One of the biggest challenges facing entrepreneurs in South Africa is getting access to funding or capital.
A great idea remains a great idea until the entrepreneurial business gets off the ground and that usually requires some form of third party funding either through private individuals / companies, banking institutions or through the funding programmes offered by the government.
Below is a summary of some of the small business funding mechanisms (certainly not exhaustive) used by entrepreneurs to convert a great idea into a great business. Before applying for any type of financing, it is advisable that the small business owner consults a reputable and experienced financial expert that can assist and guide them in order to achieve their goal of acquiring the appropriate funding.
The government does award funds to entrepreneurial endeavours that meet certain criteria. These grants do not need to be repaid and do not accrue interest but do have strict qualification criteria as mentioned above. These grants are typically available to companies that support and encourage the government’s stated economic policies and deliverables such as black economic empowerment, job creation and economic growth.
There are 14 grants available to small businesses that are used by top entrepreneurs. These are:
- Aqua-culture Development and Enhancement Programme (ADEP)
- Automotive Investment Scheme (AIS)
- Black Business Supplier Development Programme (BBSDP)
- Business Process Services (BPS)
- Capital Projects Feasibility Programme (CPFP)
- Critical Infrastructure Programme (CIP)
- The Co-operative Incentive Scheme (CIS)
- Incubation Support Programme (ISP)
- The Manufacturing Competitive Enhancement Programme (MCEP)
- Manufacturing Investment Programme (MIP)
- National Youth Development Agency (NYDA)
- People-carrier Automotive Investment Scheme (P-AIS)
- The Sector Specific Assistance Scheme (SSAS)
- Support Programme for Industrial Innovation (SPII)
Criteria for qualification of grants:
Due to the number of grants available we recommend that each grant be thoroughly researched to ascertain if your small business qualifies for any of those listed above. We further recommended that you make use of the services of an experienced and qualified professional (such as a part-time financial manager) to help you navigate these waters. Below are a few of the most important criteria that your business will need to comply with in order to qualify:
- The business needs to conform to the applicable BBBEE Codes.
- Minimum and maximum turnovers vary from grant to grant.
- The business must have been trading for a minimum of one year.
- The business must be a registered entity with a tax clearance certificate, VAT number, etc.
- The business must comply with all applicable regulations such as CIPRO etc.
Transformation and Entrepreneurship Scheme from the DTI
The Transformation and Entrepreneurship Scheme was developed to provide finance to marginalised groups in South Africa. The scheme was put in place to stimulate and develop largely entrepreneurial ventures by making the mainstream economy accessible to women, people with disabilities, workers and communities. The Transformation and Entrepreneurship Scheme is designed to help entrepreneurs access finance to develop and grow their businesses. It is important to note that these are funds that we are talking about here, not grants. As a result, these monies would typically need to be repaid with interest.
The scheme provides funding for start-up businesses, expansions or expansionary acquisitions and comprises the following broad funds:
- Women Entrepreneurial Fund;
- People with Disabilities Fund;
- Equity Contribution Fund;
- Development Fund for Workers; and
- Community Fund.
There are general criteria set out for all of these funds:
- Applicants must be able to demonstrate that their business is economically viable and financially sustainable.
- The business must be in one of the IDC’s mandated sectors.
- Provision must be made for the employment of people with disabilities.
- Funding provided will generally not be less than R1-million.
Debt finance is small business funding that is borrowed to run a business. In exchange for lending the money, the individuals or institutions that have loaned the money to the business become creditors of the business and are entitled to the payment of interest on the money borrowed and to have their loan repaid at the end of a given time period or over a pre determined time period. The big banks are usually the providers of this type of small business funding but typically require guarantees and sureties prior to disbursing funds and take little (or no) risk in the event of default.
Venture Capital (VC)
Venture capital finance is provided by outside investors into early stage businesses with high growth potential accompanied by high risk in return for above market returns. The venture capital funds obtain these returns by owning equity in the companies they invest in. VC is attractive for new companies with a limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or qualify for typical debt finance. It must be kept in mind that equity finance is a lot more expensive in the long run than debt finance as the Entrepreneur is giving away future cash flows and profits when he / she sells equity.
Private Equity (PE)
Private Equity companies are similar to Venture Capital companies but would typically only invest in larger and more established companies. Private equity funders can usually commit large sums of money for longer periods of time. In the current market, private equity companies are mostly investing in medium to large businesses, but there are a number of boutique PE firms that have found a niche market servicing smaller companies requiring smaller investments. If you intend approaching a VC or PE firm you must be prepared for a full due diligence exercise on your business. Make sure your audited accounts are up to date and that you have adequate income and cash projections into the future that can demonstrate the ability to provide an investor a return on his investment.
Asset finance is provided by most, if not all, banking institutions in South Africa. Asset finance refers to providing small business funding for the business to buy movable assets and equipment in a way that makes it easier to manage cash flow in the business. The banks can finance capital equipment such as transport vehicles or fleets, mining equipment, materials, networks, mainframes and medical equipment just to name a few. This type of small business funding is probably the easiest form of financing obtainable as the provider typically retains ownership of these assets until paid for in full. This lowers the risk, which in turn lowers the cost and barriers to entry. A company needs to consider it’s Debt / Equity ratio carefully but where possible should finance these types of assets instead of utilising cash. The asset qualifies for wear and tear allowances against normal income tax and the interest incurred on the asset finance is also tax deductible. Most Entrepreneurs should leave their hard earned cash in the bank and use it as a buffer against seasonality and unforseen downturns.
At most you only get one shot at obtaining early stage small business funding so, as discussed earlier, make sure you have all the supporting documentation, financials, certifications, records and a sound business plan with realistic forecasts – some good financial advice that you can acquire from a part-time financial consultant can often make the difference between success and failure.