SME funding in South Africa is available from a number of sources.
Depending on the nature of the business, and whether capital is required to start a venture or drive growth, there are several options to consider.
In our guide to SME funding in South Africa, we cover nine types of small business funding:
- angel investing
- traditional bank finance
- bridging finance
- business incubators
- crowdfunding
- government funding for SMEs
- private equity
- secured SMEs funding
- trade/credit invoice advances.
Angel investing
An angel investor is a wealthy individual who provides financing in exchange for a stake in a business. It’s a low-risk funding option ideal for start-ups and entrepreneurs.
Pros:
- capital doesn’t have to be paid back
- access to investor experience and business networks
- investors are more willing to take risks.
Cons:
- loss of full ownership and control of the business
- pressure to deliver.
There are numerous angel investor platforms and networks in South Africa. Examples are:
Bank finance
All major banks in South Africa provide business loans. Bank finance is an affordable way to raise funding for SMEs. The qualifying criteria, however, are strict and onerous.
Pros:
- low, fixed interest rates
- predictable monthly repayments
- helps build business credit record.
Cons:
- lengthy waiting period
- admin-heavy application process
- financial track record required.
The following sites provide business financing information from South Africa’s five biggest banks:
- Capitec business loans
- FNB business loans
- Nedbank business finance.
- SME funding by ABSA Bank
- Standard Bank business finance.
Bridging finance
Bridging finance is a short-term funding solution. It’s a cash advance that’s used to cover costs or improve cash flow, while waiting for expected funds to be released by the sale of fixed or moveable assets.
Registered financial services provider Lamna offers property bridging finance that’s particularly helpful to businesses selling commercial property in South Africa.
Pros:
- immediate access to funds
- flexible repayment terms
- no impact on credit status
- closes the funding gap for SMEs.
Cons:
- higher interest rates.
Business incubators
Business incubators provide free or low-cost workspaces, amenities and business tools to startups. The aim is to give entrepreneurs and SMEs the best possible start.
Pros:
- access to essential business services
- development and mentorship programmes
- reduced or no overhead costs
- collaborative work environment.
Cons:
- competitive and time-consuming application process
- a commitment of one to two years
- prescribed work schedules and hours.
Examples of South African business incubators are:
Crowdfunding in South Africa
Crowdfunding platforms enable convenient access to SME funding in South Africa. It’s a popular way to raise capital from a wide group of people, online or via social media.
Pros:
- no upfront fees
- access to an expanded pool of investors
- visible online and social media presence.
Cons:
- time-consuming to set up profile
- resources required to pitch a business or project
- not all applications are approved.
Among the top crowdfunding platforms in South Africa are:
Government funding
The South African government provides financial support to SMEs in the form of grants, loans and tax incentives
Pros:
- low interest rates
- easy repayment terms
- funding doesn’t have to be repaid for government grants.
Cons:
- not all South Africans qualify for government-backed SME funding
- business plans and financials are required to support applications.
Private equity
Private equity is investor funding aimed at companies exhibiting high growth potential. Investors become shareholders in the business. It’s a reasonably quick way of raising capital, and a popular alternative to a bank loan.
Pros:
- ability to choose investors with similar objectives and values
- investors bring specialised skills and expertise to the table.
Cons:
- diluted business ownership
- can lose control of aspects of the business.
Secured SME funding
Secured SME funding is business financing based on a company’s assets. Physical assets, such as tools, equipment and vehicles, are used to secure the loan.
If the business fails to make the required payments, the asset is seized and used as payment for the loan.
lama specialises in providing secured funding for SMEs. Accepted assets include vehicles and other high value items. Funds can be used for any business-related expenses.
Pros:
- immediate access to SME funding
- minimal paperwork and no delays
- optimal spending flexibility
- confidential and discrete
- no impact on credit rating.
Cons:
- higher interest rates than banks.
Trade/credit invoice advances
Trade or credit invoice advances are cash advances based on the amount due on unpaid invoices. Funding is effectively secured by what the business is owed. Outstanding monies are pursued directly from customers in the case of default.
Pros:
- immediate access to cash
- cash advances based on one or more receivable invoices
- no financials or supporting documents required.
Cons:
- an expensive way to raise capital
- customers associated with unpaid invoices are heavily scrutinised
- risk of third-party contact with the customer base.
Providers offering invoice financing solutions in South Africa include:
What we offer at Lamna
At Lamna, we offer SME funding in South Africa in the form of bridging finance and asset-based loans.
For more information about using an asset to secure a short-term loan, contact us on 086 111 2866 or simply complete and submit our online application form.
ILLUSTRATIVE EXAMPLE
Client borrows R10,000 for 90 days.
Loan Amount | Repayment Period | Monthly Interest | Total Cost of Loan | Initiation Fee | Monthly Fee | APR |
|---|---|---|---|---|---|---|
R10 000 | 3 months | R500.00 | R2 914.50 | R1 207.50 | R569.00 | 60% |
Fixed rates range from 36% to 60% APR and payment options range from minimum 3 to maximum 24 months. Apart from the initiation and monthly fees shown below, the only additional fee is credit life insurance if the borrower does not have this already.