Mncedisi Xego, Royal Fields co-founder and CEO

Establishing a new business at the height of a recession sounds precarious enough. Establishing a new credit business, aimed at a very risky section of the market, amid a full-blown global financial crisis, even more so.

But so begins the story of Royal Fields Finance, a Johannesburg-based black-owned microlender, established in May 2009 to help fund start-up businesses. The group provides bridging finance to small and medium-sized businesses, which are unable to access funding from banks and/or development finance institutions.

Admittedly, it’s still early days to assess if Royal Fields has a sustainable business model, but co-founder and CEO Mncedisi Xego predicts the company will achieve a national footprint over the next five years or so. It currently operates in three provinces: Gauteng, North West and Mpumalanga.

“We realised there’s a general aversion to fund start-up businesses. Banks are very reluctant to fund small businesses. Development finance institutions have a restrictive role; for instance, the IDC focuses on industrial businesses,” says Xego, who’s banking experience includes a stint at Rand Merchant Bank’s structured finance division.

Put in the time

He discovered that traditional funding institutions’ requirement of security and risk capital of between 10% and 30% of loan value created an opportunity for niche players willing to take risk. However, to ascertain the existence of the market, Xego and his partner Thabo Ntseare (a CA) had to undertake extensive research, which enabled them to convince the IDC to grant them a loan facility of R29m to add to their own R1m to launch the business.

“The point is that each business is different. It has its own unique problems. You can’t use – as banks do – models to assess small businesses. You need to spend time with them to have a thorough understanding of the business. Banks don’t do that,” says Xego.

Royal Fields’ main clients are small businesses that get tenders from Government, but do not have the resources to carry the contract through. Its bridging finance division earns revenue from loaning contractors that experience delays with Government invoices. The company lends at a monthly fixed interest rate of 4% on the loan amount, with an average term of three months. Its loans range from R40 000 to R2.5m.

The business is high risk, but the owners contend that the returns are also high. Xego says Royal Fields’ bad debts are very low, with an impairment ratio of less than 5%. However, he admits it can get tricky with the small businesses they deal with, some of which, he says, tend to confuse revenue with profit.

Tight security

Says Xego: “You need to spend a lot of time trying to understand the business and the individuals running the business, the project they’re working on, and try to assist them with their projections… Banks would want financial statements, management accounts… With most of the businesses we’re working with, you’re not going to get that information, because they haven’t been around for that long, or if they’ve been around for three years, nothing has happened over that period. With us we say: ‘If you don’t have accounts, what information do you have?’ We would normally ask for bank statements.”

To protect itself, Royal Fields often requests surety from its borrowers and/or the Government. Where this can’t happen, it opens a joint account with the borrower to monitor every cent that goes in or out of the client’s account until the loan has been fully repaid.