With SMMEs rightfully earmarked as the key to South Africa’s financial future, we explore the challenges facing entrepreneurs in terms of attracting finance and funding to build their businesses and startups


Small- and medium-sized enterprises (SMEs) are the true global engines of employment. SMEs have the potential to grow the economy, create jobs and broaden the tax base. Therefore, they play a crucial role in reducing unemployment, inequality and poverty levels.

According to a 2016 published article by James Mwangi, Executive Director at Dalberg Global Investment Advisors, South Africa and Ashish Thakkar, chairman of Global Entrepreneurship Council, UN Foundation, these businesses represent 78% of jobs in low-income countries and more than 90% of all new jobs created each year.

That being said, however, it is also true that 90% of all startups in South Africa fail—70% of them in their first year. As such, the ability to foresee any risks that may affect you along the way is extremely important if you plan to make it in the business world.

Christo Botes of Business Partners Limited in Johannesburg says, “If SMEs flourish then we can be sure that there are jobs being created and that employees are being trained and upskilled. Company profits should increase, consumer spending will accelerate, as the mood for doing business is great and, overall, you find an economy that also flourishes. However, the opposite applies when SMEs do not flourish.

Botes adds, “We should be aware that SMEs flourish when the big drivers of the economy are present and growing, such as big agriculture, big mining, big manufacturing, major tourism, key nodes of transport, seats of bureaucracy and seats of learning. The current drought hampers agriculture and the downward supercycle of commodities in mining are not creating a conducive environment for SMEs to flourish in, especially the more rural parts of our country.”

Therefore, the challenge here is to keep SMEs from failing and, instead, coax them to bloom and grow successfully—this can only be done by identifying the strengths, weaknesses, opportunities and threats facing small businesses.

According to Karl Westvig, CEO at Retail Capital SA, a company that provides working capital to small businesses, when you’re an entrepreneur with an exciting new business plan, one of the biggest headaches is how to finance your small to medium enterprise.

If for example, you are planning to leave employment to self-finance a small business, it is advisable to put aside enough money to cover your startup costs and a few months of living expenses. Doing this will ensure you have no worries about financial security during the first months of working for yourself.

In an article published in August 2016, Christine Makanza, a postdoctoral researcher, and Dr Co-Pierre Georg, a senior lecturer at the University of Cape Town’s African Institute of Financial Markets and Risk Management argued that “one of the major challenges of SMEs is the lack of high-quality collateral, which results in loan interest rates they cannot afford and a shortfall in financing.” They also said that “Interest rates for SMEs are higher in South Africa than the average for middle-income countries.”

It is essential that SMEs approach the issue of funding with care and it is important that there be a clear strategy and business plan in place. Many funding organisations will assist with a lot of this legwork, but at the core is the need for a business or venture that is sustainable and/or profitable.

Before any bank funding is sought, a business needs to have equity, a proven track record and an experienced team, guaranteed inputs or raw materials, proven market demand and a robust project finance model,” says Andre Pottas, Corporate Finance Partner at Deloitte.

Because funding for SMEs is such a vital matter in South Africa, the National Empowerment Fund (NEF) was established by the National Empowerment Fund Act No 105 of 1998 to promote and facilitate black economic equality and transformation.

According to a Director at the dti’s Green Economy (Investment Promotion), companies are often looking for black partners and that’s a key aspect that especially foreign companies are interested in. The dti can facilitate investor introductions to BBBEE partners.

There are also regional agencies, such as the Eastern Cape National Empowerment Fund, which Bongolethu Bacela, an Investment Associate at the National Empowerment Fund says is “responsible for funding in the entire province and we provide financial services such as business loans, funding and non-financial services. We were established to fund mainly black businesses and we do acquisitions, startups, fund management buy-ins or management buy-outs and provide pre-investment support and mentorship for entrepreneurs we have funded.”

Ideally, a funding partner should have a long-term outlook, be tolerant of the possibility of failure and be patient with regard to drawing cash from the business.

Phelela Mlilo, Provincial Manager, Eastern Cape of the Masisizane Fund, an initiative of the Old Mutual Group, explains that, for her fund, “the level of commitment demonstrated by an entrepreneur is a key factor for us to determine the potential of an SMEs success. When we conduct due diligence on a prospective client, we are able to gauge one’s commitment to the transaction. This is definitely an important benchmark for us when we decide on funding for an SME. Other factors we analyse is whether the SME is operating in a secure, reliable and established market.”

“Interest rates for SMEs are higher in South Africa than the average for middle-income countries”

Referring to a case study of a small firm the Masisizane Fund had assisted, Mlilo said, “We have just worked with a manufacturing entity, which is importing pine and distributing it for manufacturing purposes across a range of suppliers in Africa.

“We provided them with the working capital facilities so that they could procure more products. We could assist the new owner to penetrate his market and receive co-funding from the Eastern Cape Development Corporation and, as a result, save the business and see tremendous growth in a short period of time. We could also help the owner to manage staff relationships better, which would result in a significant drop in staff turnover and a much smoother overall operation.”

Once they are flourishing, a big worry for many SMEs is the matter of payments being delayed, despite the provision of goods or services.

This is where firms, which offer a peer-to-peer (P2P) financing model play a role—an investor can sign up to offer capital to SMEs and earn interest. They use technology to connect businesses looking for fast and competitive invoice financing with lenders looking to make a good return. This option is far less complicated than a bank loan.

There are also agencies such as the Small Enterprise Finance Agency (SEFA) fund. This is a billion rand fund geared towards helping young people start businesses or grow existing ones.

The types of loans they give include startup and business loans to cooperatives, bridging loans, which are given to an enterprise to finance working capital needs such as operating overheads, and tailored finance, which is, essentially, a debt facility structured around the requirements of the project.

Other options for entrepreneurs looking to finance their SMEs include the most obvious, i.e. a bank loan. While this is probably the first option a new business owner will think of, one must be aware that, as Karl Westvig points out, “the criteria are very strict and they almost always require collateral, like property, which is not ideal.”

According to South Africa’s Investment Network website (, the areas that the country’s financing agencies are most interested in at the moment are Internet, e-Commerce and Apps; Real Estate; Food and Beverage; Agriculture; IT, both hardware and software, and manufacturing.

Many of the options available to SMEs are often passed on by word of mouth and at various conferences and seminars. As a result, networking, which is all about making connections and developing mutually beneficial relationships, is extremely important for new business owners. You must be willing to get your name out there and work on building a solid reputation.

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