One of the key ways that the South African government drives the growth and sustainability of small businesses is by providing development funding. This is because the SME sector is of great importance as it contributes to job creation and is an engine of growth for the economy.
In recognition of the role small businesses play, the government has prioritised the promotion and development of small businesses in an effort to reduce the SME failure rate and to help small businesses to grow.
The funding landscape
There is great demand for funding in South Africa. According to the SME South Africa Landscape Report, ‘An Assessment of South Africa’s SME Landscape: Challenges, Opportunities, Risks and Next Steps’ (Landscape Report), the majority of small business owners surveyed said they are actively looking for funding however, the vast majority (94%) had not received any kind of funding from the government. Only 6% said they had received funding of this kind.
Of the 6% of business owners who noted that they had received government funding, the largest share pointed toward government grants (21%) as the key funding mechanism used. Business owners indicated that they have received funding from other government structures such as the DTI (17%), the NYDA (16%), SEDA (15%), and the GEP (15%). A small portion (13%) of these business owners did indicate ‘other’ government avenues that they have pursued to secure funding, including the Umsobomvu Youth Fund, the National Film and Video Foundation, and the Gauteng Department of Enterprise Development.
Government funding challenges
The Landscape Report points to a number of reasons for the low uptake of government funding, primarily a lack of accessibility to and knowledge about the various funding options available to the small business community, as well as a lack of funding readiness.
Darlene Menzies, CEO of Finfind, an innovative online platform linking finance seekers with matching SA funders highlighted the following concerns in the article ‘SA Funders And Finance Seekers – Where Is The Gap?’.
“Most entrepreneurs don’t know where to start when it comes to applying for finance. The world of funding is largely foreign territory to them, and learning to navigate it can be a challenge. Applying for finance is a daunting task. When you ask about Government funding, the common response is that they know there is funding available, but that it is very difficult to secure. If you are successful, it takes forever for the funds to be paid to you, which often occurs after the opportunity which required funding has been lost.”
To combat this, recommendations in the Landscape Report are additional or improved support for SMEs looking to secure finance, including more information about SME funding to be made available, such as where it can be accessed and the requirements for each fund.
To address the lack of funding readiness, the report recommends that the government take initiative to train and mentor business owners on business fundamentals such as how to write good business plans, how to integrate accounting systems and better manage their businesses.
The South African government provides several different forms of funding, such as grants, tax incentives, loans and equity finance options.
Grants
A grant is an award of money that is non-repayable, the government lending agency provides for 100% of the financial need. These types of grants are often once-off opportunities to assist new businesses. The receiving business is obligated to spend the funds in a manner specified by the provider.
Cost-sharing Grants
These grants do not provide for 100% of the financial need, they typically finance from 35% to 100% of the applications. The business owner is required to fund the balance of the finance required for the project.
Incentives
Incentives are paid after the event has occurred, unlike grants where the money is provided for a project. Business owners are able to claim back the portion of the approved project that the incentive addresses. Like grants, incentives do not require that you repay the money.
Tax Incentives
A tax incentive means that the business may deduct a certain amount from the money it owes in tax. The government offers tax incentives to encourage businesses to engage in a specific activity (such as employing young people) for a certain period of time.
Equity Funding
In this instance, the government provides the business owner with finance to grow the business in exchange for a percentage ownership of the business and a share of profits as well as a lump sum when they exit.
Read more: A Guide To The 5 Types Of Government Funding
The requirements for specific government instruments will differ depending on the specific grant or incentive.
However, it’s important that all businesses looking to access funding be compliant with all relevant regulatory and statutory requirements such as be registered with the CIPC and registered for tax with SARS.
Read more: The Basics of Registering Your Business
See also: SARS Business Registration Faqs – What You Need To Know To Stay Compliant
Additional requirements to access government funding are BBBEE and financial compliance, including annual financial statements, management accounts and tax clearance.
In the article, ‘The Consulting Firm That’s Helping Black Industrialists Secure Millions In Funding’ Nadia Rawjee, a financial strategist has the following advice for business owners looking to access government funding.
“Record keeping is essential if you would like to access developmental finance in the future. You need to ensure that you have a strong bookkeeping administrative system, accountants that would ensure you remain tax compliant and provide you with regular management accounts and annual financial statements,” says Rawjee.
Rawjee is the founder of Uzenzele Holding, a niche consulting firm that specialises in helping entrepreneurs access development funding in the form of government grants, incentives or loans from institutions like the Department of Trade and Industry (DTI), Industrial Development Corporation (IDC), National Empowerment Fund (NEF), and Small Enterprise Finance Agency (SEFA).
Below are the most common requirements for applying for funding.
