South African SMMES and Co-Operatives Funding Policy

Small, micro and medium enterprises (SMMEs) play a big role in the furthering of South Africa’s economy. The number of SMMEs in South Africa continues to grow and with it comes the creation of jobs and eradication of poverty for many. However, SMMEs still struggle to access funding for their businesses. Therefore, the SMMES and Co-Operatives Funding Policy was proposed by the South African government. During September 2024, the cabinet approved the final funding policy for micro, small and medium enterprises (SMMEs) and cooperatives, for implementation. This guide breaks down the policy for entrepreneurs.  

The challenges faced by SMMEs are many. According to a survey done by the Small Business Development Ministry, the top challenges faced by SMMEs are:

• Access to funding.
• Competition from bigger businesses.
• Limited access to the market.
• High operational costs.
• Lack of skilled labour options.
• Strict regulatory compliance.
• Cybersecurity threats.
• Management of cash flow.
• Limited access to technology solutions and products.
• Environmental sustainability.

These challenges show why SMMEs are struggling to scale their businesses and make an even greater contribution to the economy. To help SMMEs and other small businesses grow, the government developed the National Development Plan (NDP). The NDP is an action plan for eliminating poverty and inequality by 2030. According to the government, the NDP envisages that 90% of the 11 million jobs set to be created by 2030 will come from small businesses. The government has also identified that the involvement and structure of co-operatives businesses is a key element to bringing rural and under-developed areas closest to full economic participation.

A cooperative business is a business owned and controlled equally by the people who use its services or work. Typically, the business is run and owned by and for its members. The members of a cooperative can be employees or residents, and all have an equal say in what the business does and an equal share in profits.

Benefits Of A Cooperative Business

Some of the benefits of a cooperative business include:

• Higher buying power by lowering costs and buying products in bulk.
• A better bargaining power.
• Expand into new and existing market opportunities.
• An equal say in the business for its members.
• Shared values by the members.
• Tax benefits for cooperatives organised as non-profit businesses.
• Access to industry incentives.
• Access to cooperative incentive schemes.

Looking at these benefits, you can see why cooperative enterprises are great for the growth of SMMEs. In an effort to grow both these types of small businesses, the government has introduced the South African SMMES and Co-Operatives Funding Policy.

The SMMEs and Co-operatives Funding policy was created by the Department of Small Business Development. It aims to:

• Deepen access to finance.
• Increase the number of established small businesses.
• Reduce the level of concentration or monopolies in certain sectors.
• Transform the ownership patterns of the economy.
• Address financial literacy amongst SMMEs.
• Promote financial education in underserved communities.
• Advocate for a less strict compliance environment for small businesses.

In its application, the policy is expected to address and eliminate the issues related to lack of coordination on SMMEs funding support programmes, double dipping and ecosystem fragmentation.

