Entrepreneurship has been increasingly encouraged by government in the past few years, as the barrier for entry is continuously being lowered to stimulate participation in business. Funding has however proved to be a high hurdle for entrepreneurs.
When South Africa recorded a 32.6 percent unemployment rate a few months ago, the general concept of entrepreneurship, and small business funding, got more attention than usual. The thought is that small-scale entrepreneurs are underfunded due to the large demand for capital and that new entrepreneurs need to demonstrate their likely ability to stay afloat before any cash injections are directed their way. These two considerations are critical in a country where 70-80 percent of small businesses fail within 5 years.
“When looking for funding, don’t just look for cash. Look for the right people” (American fashion entrepreneur, Jodie Fox)
According to South African Reserve Bank data, the low level of small business financing appears to be emanating from the demand side as “the vast majority of SMEs indicate that they do not borrow from financial institutions, particularly banks”.
Statistics SA’s Annual Financial Statistics (AFS) recorded that “Industries in the South African formal business sector, and included in the AFS survey, generated R10,5 trillion in total turnover in the 2019 financial year… A breakdown of turnover by business size shows that small businesses were responsible for generating R2,3 trillion (or 22%) of the R10,5 trillion.”
There are however alternative funding options for small businesses in general, rather than the conventional method of going to the banks.
- Agency funding options
These are available to small businesses with the objective of meeting certain quotas, including gender, race, regional and industrial transformation.
Examples of agency funding programmes include:
- National Empowerment Fund (NEF) services business loans from R250 000 to R75 million across a variety of industry sectors.
- Small Enterprise Finance Agency (SEFA) has a programme called the Township and Rural Entrepreneurship Programme (TREP), among others, where it finances SMMEs in townships, rural areas and farms with R350 000. R300 000 is for equipment and R50 000 working capital in a form of a grant.
- Department of Trade and Industry’s (DTI) mandate is economic enlargement and Black Economic Empowerment.
- Isivande Women’s Fund is a BEE and gender equality programme that provides funding from R30 000 to R2 million.
- The Small Enterprise Development Agency (SEDA)
Bootstrapping, also known as financial bootstrapping, describes a position in which an entrepreneur starts a company with little capital, relying on own funds rather than outside investments to build the business. Bootstrap financing techniques are often favoured by smaller businesses.
Various crowd funding platforms are available online in South Africa, with the general touch points being a funding goal project description, audio visual presentation, rewards structures for backers, “jump starters” profiles and project deadlines.
The size of the crowdfunding market in South Africa is yet to be determined, even though regulators are said to still be trying to get a full understanding of the increasingly popular trend.
Although crowd funding is not specifically regulated in South Africa, certain activities may fall under various financial services regulatory provisions and legislation.
Crowd funding is also popular with crypto-assets managers, deriving from their common nature of surviving in a digital habitat.
Crowd funding classes are:
- Debt-based crowd funding, which is basically a loan where the investors provide funding to the recipient, which is then repaid over time with interest.
- Equity-based crowd funding, whereby the investors provide funding to a start-up company by subscribing for shares and these funders sign-up to only receive dividends when the project becomes profitable.
- Rewards-based crowd funding has characteristics of bartering as investors generally make an “investment” into a business with an undertaking that allows for them to receive goods or services in return for the funding once the business has been launched successfully.
Getting a business partner comes with both advantages and disadvantages and should not be embarked on without professional advice.
For additional reading:
- For more information on how to qualify for the Township and Rural Entrepreneurship Programme (TREP) funding, click here.
- Read the SA Financial Regulation Journal’s analysis of legalities around crowd funding, here.
- Read Stats South Africa’s report on Small Business Performance in 2019 (which was published in December 2020), here.
- For more information on the concept of bootstrapping in South Africa, read the Cape Peninsular University of Technology’s published research paper titled “The impact of selected characteristics on the financial bootstrapping methods adopted by immigrant entrepreneurs in the retail clothing sector of the Cape metropole” here.
The article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.