Small Business Funding in South Africa - The Complete Guide

Despite a challenging and competitive environment, small businesses in South Africa have a variety of options when it comes to funding opportunities, each with their own pros and cons.

We’re going to break down everything you need to know in order to make an educated and confident decision about whether you should consider small business finance, and which type of funding best suits your needs.

This guide is intended to give you an overview of the entire small business finance space in South Africa. We cover everything from SME finance solutions to crowd funding, to government grants.

What is Small Business Funding?

There are a lot of big words thrown around in the business world, but what exactly is small business funding?

The one thing to remember is that small business funding is designed specifically for small businesses. That means they do not follow the traditional banking model where a client would need to put up surety (collateral) in order to receive funds. Small business funding works in such a way that businesses who don’t yet have the capital or assets to provide surety, can still get access to funds using new-age technology. Depending on your needs, and your type of business, there is a type of funding out there that suits you.

A lot of people will ask why it is expensive compared to traditional bank finance. The reason is the fact that the financers are often only relying on technology to make a credit decision. They are essentially ‘guessing’ (using very complicated algorithms) how risky a business is. Often, they will extend a business cash without any surety or collateral. That means these loans are more risky for lenders, and therefore more expensive than a bank loan where there is always collateral on the table.

However, because of the advancement in technology and financers having experience in the South African market, the interest rate (or set fee’s) on small business loans is reducing. They are often times the only (and best) solution for a small business that is desperate for cash to grow their business.

It sounds complicated, we know. That’s where FundingHub steps in. We understand the market, so you don’t have to. When you apply through FundingHub, we do all the hard work of funding the right funding solution for you. Depending on your business type, and needs, we’ll give you options so you can choose the best deal for you business, and access the funding you need.

This money can be used to help deal with operational costs, stock, equipment, or anything else your business may need.

This is often done when cash-flow is low or capital is in need to get the business off the ground, to help secure a new client or order, bridge a gap between payments, or to grow a business from one stage to the next. Of course, there’s no ‘one-size-fits-all-reason’ as to why a business should look into small business funding, as each business has its own unique revenue model, goals, and operations.

Should I Consider Small Business Funding?

Before you even embark on exploring funding options for your small business, you should ask yourself: does my business really require funding? There are a few questions to ask yourself in order to understand your needs and current state of your business.

Is your business eligible?

Unfortunately, FundingHub does not fund any startups. To be eligible for funding, you have to meet the following minimum requirements:

• Your business has been trading for 6 months. This means you have had revenues coming into your bank account for 6 months, at least.
• Your business has a monthly turnover of at least R30 000 (or yearly turnover of approximately R350 000)

Is your business currently successful?

If your business is doing well, you have adequate cash-flow, and are able to turn a profit, it’s unlikely that you actually need small business funding.

It’s always good to keep in mind that most small business funding avenues are often loan agreements in one form or another. Debt can be a tricky thing to deal with, even if a loan seems attractive right now.

However, there are small business funding options which reduce the risk and time associated with traditional loans.

Before you apply for funding, consider why you need the money.

What do you need the finance for?

The most important question you should be asking yourself is what the funds are for.

This will guide your decision most significantly.

If your finance is for growth, you need to ensure that the interest rate on the loan is not more than the potential return on investment that that money may yield. If it does, the loan will be costing you money.

If your finance is for other purposes, you need to make sure that the monthly repayment due for that loan is going to be repayable with your current cash flow.

Reasons for Small Business Finance

Growth Capital

If cash is the only thing preventing you from taking your business to new heights (perhaps you need a new forklift for your warehouse?), then small business financing could help bridge that gap and is something to consider.

Working Capital

Working capital finance is best used in any situation where your business faces a cash deficit. There a lot of different types of finance that are classified as ‘working capital finance’. Think of working capital finance as the solution to turn to whenever you are unable to pay someone (i.e. short on cash).

Here are some specific working capital finance solutions that can help you:

• Purchase order funding for small businesses is an option, where you can use your purchase order documents from the reputable customer or client in order to draw funding from a bank or company. This financier will often directly pay for the stock you require from your supplier, in exchange for a portion of the profits.
• Invoice Factoring
• Revolving Credit
• Unsecured Loan
• Secured Loan
• Debtor Finance

Specific Needs

Sometimes, it is best to use a very specific type of finance that is suited exactly to your situation. By using these types of finance, the overall deal can often be more advantageous and/or cheaper for your business, because of the way the deal is structured. Here are some examples of situations where you might consider a specialized type of finance.

Contract Fulfillment

Otherwise known as purchase order finance or tender finance, this is specifically built to help your business fulfill a large contract.

The financer will extend you money to buy the goods/resources you need and then on fulfillment of the contract, you pay the financer back. Typically, they take a percentage of your revenue earned, which means you don’t have to come up with any cash to fund the deal. Everything is taken care of when you get the money in your pocket.

Equipment Purchase/Lease

This is especially applicable if your business is looking to buy or lease some equipment, but don’t want to fork out the lump sum in cash to pay for it straight away.

Equipment finance can be used for a wide range of uses; office furniture through to TLB’s and bulldozers.

The most common process used is a lease-to-own contract where the equipment you are financing actually belongs to the financer up until the day you pay your final installment. That way, there is less risk for the lender, you don’t have to provide any other collateral, and the loan is overall cheaper for your business.

