Doing Business

Securing Funding for your SME in South Africa

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South Africa’s Small-Medium Enterprises (SMEs) have a considerable role to play in bridging the exacerbated unemployment gap. The National Development Plan (NDP) estimates that of the 11 million jobs, to be created by 2030, 90% of these jobs will come from new or expanding SMEs.

In addition, the Presidency estimates that SMEs account for 42% of the GDP and employ 47% (7.3 million) of the South African workforce. Funding is one of the biggest hurdles faced by SME’s and in response government has made various avenues available to assist SMEs to secure funding.  

The South African government has developed funding mechanisms in the form of grants and funding institutions focused on business ventures. These institutions are government Departments, Agencies and Foreign entities:

  • Department of Trade, Industry and Competition (the dtic),
  • Department of Small Business Enterprise,
  • KZN Growth Fund,
  • Land Bank,
  • Industrial Development Corporation (IDC),
  • Small Enterprise Finance Agency (SEFA),
  • National Empowerment Fund (NEF),
  • Technology Innovation Agency (TIA) and,
  • African Development Bank (AfDB).

Depending on sectoral focus and size of the business, various incentives and grants are available for SMEs from these entities. By visiting the websites of the funders, a budding SME has access to varied options for financial assistance.

Government’s financial instruments come in the form of various grants or incentives:

Full or cost-sharing grants

These are usually not repayable.

Grants that are less than 100% require you to fund the balance of finance required for the project at hand.

Incentives

These are similar to grants, as you do not have to repay the money. However, unlike grants, where the money is provided for the service or asset, incentives are paid after the event has occurred.

Tax Incentives, means that the business may deduct a certain amount from the money it owes in tax.

Equity Funding

Equity funding which means that the government-funding agency buys a certain part of your business in return for percentage shareholding.

The equity provides you with the finance to grow the business and the investor receives a share of the profits and a lump sum when they exit.

Adapted from: https://smesouthafrica.co.za/guide-government-funding-small-businesses/

Although SMEs account for approximately 98.5% of all businesses in South Africa, historically they have struggled to access funding to grow. According to a 2018 survey[1]  a mere 6 percent of SMEs reported that they secured government funding while 9 percent cited private sector funding.

As such, the growth and sustainability of South African SMEs is largely inhibited by access to finance. Most commonly sighted factors contributing to low access to finance include the lack of availability of credit information, lack of suitable finance products targeted for small enterprises and the lack of assets for SMEs to use as collateral to secure much needed loans.

Most SMEs have turned to Non-Bank Financial Institutions (NBFIs) to access funds. Despite these NBFIs attracting higher interest rates, a growing trend post COVID-19 pandemic has seen a rise in demand for loans from NBFIs in South Africa (Examples of NBFIs in South Africa).

Historically SMEs have been unattractive segment for traditional banks so NBFIs have filled a much-need gap. They offer SMEs repackaged funding solutions, which are not restricted to how borrowed funds can be used. NBFIs allow SMEs to determine the manner fund are used and price the risk accordingly. NBFIs are becoming an attractive source of funding for SMEs who have traditionally been excluded from the government and Banking sectors.

Although securing funding remains none of the hardest obstacles for entrepreneurs and SMEs in South Africa, taking the decision to pursue an entrepreneurial route offers great rewards not only to the business owner but also to the overall South African economy.

 Websites:

www.thedtic.gov.za

www.smbd.gov.za

www.nefcorp.co.za

https://www.kzngrowthfund.co.za/

https://www.landbank.co.za/

https://www.idc.co.za/

http://sefa.org.za/

https://www.tia.org.za/

https://www.afdb.org/en

 

Sources:

https://smesouthafrica.co.za/guide-government-funding-small-businesses/

https://www.mckinsey.com/featured-insights/middle-east-and-africa/a-credit-lifeline-how-banks-can-serve-smes-in-south-africa-better

An assessment of South Africa’s SME landscape: Challenges, opportunities, risks & next steps, SME South Africa, 2018, smesouthafrica.co.za.

https://www.iol.co.za/business-report/5-companies-and-organisations-that-can-assist-in-funding-your-sme-11907359

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