South Africa’s financing landscape has changed drastically since the growth of fintech companies. These alternative lenders have made access to financing quick and seamless, and affordable for smaller businesses. However, there is still a large funding gap that exists and requires more holistic financing mechanisms. One type of financing that small to medium-sized enterprises (SMEs) need more of is blended finance.
During Cyril Ramaphosa’s 2026 State of the Nation Address, he highlighted the importance of SMEs and their role in job creation and inclusive economic growth. The President emphasised the importance of creating an ecosystem for SMEs that reduces barriers that constrain the sector. In response, the government highlighted its plans to refine the draft Business Licensing Bill to ensure it supports, rather than hinders, entrepreneurship and amending National Credit Act regulations to improve access to more affordable finance. There is also a renewed focus on easing entry for township and rural businesses.
Additionally, the government set aside more than R 2,5 billion to support over 180 000 SMEs, and an additional R1 billion in guarantees for 2026. The government’s ambition is that if every small business could employ just one more person, up to three million new jobs could be created in the economy.
In this article, we look at what blended finance is, how it works and the benefits for SMEs.
What is Blended Finance?
Blended finance is a strategic approach that combines public and private funding to mobilise private capital flows towards emerging and frontier markets. It aims to attract commercial capital to projects that benefit society while providing financial returns to investors. Blended finance has become an essential tool for mobilising private capital to support infrastructure development, particularly in emerging markets where financing gaps are most pronounced.
By blending public finance with private investment, blended finance mechanisms can help bridge the financing gap for various development objectives.
Primary Aspects of Blended Finance
Before we look at how blended finance can impact SMEs, we need to look at the three primary aspects of it.
1. Leverage
Financial leverage is the idea of spending or borrowing money to make money. Leverage is the use of development finance and grant funds to attract and catalyse private capital.
2. Impact
For an investment to be classified as blended finance, it must be based in a local context and offer strategic, impactful partnerships for those the investments engage. The investment needs to generate social, environmental and economic progress for all those targeted with capital.
3. Returns
For private investors to be interested in blended finance, they must see the possibility for a financial return on their investment that aligns with market expectations. Leveraging transparency and evidence-backed results makes it easier to attract new investors to development projects.
Benefits of Blended Finance
The primary benefit of blended finance is to bridge funding gaps for high-risk, low-return projects like SME growth. The core benefits of it can be broken down into three main categories:
1. Enhanced Risk and Return Profile
Blended finance mechanisms improve the financial viability of development projects, making them palatable to risk-averse private investors. It also provides:
- Downside protection: Public or philanthropic funds can absorb initial losses (first-loss capital), shielding private investors from extreme financial risks.
- Credit enhancement: Mechanisms like public-backed guarantees and insurance reduce the default risk for commercial lenders.
- Concessional capital: Projects can utilise below-market interest rates or grants to improve overall expected returns.
2. Catalysing New Capital and Markets
Blended finance unlocks vast pools of private wealth, which are necessary to achieve global objectives. They also enable:
- Mobilisation of private funds: Blended finance acts as a bridge, bringing in commercial capital for social and environmental projects.
- Access to new markets: It allows private investors to enter frontier or emerging economies, such as those in Africa, that they might typically avoid.
3. Scaling Impact and Development
Blended finance not only ensures direct financial returns but also enables countries to meet their socio-economic and environmental goals. It also enables the following:
- Drives sustainability: Concessional funders frequently demand higher sustainability and social performance requirements, which establishes stronger market standards.
- Developing local markets: Deploying blended finance through local financial institutions helps build the capacity and expertise of regional funders.
- Proof of concept: It acts as a temporary catalyst to prove the viability of new business models, reducing long-term dependency on government subsidies.
Where to Apply for Blended Finance in South Africa
In South Africa, blended finance combines commercial loans with risk-tolerant capital such as government grants to lower borrowing costs for SMEs. You can access blended finance through the following avenues.
1. Small Enterprise Development and Finance Agency (SEDFA)
SEDFA offers a blended finance programme called the Township and Rural Entrepreneurship Funding Programme. It is designed to support startups and growing SMEs. This product pairs debt funding (which requires interest) with a conditional grant, which is non-repayable and interest-free, provided specific conditions are met.
2. Land Bank’s Blended Finance Scheme (BFS)
Land Bank’s blended finance programme aims to commercialise development farmers with the objective to facilitate meaningful participation of black producers and majority black-owned enterprises owning and controlling the agricultural value chains.
Qualifying criteria:
- South African citizens with a valid ID and/or registered business entity.
- Applicant must be a black South African as defined by the Broad-Based Black Empowerment Act No.53 of 2003 (as amended by Act 46 of 2013).
- Black-owned and managed farming enterprises that are commercially viable in commodities prioritised in the Agriculture and Agro-processing Master Plan (listed above) and Aquaculture.
- In the case of joint ventures, the non-black partner should have 40% but not less than 26% ownership in the enterprise.
- Enterprises with 10% farm worker profit sharing.
- No debt takeovers, settlements or refinancing of facilities.
3. Co-operatives Development Support Programme
The Co-Operative Development Support Programme (CDSP) is a programme of the Department of Small Business Development (DSBD) with an objective to support co-operative enterprises financially and non-financially in partnership with other key strategic stakeholders.
It offers blended financing to eligible co-operatives on a cost-sharing funding of a combination of a grant and a loan. The grant funding portion of funding is capped at R2,5 million towards qualifying activities. The grant support is available for machinery, equipment, infrastructure, commercial vehicles and business development support.
Does South Africa Need More Blended Finance Vehicles?
The simple answer is yes. South Africa’s R350 million funding gap in the SME sector highlights how SMEs still struggle to access more impactful, growth funding. Blended finance vehicles can unlock growth funding for SMEs, enabling them to become more sustainable and enhance their already large socio-economic contributions.