Financial documents
Besides these documents, they will ask for the following supporting documents to confirm statutory compliance and to validate the information on funding applications:
Get a full list of agricultural funds for the following categories/businesses:
In a bid to grow entrepreneurship in South Africa, a number of government agencies provide financial and non-financial support to qualifying enterprises and individuals.
The IDC is a national development finance institution set up to promote economic growth and industrial development. They offer loan amounts of a minimum of R1-million with a maximum of R1-billion per project allowed.
Lending criteria: Startup businesses, including funding for buildings, machinery and working capital for businesses operating in South Africa. Existing businesses can also apply for expansionary purposes. Over 50 percent ownership by persons under 35 years of age. Businesses must demonstrate economic merit and have prospects of acceptable profitability to be able to service their obligation. Broad-Based Black Economic Empowerment certification from an accredited verification agency, where applicable.
Priority sectors: Green industries (renewable energy, energy efficiency and waste management and recycling), agricultural value-chain, manufacturing activities (clothing, textiles, pharmaceuticals, plastics and chemicals), strategic high-impact projects (logistics industrial infrastructure, mining value-chain, tourism and high-level services, media and motion pictures, knowledge economy – ICT, and biotechnology).
Funds:
Sefa provides financial and business support to numerous SMEs and cooperatives throughout the country, furthering the development of existing enterprises or the establishment of new enterprises.
Lending criteria: Businesses must show economic and financial viability (demonstrated or potential), must operate within the borders of South Africa. The fund only offers debt financing and no equity instruments.
Priority sectors: Entrepreneurs in the following sectors: green industries, agricultural value-chain (agro-processing and primary agriculture – cash crops only), manufacturing, small mining value chain (mineral beneficiation), tourism, information technology and retail and wholesale of product.
Funds:
SEDA is tasked with developing, supporting and promote small enterprises throughout the country, ensuring their growth and sustainability.
Priority sectors: Green industries (renewable energy, energy efficiency and waste management and recycling), agricultural value-chain, manufacturing activities (clothing, textiles, pharmaceuticals, plastics and chemicals), strategic high-impact projects (logistics industrial infrastructure, mining value-chain, tourism and high-level services, media and motion pictures, knowledge economy – ICT, and biotechnology).
Funds:
The organisation offers microfinance grants for survivalist youth entrepreneurship, and cooperative grants for greater participation of youth in the cooperatives sector.
The objective of the grant programme is to provide young entrepreneurs with an opportunity to access both the financial and non-financial business development support to establish their survivalist businesses.
Find out more about NYDA Grants: What You Need To Know About NYDA Grants
Lending criteria: The application process for the NYDA grant includes: Be under the age of 35. The applicants must have necessary skills and experience or a potential skill appropriate for the enterprise that they conduct or intend to conduct.
Read more: Find out more about the NYDA application process
Priority sectors: The types of businesses assisted through the grant programme are mainly: artisan skilled entrepreneurs.These include, but are not limited to, motor mechanics and panel beaters, electricians, plumbers, domestic appliance repair services, beauticians, hairdressers, cleaning companies, small scale recycling companies, street vendors, car washes and others.
Funds:
The NYDA grant finance starts from R1 000 to a maximum of R200 000 for any individual or youth co-operative. Young people interested in accessing the grant programme will have to commit to participating in the NYDA mentorship and voucher programme for a minimum of two years. The program consists of both pre and post-approval assistance.
The NEF is tasked with promoting and facilitating black economic participation by providing financial and non-financial support to black empowered businesses, and promoting a culture of savings and investment among black people.
Lending criteria: The NEF provides business loans from R250 000 to R75-million across all industry sectors, for startups, expansion and equity acquisition purposes.
Priority sectors: All industries, including but not limited to ICT, tourism, transportation, textile industry, services, retail, property, printing services, motor industry, mining services, media, manufacturing, agro processing, energy, financial services, food & beverages.
Funds:
The Technology Innovation Agency (TIA) was established in terms of the TIA Act 26 of 2008, with the objective of stimulating and intensifying technological innovation in order to improve economic growth and the quality of life of all South Africans.
Lending criteria: The NEF provides business loans from R250 000 to R75-million across all industry sectors, for startups, expansion and equity acquisition purposes.
Priority sectors: Focus areas include health, agriculture, bio-economy, natural resources, energy, ICT and manufacturing.
Funds:
The dtic and its subsidiary agencies are involved in promoting economic development, black economic empowerment, implementing commercial law, promoting and regulating international trade, and consumer protection.
Lending criteria: The dtic supports the development of sustainable, competitive enterprises through the provision of incentive programmes that support national priorities. All incentive schemes on offer by the Department of Trade, Industry and Competition (the dtic) have their own specific guidelines and qualifying criteria.
dtic Incentives schemes:
Find out more about COVID-19 specific government funding: