As the South African economy changes, it’s a good time to think about starting up a business, developing an existing one or taking on a government or private sector contract. The growing importance of SMEs to the South African economy means that they now account for approximately half of all people in formal employment in South Africa and for about a third of the national GDP.
The finance minister recently said the government was investing roughly R200-billion a year in expanding South Africa’s infrastructure through new capacity in transport, water, energy, ICT and social infrastructure to ensure that businesses can succeed. He further emphasised that young entrepreneurs must be given support, and there are a number of measures now being implemented across government to expand the economy and support small businesses.
The majority of entrepreneurs feel that access to finance is their greatest challenge. What kind of financing is available to entrepreneurs when they’re starting or expanding a business?
1) Private loans from family or friends.
These loans are often unstructured, leaving the entrepreneur open to uncertainty. There might be an expectation that the funder will be paid back within a very limited time period or that they can be involved in the business.
2) Bank loans and term financing
In the case of overdrafts, bank loans and term financing, the amount available to the entrepreneur is limited by the security he or she is able to offer against the loan. Quite often the financial institution has no vested interest in the business’ success and so provides no on-going business support.
3) Government grants
There are a number of grants available, each with its own set of criteria. Generally, the following will be required:
• The business needs to be majority black-owned
• It needs to have a significant representation of black managers (if applicable)
• The business must have a minimum of one year in trading
• The business must be a registered entity with a tax clearance certificate, VAT number, etc.
• The business must comply with all regulations such as CIPC, SARS etc.
• All owners and major shareholders need a clear credit history
4) Quasi- equity investments
Quasi equity investments are not made on the basis of security, but rather on two main criteria: firstly the potential for success as contained in the applicants’ business plan and, secondly, the skills and business management abilities of the entrepreneur. This enables SMEs with limited security but a viable business plan to obtain funding. The funder also has a vested interest in the success of the business venture since it will be sharing in the profits of the business.
There are many organisations that provide funding to the smallest micro businesses all the way through to medium-sized enterprises in South Africa. By knowing who and where these financiers are, you can approach the most appropriate organisation that meets your business’s specific needs and goals.
• IFC – The International Finance Corporation – www.ifc.org
• DBSA – The Development Bank of South Africa – www.dbsa.org
• IDC – The Industrial Development Corporation – www.idc.co.za
• IPFA – The International Project Finance Association – www.ipfa.org
Entrepreneurs who are looking for ways to strategically develop their business need the professional advice and support infrastructure provided by Lean Enterprise Acceleration Programmes. Contact LEAP on 011 449 7074 or visit www.leapco.co.za to see how we can help you.
Please join the conversation. We would love to hear your point of view.