Property Purchase/Upgrade

Another specific case for small business finance is when a business wants to upgrade its premises, or buy a new one. There are specific finance houses who will finance these deals, and use your business premises as collateral for the finance. These are typically the cheapest types of small business finance loans because there is security available for the lender.

SME Finance Providers

These are all the players in the small business finance space in South Africa.

Small Business Specific Solutions

Technology has enabled a new breed of small business lenders to start operating in South Africa. They are bridging the gap between the traditional business finance model that banks have previously offered and the needs of SME’s in South Africa.

FundingHub has established relationships with over 40 business lenders in South Africa. Some of these include:

• Nedbank
• Investec
• Retail Capital
• Merchant Capital
• Lulalend
• Spartan Finance
• Pollen Finance
• Redtree Capital
• DG Capital
• Sureswipe
• Chester Finance
• Keitzman Finance
• Bridgement
• Fundrr
• Cash Flow Capital
• Profit Share Partners
• Business Partners
• Payabill
• Business Fuel
• Growth Capital
• Betterbanc
• The People’s Fund
• CapX Finance
• Bright On Capital

Big Banks

Most of the notable banks in South Africa, including the likes of Nedbank, Standard Bank, and FNB, offer loans to small businesses, if you have security to provide.

Banks usually offer the following types of loans:

• Secured loans: Companies can use collateral in order to secure a loan (and a favourable interest-rate) from a bank. This collateral could include a property, assets, or inventory.
• Property backed loans: A specific type of secured loan where property is used as surety on the loan.

For small businesses, this can be a challenge. Buying property or assets which can be used as collateral on a secured loan is expensive, an often times out of reach for small businesses.

That’s where the need for small business specific solutions arises from.

Public/crowdfunding

Instead of approaching one large entity such as a bank or a single investor, crowdfunding involves trying to raise small amounts of money from a large number of people.

Crowdfunding can be very successful, especially if entrepreneurs share their business plans, pitches and progress via social media to spread awareness.

Utilising online tools, such as Kickstarter, BackaBuddy, or GoFundMe platforms can help generate interest and investment into your business or idea.

State / government

The South African government does have funding opportunities for small businesses, which can take the form of non-repayable grants (these do not have to be paid back, depending on your business), incentive opportunities (such as tax incentives to assist with cash-flow after a certain period or goal is met), and government equity funding, which would see the state purchase a portion of your business, making them shareholders.

Each of these have their pro’s and con’s. You should carefully consider where you are in your business life-cycle, and make your decision from there.

Types of Small Business Finance

Alongside the traditional small business loan agreements with banks, there are some other funding instruments that could potentially suit the different needs and situation of your business:

Purchase order finance

Often small companies (or even larger-sized ones) who may have received an order or have been requested to provide a product, stock, service, or resource that may be out of their scope, will likely look to purchase order financing.

That’s where you can step in as the provider of this service. If you have an official purchase order from a reputable company, along with your company's documentation and credit history being up to date, you can apply for purchase order financing.

Check out our full guide on Purchase Order Funding to find out more.

Equipment finance

Alongside the internal cash-flow of your business, you may need to raise funds specifically used for equipment, which can be extremely expensive. Thankfully, there is the avenue of Equipment Financing to assist with this.

The benefits of Equipment Financing is that it offers flexibility, which can entail custom-tailored deals that take into account

• The type of equipment you’re buying, along with
• Its intended use,
• How long you plan to utilise it for, and
• The amount of capital you have available.

These considerations may seem negligible, but they can drastically alter the conditions of the loan, lower your capital outlay risk, and get you a far more favourable interest rate.

Angel Investors

If your business is not in a position or capacity to apply for formal financing options, the world of angel investing could be your go-to. Private investors often invest in small businesses if the concept or promise-of-returns is of interest to them. This angel investing funding is usually done in exchange for shares or equity in your business; so if you’re in the early stages of your business and unable to acquire a loan from a bank, approaching angel investors is an alternative option – just be willing to part with a portion of your company in exchange for a cash injection.

Business Incubators

South Africa has seen a big growth in the business incubator industry, whereby organisations or companies will find new start-ups to help grow and accelerate their business. They may provide startup capital and/or other resources, such as office space, management training, and financial and marketing advice.

Advantages of Small Business Funding

While taking a loan or receiving funding may be a daunting prospect, it can help provide your business with the capital or cash-flow it needs to achieve greater success. Of course, finding the right funding solution for your business is the key. There are some advantages to receiving small business loans or funding:

• Boosts available cash for enterprising growth.
• Quick to access.
• Fair interest-rates (depending on the terms and conditions agreed upon).
• Allows you to purchase otherwise extremely expensive machinery or stock.
  

Disadvantages Small Business Funding

Of course, any sort of credit line or loan comes with pros and cons, and in terms of the disadvantages, it will essentially put your company in debt to an entity or personnel who provided the funding.

Some of the disadvantages to consider when seeking funding, include:

• Firstly, your business may not get approved.
• You may have to offer up assets as collateral.
• Even if approved, you may not get access to the cash you wanted.
  

The Finance Application Process

That’s where FundingHub steps in. We take the hassle out of finance.

All you have to do is full in an application form online, and we will guide you through the process.

Alternatively you can phone us at 087 057 1412 and we’re happy to talk you through the process.