Winning a government tender in South Africa is great news for a small business, but many enterprises hit a brick wall when it comes to funding it.
Delayed approval from traditional lenders often stops a tender before work even begins, and, coupled with slow government payments, it can often take months to receive payment.
Suppliers want cash upfront, and workers need paying, all while the SME owner sits and watches their bank account.
If you’ve been in this position, you’ll know how quickly a tender win can turn into a cash crunch. This guide covers the key tender funding methods, who each one suits, and how to match your funding to the government payment cycle.
The Cost of Winning
After the initial excitement of winning the contract has settled, its expenses become apparent. You need to set up the site, buy materials, hire new staff, and maybe even sort out a new insurance policy. None of these costs can wait.
What’s more, government contracts often come with built-in penalties for delayed work. Your company might also suffer from a dented track record when the next bidding process rolls around.
Work Out Your Funding Gap Before You Bid
Most SMEs wait until they’ve won the contract before working out the funding they’ll need, but flipping it around so that you know this figure BEFORE you bid will stand you in better stead.
Here’s a simple method you can follow. Calculate:
- Upfront costs: All the essential outgoings before you get the first payment
- A realistic payment date: This is typically the delivery date plus 30 days, then add a buffer for delays
- Running costs in between, including wages, rent and supplier accounts
Let’s say you win a R600 000 contract with R240 000 in upfront costs. Your first payment comes after 75 days. Your overheads for that time will be roughly R125 000. This means your funding should be R240 000, plus the R125 000 overheads, giving a total of R365 000.
Having this figure in mind will let you start looking for realistic funding options that you can have up your sleeve should you win the bid.
3 Tender Funding Options
1. Development Finance Institutions (DFIs)
DFIs are state-backed institutions that provide funding for SMEs, with SEFA and the NEF being two prime examples.
Government tender funding applications often get approved, with competitive lending costs, but the process can take weeks or even months. If you can get a good head-start on securing funding before you start the work, then DFI funding could work.
You’ll need to show your CSD registration, tax compliance, and your CIDB grading for construction to get started.
2. Private Working Capital Providers
Many private providers specialise in business funding with faster turnaround times than DFIs, however, their terms, fees, and criteria vary. Compare the total funding cost of each project to make sure the two are compatible.
3. Lula’s Fixed-Term Funding
Lula is a leading provider of tender funding, having supported over 25 000 businesses with R13 billion in funding since 2014, including many working in construction.
Established SMEs who need capital moving before the first invoice clears find that Lula’s Fixed-Term Funding works brilliantly with tenders thanks to its average disbursement time of 22 hours. They get up to R5 million as a one-off lump sum in their account ready to go, and they have three, six, nine, or 12 months to repay it.
There’s no interest, just a fixed fee agreed upfront, so you can price it into your tender margin, and you can use the funds wherever the contract needs them.
What Funders Will Ask For
Fast and flexible funding doesn’t mean skipping checks. Any credible funder will review the following:
- Bank statements and transaction history
- Your credit history
- Proof of the award or purchase order
- Tax compliance and CSD registration
To qualify with Lula, you need one consecutive year of trading history, at least R40,000 in monthly revenue, and a business registered in South Africa. You can link your bank account’s read-only transaction data to speed up the assessment, but credit and affordability checks still apply.
Match the Funding to the Payment Cycle
Many SMEs make the mistake of choosing a term shorter than the payment cycle. If you expect payment on day 75, a three-month term leaves almost no margin for delay. A six-month term gives you room.
Then, settle early once the department pays. Lula charges no early repayment penalties, so you can repay early without having to worry about paying for the privilege.
For more on structuring this, see Lula’s guide to tender funding.
Plan the Funding With the Bid
The SMEs that profit from government work treat funding as part of the tender, instead of something you hunt around for after you win it.
Calculate the gap, line up your documents, and choose a route that fits your timeline to stand the best chance of a successful tender contract.
