Funding small businesses is part of the government’s economic development plan. For a country to become economically healthy, it needs, amongst other things, to balance imports and exports, create an enabling environment for business growth as well as ensure the structures are in place to ensure young people can be employed and/or start their own businesses.
Small businesses currently account for close to 60% of the jobs in South Africa, so if this sector grows it will significantly lower unemployment. However, to address all the points raised in the above paragraph, government also needs to assist medium and large size businesses, and hence you’ll find that some funds are better suited to large businesses than small ones. Sometimes, there are opportunities for small businesses to partner with larger ones to access funding for mutually agreed upon projects.
This module discusses the key objectives of government funding and will assist you in aligning funding applications to government requirements.
Socio-economic driven goalsPrimarily the government offers funding to businesses that will help it achieve its key objectives such as job creation, wealth creation and improved wealth distribution across the population groups, increased export markets and improved economic participation for previously disadvantaged people.
Therefore businesses seeking government funding should be strong in terms of the following:
- BEE (preferably a minimum of a BEE Level 4 rating). Whilst this can be achieved simply through a low turnover, it is preferable that the business has at least 51% of the business ownership by previously disadvantaged race groups. This is a particularly important factor to providing economic inclusion.
- Gender (51% owned or managed by women). Note that gender does not feature in all of the government funding options.
- Youth employment.
- Employment of disabled people.
- Job creation.
Sector driven goals
Government has also chosen certain sectors that are important for South Africa’s future, and has made government funding available to businesses that function within those sectors.
They include the following:
- Automotive (OEM component manufacturing).
- Green industries.
- Chemicals and allied industries.
- Forestry and wood products.
- Metals, transportation and tachinery products.
- Mining and minerals beneficiation.
- Information and communication technology.
A note on BEEThe need to build a healthy economy means that economic inclusion for previously disadvantaged people is a top priority. Therefore, BEE is an important criterion that is built into the majority of fund requirements. Where BEE is relevant, the fund dictates the percentage of the business that needs to be owned or run by black or previously disadvantaged individuals. Some funds simply require a certain BEE status (producing the required BEE certificate showing the appropriate level will be sufficient). To avoid fronting, the company applying for the loan will need to show that previously disadvantaged people play a significant and active role in the business decision making process.
InnovationSome government lending agencies such as the Technology Innovation Agency (TIA) and the Industrial Development Corporation (IDC) focus heavily on innovation. They provide funds for innovative projects as this not only increases South Africa’s competitiveness on a global scale, but also provides opportunities for scale which increases wealth and job creation.
There are also innovation forums, such as that formed by The Innovation Hub in Pretoria. Together with their partners, they hold innovation discussions and provide industry challenges (all sectors) that small businesses can respond to.
Competitive edgeImproving the competitiveness of South African companies opens the opportunity for them to compete in the international market place. This improves South African exports. The growth of an economy is directly related to size and revenue of its exports. The aim is to grow the export market and lessen the import market as this increases the country's purchasing power. Therefore the government has provided funds to its lending agencies to assist companies in becoming globally competitive and to encourage and grow the export market for South African goods.
Legal complianceGovernment funding is only available to companies that are legally compliant with all the laws and regulations that govern businesses and this includes sector specific regulations as well. Therefore, businesses must be fully up to date with VAT and tax, as well as UIF and Workmen’s Compensation (only relevant if the business employs staff). Industry specific accreditation and certificates must be submitted if relevant and company founding documents (provided by CIPC when the company was registered) must be submitted. It is important to check your compliance status before applying for government funding.
Submitting funding applicationsEach government lending agency provides a number of different funding options. Your job will be to understand the objective of the fund (what it hopes to achieve by funding businesses) as well as understand how the funds are dispersed, and what you need to provide in order to receive the funding. This is particularly important for small businesses as many grants and incentive work on the basis of the business pays for the goods/service and then claims back as percentage of these costs as set out in the fund claim form. In other words, you need the money for the initial purchase before you receive the government grant or incentive.
In many cases the lending agency has staff that can assist you to understand their requirements, and it is worth taking the time to visit the agency before spending hours completing the application, only to find that you have to change or add information.
Some lending agencies, for example the Small Enterprise Finance Agency (SEFA) and the National Empowerment Fund (NEF), provide mentors who will work with the businesses that have been funded. The aim is to provide the small businesses with access to high level skills and guidance to improve their chances of achieving the objectives. Obviously it is in their interests to help the business achieve the desired growth, as this ensure that the loan will be repaid.
To make it easier for small business owners to find out what government funds are available, Finfind has summarised the government finance offerings. Read the module Summary of government funds to see whether government finance is a good fit for your business.