A Guide to NEF Funding in South Africa

The National Empowerment Fund (NEF) may be the right funder for you if your business venture has the potential to make a positive impact on the local economy, creates jobs and endeavours to increase the economic participation of black people, women, youth and other previously disenfranchised groups.

The fund is designed to facilitate and promote black economic participation. Founded in post-apartheid South Africa in 1998, the funder provides financial and non-financial support to black entrepreneurs and groups in support of Broad-Based BEE (B-BBEE) in terms of government legislation.

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The NEF is a major part of the government’s effort to support SMEs in the country. The fund offers a wide variety of financing products which target businesses across all industries.

Businesses can apply for funding for startup, expansion and equity acquisition purposes. This is offered in a combination of debt, equity and quasi-equity. Non-financial support is also made available in the form of funding advice, business planning and “general assistance to help ensure that applications are of sufficient quality to complete all steps in the application process”. Successful NEF candidates can also access post-investment support.

Before applying for development funding such as NEF funding it’s important that business owners do their research and prepare for what can be an extensive process. Your business must be able to meet the fund’s strict criteria, deal with the heavy paperwork, and handle the long processing times.

A lack of knowledge and time are some of the key challenges that businesses applying for government funding need to be prepared for, said Zahra Rawjee, director of operations and business development, in a previous interview with SME South Africa. Her company helps entrepreneurs access development funding from the NEF and other government funders.

“Entrepreneurs [who own and manage their own businesses] are good at what they do. While they are masters of their craft, they often have limited knowledge of how or where to access finance from.

“If this knowledge and skill set does reside within the business, capacity constraints exist as these initiatives require a substantial amount of time to see through to conclusion, which will require the business to redirect resources that should be focused on sales and customer service.

Financial and B-BBEE compliance are often also lacking, says Rawjee, including annual financial statements, management accounts and tax clearance.

“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,” she says.

Finally, business owners also have to manage expectations, she adds.

“The timeframe of decision-making to undertake an expansion project by the client often results in unrealistic expectations.”

Access the full article: The Consulting Firm That’s Helping Black Industrialists Secure Millions In Funding

NEF funding is available for a wide range of different business ideas and opportunities. This includes:

• Food and beverage
• Tourism and entertainment
• Retail
• Property
• Financial services
• Energy
• Construction and materials
• Agro-processing
• Manufacturing
• Motor industry
• Transportation
• Textile industry
• Media

As long as you run a compliant business that meets the set requirements, any South African business owner can apply for funding.

Each application for funding is assessed in terms of the following criteria:

• Commercial viability of the business case being presented
• The business must comply with all relevant laws and regulations
• There must be operational involvement at the managerial and board levels by black people
• Minimum percentage of black ownership or interest of 51% is a requirement
• The business must be able to repay NEF funding
• The business must create a reasonable number of jobs
• Geographic location of the business is also important with the focus on rural or economically depressed areas encouraged
• Meaningful black women participation is viewed more favourably
• Rural and Community Development Projects must have meaningful participation by communities
• Possibility of co-funding with private or public sector institutions is encouraged in larger projects.

The NEF provides business loans ranging from R 250 000 to R 75 million.

The following non-support is provided by the NEF.

1. Pre-investment Unit (PIU) – support for entrepreneurs through the application process.

The PIU’s primary functions are to:

• Information on NEF funding and non-funding solutions
• Provide guidance in drawing up funding applications
• Identify applications which meet the NEF’s funding criteria
• Keep clients informed on the progress of their applications
• Advise applicants on qualifying criteria and application process

2. Post-investment unit – support to mitigate against business failure.

The unit is responsible for:

• Regular portfolio monitoring
• Regular collections management and credit control
• Mini restructure of distressed investments
• Turnaround and rescue of highly distressed investments
• Legal and workouts
• Active board seats on larger investments
• Mentorship and technical assistance
• Valuations of investee companies
• Impairments of investments; bad debt write off
• Legal Compliance
• Portfolio Management
• Portfolio Risk Management
• Additional funding on existing investments
• Exits on matured investments
• Knowledge Management
• IT system development
• To provide a superior customer relationship management channel for all NEF’s Investees

