SEFA: bringing finance to SMMEs

We speak to SEFA CEO Thakhani Makhuvha

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Small Enterprise Finance Agency (SOC) Ltd, commonly known as SEFA, was established on  April 1 2012 as a result of the merger of South African Micro Apex Fund, Khula Enterprise Finance Ltd and the small business activities of IDC.

SEFA's mandate is to foster the establishment, survival and growth of SMMEs and contribute towards poverty alleviation and job creation. sefa has a regional footprint of 9 offices around the country.

“Our vision is to be the leading catalyst for the development of sustainable Survivalist, Micro, Small and Medium enterprises through the provision of finance,” says CEO Thakhani Makhuvha. “In addition to being a loan financer, we also have other partnerships. We collaborate with other institutions to create an environment conducive to providing finance and support to small businesses.”

SEFA is built on a foundation of guiding principles designed to deepen institutional culture, organizational cohesion and guarantee success. The organisation acts with speed and urgency, with a solution driven attitude and a commitment to serve with integrity. SEFA prides itself on transparency and innovation, ensuring compliance with the best practice on the dissemination and sharing of information with all stakeholders, and continuously looking for better ways to serve customers.

“Entrepreneurship is huge in South Africa, it is vibrant and very active. In terms of job creation, SMMEs is one of the areas that creates quite a number of jobs as compared to big business,” explains Makhuvha.  “In South Africa alone, over 61% of jobs that are created are created with small business and cooperatives. Sufficient access to finance plays a large role in maintaining this rate of employment opportunities, and in addition to access to financial aid, there are other challenges that SMMEs face.”

Makhuvha explains that a number of challenges relate to the legislative regime and compliance requirements that small businesses need to face. Small businesses need to make sure that they are compliant with the tax regime, registered and are legitimate businesses.

“But one of the greatest challenges relates to access to the market,” says Makhuvha. “Small businesses need to be able to identify where they can be able to sell or get exposure and become known to potential buyers out there. So access to markets is one of the challenges that we have identified from our side. What we do is, for example, we assess the business plans that are brought to us and we look at the transactions. We need to ask ourselves ‘is there a market for this, are the entrepreneurs unique’, because somebody next door is doing similar business.

“So this is one of the fundamental areas that small businesses find themselves in. Another challenge is the issue of sufficient infrastructure in which small businesses can sell their products.”

Regarding the requirements to qualify for a loan from SEFA, Makhuvha explains that first and foremost a business plan or a business profile is required. SEFA provides funding from as little as R500 to R5 million. “We need to be able to clearly see from the business plan what the business will be doing, its projections and methods to achieve these outlooks. We need to see where the business is coming from and that there is a solid foundation of planning.”

SEFA provides funding to South African citizens or permanent residents. All businesses need to have a physical address at which they will be operating. SEFA does not provide funding to individuals, but does provide funding to sole traders – those that are in business and are not consumers, and the business has to be domiciled or operated in South Africa.

“We can do trade finance and it is very critical for us to ensure that as we assess these businesses. They have they have to demonstrate their ability to repay the loan,” explains Makhuvha. “We are registered with the National Credit Regulator, and we need to be responsible in terms of our lending activities. So as we assess their business plan, they must demonstrate their ability to repay.

“Being a development finance institution, SEFA would not require collateral, we don’t require security in our funding. However, if the entrepreneur wants to provide security we appreciate that, and we take it because it helps us to cushion the risk.  We do not require owner’s contribution, and we look at it from a long term perspective, and we look at the cash flow generating ability of the business.

“What makes us different from the commercial bank, being a development financing institution we have got a high level of risk as compared to them. I think we provide funding to clients that are more high risk than what the banks would do.  So clients that can be refused from banks are the clients that we would normally deal with,” he says.

SEFA offers Direct Lending and Wholesale Lending loan options. Makhuvha explains that Direct Lending is the providing of funding to small businesses directly from SEFA’s branch networks. SEFA has a regional footprint of 9 offices around the country with multiple offices in certain provinces. Additionally SEFA has opened a core location with other agencies like SEDA, Small Enterprise Development Agency, as well as the IDC.

“So direct lenders are clients that go into our offices, and they get supported by us if they are looking for asset finance to buy plant and equipment,” says Makhuvha.  “If they are looking for a bridging loan they get a contract and if they want to execute the contracts we give them the bridging loan facility.  We also give some people a revolving loan facility.  We provide the terms for these loans. Those that are going to be able to repay the loan over a period of five years, for instance, will get assistance from us with the facilities.  There might be clients who are doing trade outside our borders, who may be selling goods and services and who are looking for short-term trade finance and we would then provide that.  So working capital facilities are the typical funding implements we provide, using our direct lending channel.”

Makhuvha continues: “The wholesale lending channel is where we utilise our partners and intermediaries as a conduit to make sure that more funding is made available to SMMEs and cooperatives.  One area is the micro-finance institution, those that can provide funding from as little as R500 to R50 000, where we give them a line of credit and they will then on-lend.  So it’s a business loan or a line of credit facility that we provide to the micro-finance institution.  We also provide this business loan facility to retail financial institutions who might be specialists in certain areas.” 

SEFA works hand in glove with the Cooperative Financial Institutions where they have got their cooperative members. Under wholesale lending, SEFA also has another funding implement through our insurance subsidiary called Khula Credit Guarantee.  In this case SEFA provide indemnity to banks. Major banks provide funding to SMMEs and cooperatives and their assessment their criteria is not as strict as their normal own criteria, and SEFA would then give them a guarantee or an indemnity which ranges from 60% to about 90%. 

Makhuba explains that any entrepreneur can go to any of the commercial banks and borrow funding “and the banks will do their assessments and should they for some reason fail to meet their obligation in terms of the loan, we will then be able to indemnify the financial institution.

“As a development finance institution we measure our success rate by the developmental impact that we have made - how many SMMEs have been financed, how many jobs have been created. Year on year in terms of our target market 30% of our funding has to go to businesses that are owned and managed by young people, 45% are to be businesses that are residing in rural areas, poor communities and townships.  Another 45% have to be businesses that are owned by women, 2% people living with disability and 70% black people,” says Makhuvha.

“Since the establishment of SEFA in 2012 up to the end of March 2015 we have disbursed over R2.1 billion into the economy.  So those are the typical measurements that were required to produce to various stakeholders.  We are accountable to parliament, we are accountable to the shareholders of the IDC as well as the Department of Small Business Development. 

“So on a regular basis we provide them with the developmental impact that we have made through the funding that was made to these small businesses. I fully believe that we are in the right path to contribute somewhat to addressing the challenges of unemployment, poverty and inequality, by assisting SMMEs to achieve success,” concludes Makhuvha.

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