SMMEs and Co-operatives Funding Policy Proposals

Some of the policy proposals include: Improving the coordination in the SMME and co-operative access to finance ecosystem The coordination for SMMEs and co-operatives should recognise that actions are required in all levels (national and sectorial) of the value chain. Also, appropriate platforms should be established with clear and approved mandates. Improved database of small businesses Currently, there is a lack of reliable data on small businesses in South Africa. Because some small businesses are unregistered and informal, there is little information on them. The government seeks to build a comprehensive database of SMMES and cooperatives to inform its resource allocation and programme design efforts. The government also seeks to leverage the extension of financing to SMMEs as a tool for gathering data. Improved provision of startup capital The lack of funding for new businesses/startups presents a hurdle in establishing these new ventures within the economy. The government believes that different funding vehicles are needed for financing start-ups. One of the funding vehicles identified by the government is the SA SME Fund. The R 1,4 billion government and private sector fund has invested in venture capital and growth equity firms and other initiatives. The SA SME Fund managers are tasked with identifying eligible SMEs to invest in on an equity and debt basis. The Department of Small Business Development (DSBD) seeks to follow the model of the SA SME Fund and create a central funding initiative in partnership with the private sector. Additionally, the DSBD wants to establish a Fund of Funds. This capital for this fund will be provided using the underspending from the 1% allocated to the Enterprise Development component. Targeted funding instruments for SMMEs and cooperatives The government says that the SMME sector should not be seen as a single homogenous market. This is because all SMMEs have different funding needs and different types of funding. To address this need, the DSBD is seeking to create a mix of funding instruments to address the needs of various SMMEs including those who are considered informal. The DSBD believes that the funding product should be matched with the funding needs of SMMEs. Additionally, government funding agencies such as SEDA and SEFA should develop funding instruments that match the different needs of SMMEs. Business Develop Support (BDS) Having comprehensive business development support plays a huge role in the growth of SMMEs. It is recognised that SMEs that received developmental support such as quality guidance and support from practitioners or advisors reap significant benefits that carry them from early-stage to establishment. Additionally, good business development support can help SMMEs gain financial literacy. This will help them prepare better for funding opportunities. De-risking SMMEs and Cooperatives Finance a) Partial credit guarantee scheme Partial credit guarantee schemes are aimed at providing registered credit providers with cover in the case of loan defaults. In South Africa, there is the Khula Credit Guarantee (KCG) scheme which was established to provide indemnity to help SMMEs and cooperatives. The money provided to these small businesses is there to help them establish, acquire and expand new or existing businesses. Additionally, the KCG scheme helps SMMEs and cooperatives to get funding from commercial banks, non-bank financial institutions, corporates with enterprise and supplier development programmes (ESD) and other lenders. The DSDB aims to support the implementation of the KCG. The department will support the KCG scheme in its efforts for stop loss mechanisms, risk-based pricing structures, clearly defined claim payout process, diverse funding products and industries. b) Moveable asset registry Most SMMEs often lack fixed assets to put down as collateral for funding applications, however, most have moveable assets. The DSDB seeks to prioritise the establishment of a moveable asset collateral registry in South Africa. Establish a simplified business registration and legal processes for winding up SMMEs There are a range of regulations, legalities and registration processes that small businesses must comply with and go through before they are compliant. The DSDB believes that there needs to be more simplified and affordable legal processes that deal directly with the growth of SMME business operations. Credit information systems for small businesses The DSDB seeks to develop credit information systems dedicated to SMMEs and cooperatives. The systems should also contain models and risk assessment tools to make finance accessible to SMMEs and cooperatives. Easing of small businesses cash flow constraints through timely payments and invoice factoring The DSDB looks to promote a transparent market for discounted invoices for small businesses. This new market seeks to eradicate limitations for small businesses related to limitations on the type of invoices and invoiced business that are eligible for factoring.

Other SMMES and Co-Operatives Funding Policy Proposals

The DSDB has outlined a number of proposals for the policy. Some of the others include:

• A different structure for the SMME access to the funding market.
• More access to finance for informal SMMEs.
• Creation of an accessible funding environment for targeted groups.
• Monitoring of the access to the finance market for SMMEs.
• Incorporation of digital financial service provisioning in SMME and cooperative access to finance.
• Improved microfinance institutions and their capacity to deliver sustainable financial solutions.

Small Enterprise Funding Agency (SEFA)

Sefa is a government funding agency which provides funding to small businesses in South Africa. Sefa has two different funding instruments which are loans and grants. The funding ranges from R500 000 to R15 million. Funds are distributed through SEFA’s direct lending and wholesale lending programmes. Sefa has the following funding programmes:

• Township and rural entrepreneurship funding programme.
• Small enterprise manufacturing support programme.
• National youth policy.
• Inyamazane funding scheme for military veterans.
• Amavulandlela funding scheme for people with disabilities.
• Godisa supplier development fund for Transnet suppliers.

To apply for funding from SEFA, you will need the following documents:

• Certified copy of your ID.
• Certified copies of your business registration and other compliance documents.
• Any supporting quotations for the required assistance.
• Any personal income and expenditure schedule.
• An assets and liabilities statement.

For any additional information contact SEFA directly at (+27)12 748 9600, e-mail helpline@sefa.org.za or visit the SEFA website for more details or queries.

National Empowerment Fund (NEF)

The NEF is also a government funding agency which provides a range of financing products for businesses across all sectors. You can apply for startup, expansion or equity funding. The funding instruments of the NEF include debt, equity and quasi-equity. The NEF also provides business support in the form of funding advice, business planning and developmental support. The NEF has the following funding programmes:

• The Women empowerment fund.
• The iMbewu fund.
• Procurement finance programme.
• Franchise financing.
• uMnotho funding programme.
• Strategic projects fund.
• Rural, township and community development fund.
• Arts and culture venture capital fund.
• Tourism transformation fund.

Each of the NEF’s funding programmes has its own requirements. You can look through the requirements of each programme in our guide to NEF funding. These two programmes are set to play a crucial role in the DSDB’s implementation of the new SMMEs and cooperatives funding policy. Once this policy is implemented, small businesses will be able to grow easily and make a greater contribution to the economy of South Africa.