According to the NEF, the process period is 3 to 4 months on receipt of the application up to the disbursement stage. It includes the following key steps:

• Screening of funding application form
• Submission to investment committee
• Due diligence process
• Resubmission of final report
• Legal process and procedures
• Disbursement

NEF funding is currently obtainable from the following nine funds:

Women Empowerment Fund (WEF)

The NEF Women Empowerment Fund allocates funding in the form of a loan or debt equity to qualifying black women-owned businesses across all industries for start-ups, expansion, or equity acquisition purposes.

The funding ranges from R250,000 to R75 million.

The funding requirements for this fund are as follows:

• Minimum of 51% black female ownership.
• Operational involvement at the managerial and board levels by black women.
• Commercial viability of the business case being presented.
• Compliance with all relevant laws and regulations.
• Ability of the business to repay WEF funding.
• Creation of jobs.
• Focus on rural or economically depressed areas encouraged.
• Possibility of co-funding with private or public sector institutions in larger projects.
• For property transactions, at least 51% of the annual expenditure of the business to be allocated to majority black-owned businesses.

Where to Access Funding For Women-Owned Businesses in South Africa [UPDATED]

iMbewu Fund

This fund is designed to support black entrepreneurs requiring startup capital or existing black-owned enterprises in need of expansion capital.

The key requirements of this product are:

• BEE applicants should be actively involved in the day-to-day management of the business.
• Minimum black ownership of 51% is a requirement.
• Business and/or industry experience by black entrepreneurs is considered.
• The NEF reserves the right to oblige applicants to participate in the NEF mentorship programme where there is a lack of business and/or industry experience.
• The business should be able to repay NEF’s investment.
• Funding instruments include term-loans, shares, and other structures with ordinary share characteristics.
• NEF funding is charged at prime linked interest rates.
• Business must have a clear value-add with a sound business case.
• Maximum NEF funding is R10 million.
• The NEF will exit from the investment in 5 to 7 years.

Procurement Finance

The Procurement Finance product assists black-owned SMEs that have secured tenders or contracts with financing to complete them. Funding instruments for this fund include term loans, bridging finance, asset finance, and revolving facilities. NEF funding is generally limited to R10 million for this product.

The key criteria of this product are:

• Active participation by black individuals in the operations of the business.
• Minimum black ownership of 50.1% is required.
• Industry knowledge by management or clear transfer of skills through relevant partnerships.
• Funding instruments include term loans, bridging finance, asset finance, revolving facilities, and debt finance.
• NEF will fund both the acquisition of assets and the working capital requirements of the business.
• NEF funding is charged at prime linked interest rates.
• The NEF reserves the right to oblige applicants to participate in the NEF mentorship programme.
• NEF will support contracts awarded by reputable entities.
• NEF does not generally support subcontracts, especially those awarded by agents and entities that have a weak financial position and lack track record.
• The contract must be commercially viable and generate sufficient profits and cash flow to repay NEF’s loan.

Franchise Finance

This product provides financing for entrepreneurs interested in acquiring a franchise business or looking for expansion capital.

The key criteria of Franchise finance are:

• The NEF prefers to fund well-established franchise concepts.
• Active management involvement by BEE parties is required.
• Minimum BEE shareholding of 51% is a requirement.
• NEF funding of franchises is through a loan instrument with the term matching the duration of the franchise license, up to a maximum term of 7 years.
• BEE party must have been pre-approved by the franchisor before approaching NEF.
• NEF funding generally limited to R10 million.
• NEF will fund SMEs using mainly debt.
• NEF funding is charged at prime linked interest rates.
• The NEF will exit from the investment in 5 to 7 years.

uMnotho Fund

This Fund is designed to improve access to BEE capital.

uMnotho Fund has the following products:

• Acquisition Finance
• Project Finance
• Expansion Finance
• Capital Markets Fund
• Liquidity and Warehousing

These products provide capital to black-owned and managed enterprises; black entrepreneurs who are buying equity shares in established black and white-owned enterprises; starting new ventures; expanding existing businesses and BEE businesses that are or wish to be listed on the JSE.

