internal automated credit scoring scorecard to determine if the small businesses should be financed or not. The lack of venture capital funds makes many new small businesses dependent on bank loans and overdrafts and suppliers’ credit for early-stage financing, which is known as unstructured lending (FinScope Survey, 2010). Factors that are taken into consideration by commercial banks’ finance model to assess Small Enterprise assets credit application are: 1. Character: Business and Owner’s credit history based on credit score; Trade references - reputation of business with suppliers and customers; Letter of good standing - bank report based on existing relationship with the potential lending institution; Management skills and experience; Years with Bank; Owner's personal credit history; Experience (years) in Business and Type of Legal Entity
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