Small to medium enterprises (SMEs) are the backbone of our economy: more than 60% of all private-sector jobs in South Africa are created by SMEs and they contribute to around 40% of the gross domestic product. SMEs’ undeniable value to the economy however does not translate into their ability to access funding from traditional financial institutions.
As SMEs with an annual turnover of less than R20 million tend to not have the large cash reserves or significant assets required to put up as security to acquire loans, their funding requests tend to be neglected by risk-averse traditional financial institutions.
SMEs hold undeniable value to the economy but this does not always translate into their ability to access funding from traditional financial institutions.
With the International Finance Corporation (a division of the World Bank) estimating that the SME funding gap in South Africa sits at more than R294.5 billion, alternative funding models are needed to address the severe lack of access to early-stage funding facing South African entrepreneurs.
Types of funding
In a recent SME Landscape Report, only 6% of all SMEs reported that they had received funding from the government, including the Department of Trade and Industry and the National Youth Development Agency.
Luckily for startups, there are a growing number of funding alternatives available if you’re trying to figure out how to get small business funding, that isn’t directly from a bank. Here are the top 3 alternative forms of funding available to South African entrepreneurs:
Instead of trying to raise money from a single entity or a single investor, crowdfunding involves trying to raise small amounts of money from a large number of people. Sharing business plans, pitches, and progress via social media can build the success of your crowdfunding campaign.
The most suitable crowdfunding platforms in South Africa currently are:
Business incubators specialize in developing and accelerating the growth of small businesses with the potential to scale. They might provide funding and invest additional resources like their time, skills and networks. If you feel like a business incubator could be the right answer for your business, here is a list of South African incubators you could reach out to.
Angel investors are high net-worth individuals who invest in businesses in their early stages when the business is unlikely to qualify for traditional forms of funding. The investment is usually made in exchange for shares or equity in the business. You can pitch your idea or business on hosting sites that connect Angel investors to entrepreneurs like the Angel Investment Network and Jozi Angels.
Applying for small business funding
While funding sources will most likely require different documents from you when you apply for funding, the following are generally what you will need to get the process started:
- Be prepared to share what your business needs are and why you need the funding
- Understand the true purpose of your business and what problem you are ultimately trying to solve for.
- Have your business registration documents readily available – if your business is not formally registered yet, it is important to have your registration sorted with the CIPC first.
- Make sure your financial records are readily available and that you are well versed with their contents.
- Have your credit score available