1. Acquisition Finance

The key criteria of this product are:

• BEE applicants seeking to fund equity purchases of between R2 million and R75 million in existing businesses.
• Focus on medium to large companies.
• Focus on partnerships with existing management teams and other equity investors.
• Minimum BEE ownership of 25.1% post NEF investment.
• Active BEE management participation.
• Active BEE involvement in investee companies.
• BEE financial contribution determined on a case-by-case basis.
• Investment instruments can include a combination of debt, equity, and mezzanine finance.
• The NEF reserves the right to oblige applicants to participate in the NEF mentorship programme.
• Typical investment horizon of 4 to 7 years.
• Security to include personal guarantees.

2. Project Finance

This product provides capital of R5 million to R25 million per project for BEE parties seeking to participate in medium-sized greenfields projects with total funding requests of between R10 million and R200 million.

The key criteria of this product are:

• Minimum 25.1% BEE shareholding.
• Investment instruments can include a combination of debt, equity, and mezzanine finance in support of BEE.
• BEE-specific financial contribution assessed on a case-by-case basis.
• NEF exposure to the project generally not to exceed 50% of total project costs.
• Proven management experience within the consortium.
• Active BEE involvement in investee companies.
• Debt funding raised from the market to match equity funding provided by NEF and other project sponsors.
• The NEF investment horizon is 5 to 10 years.
• Security to include personal guarantees.

3. Expansion Finance

The NEF will provide funding of R5 million to R75 million to entities that are already black-empowered but seek expansion capital to grow the business.

The key criteria of this product are:

• Investment instruments can include a combination of debt, equity, and mezzanine finance in support of BEE.
• BEE shareholding should be a minimum of 51%.
• Pricing based on instrument, risk matrix, security package, etc.
• Typical investment horizon of 4 to 7 years.
• Active BEE involvement in investee companies.
• Security to include personal guarantees and security over business assets.

4. Capital Markets Fund

This product invests in BEE enterprises, particularly those owned by black women, that seek to list on the JSE or its junior AltX market. The uMnotho Fund will also help listed BEE companies to raise additional capital for expansion.

All other key features are similar to those of the Acquisition Finance product.

5. Liquidity and Warehousing

This product

assists BEE shareholders who need to sell a portion or all of their shares while keeping the shareholding black.

All other key features are similar to the Acquisition Finance Fund.

Strategic Projects Fund (SPF)

The SPF fund works to ensure the participation of black people in early-stage projects. The fund provides venture capital finance to develop industrial capacity in strategic sectors identified by the government as key drivers to economic growth.

SPF targets the following priority sectors:

• Agriculture
• Business Process Outsourcing (Call centres, data storage centres, and termination centres)
• Textiles
• Mining, Mineral Processing, and Mineral Beneficiation
• Automobiles
• Renewable Energy and Biofuels (solar, biomass, hydro, co-gen, and wind)
• Plastics
• Pharmaceuticals and Chemicals
• Forestry, Pulp, and Paper
• Infrastructure (telecoms, healthcare, roads, rail, airports, dams, and water)
• Manufacturing
• Tourism (hotels, resorts, tourism attractions, and leisure)

Rural, Township and Community Development Fund

The aim of the Rural, Township and Community Development Fund is to provide funding to aspiring rural entrepreneurs, cooperatives, and community groupings. The fund also seeks to facilitate skills transfer.

The sectors funded are as follows:

• Agro Processing and Manufacturing
• Eco-Tourism
• Forestry and Fisheries
• Commercial Property
• Aqua and Marine Culture
• Non-Farm Activities (rural based)

The key criteria of this product are:

• Projects must be financially sustainable.
• BEE applicants should be actively involved in the day-to-day operations of the business.
• Technical partners should be actively involved in the day-to-day operations of the business.
• The NEF will invest using debt, equity, and quasi-equity instruments.
• Minimum black ownership of 25.1% is a requirement.
• Joint ventures between black and non-black partners to support skills transfer.
• The business should be able to repay NEF’s investment.
• The business must have a clear value-add with a sustainable business case.
• The NEF will exit from the investment in 5 to 10 years.
• The NEF reserves the right to oblige applicants to participate in the NEF mentorship programme.

Arts and Culture Venture Capital

The fund is designed to promote and develop the arts and culture sector by providing affordable loans to start and/or expand small businesses.

All compliance requirements listed below must be submitted:

• Completed NEF application form;
• Business plan and projected Income Statement, Balance Sheet, and Cash Flow Statement for the duration of the funding period;
• Cash flow projections indicating how the loan will be repaid over the term and the loan duration;
• Registration documents as a legal entity;
• Valid tax clearance certificate;
• Minimum of 51% shareholding by black South African citizens as defined in the B-BBEE Act who are resident within the borders of South Africa;
• In need of start-up or expansion capital;
• Require loan from the Arts and Culture Venture Capital Fund of not less than R250,000 and not more than R5 million;
• However, applicants are welcome to apply for normal NEF funding above R5 million;
• Loan repayment should be within twenty-four (24) months;
• Own contribution of 5% or more towards the project;
• Audited/reviewed financial statements for the past three years along with management accounts not older than three months ONLY for businesses that have been in operation;
• A minimum of three (3) months must be provided between the closing date of the advert and the actual date when the first disbursement on the loan is required to allow enough time for the project;
• Financing any asset such as equipment or infrastructure must be for the purpose of start-ups or expansion with existing contracts or orders;
• Social impact in the form of job creation and economic empowerment by indicating how many job opportunities will be created;
• Employment numbers must be stated by race, gender, disability, etc. for the project to be funded;
• Applicants should be actively involved in the day-to-day operations of the business. If the applicant is employed full time, they may be required to resign from his/her employment and provide the Fund manager with proof of resignation;
• Necessary skills, experience, or with the potential skill appropriate for the enterprise to succeed;
• Have a profit motive and clearly indicate how the loan will be repaid;
• Applicant’s projections must show growth prospects in order to be self-sustainable in the future; and
• Brief profile and financial strength to settle projected receipts when due of the applicant’s customer(s) or sponsor(s)

Tourism Transformation Fund (TTF)

The TTF is a dedicated capital investment mechanism that was developed in collaboration with the National Empowerment Fund (NEF) to drive transformation in the tourism sector in a more direct and impactful manner. It aims to assist small and micro black-owned tourism enterprises to expand and grow with the goal of creating a new generation of black-owned, youth, women, and community-based tourism operators. All applications and approvals for this program are managed by the NEF.

The TTF provides a combination of grant funding, debt financing, and equity contributions to facilitate capital investment in the tourism sector by black entrepreneurs.

Application requirements

New and existing black-owned enterprises are eligible for funding if they satisfy the following requirements:

• The enterprise must provide services to tourists as its direct clients.
• The project must have proven commercial viability and sustainability, as per the NEF funding criteria and due diligence.
• The enterprise must be majority (51%) black-owned.
• The enterprise must be black management controlled.
• Shareholders must be operationally involved in the business.
• The enterprise must be registered as a legal entity in South Africa in terms of South African law.
• The enterprise must either be a black-owned Exempted Micro Enterprise (EME) or black-owned Qualifying Small Enterprise (QSE), in terms of the Amended Tourism Broad-Based Black Economic Empowerment (B-BBEE) Sector Code.

Read: Everything you Need to Know about the Newly Launched Tourism Transformation Fund