SME Guides To Government Funding In South Africa
One of the key ways that the South African government drives the growth and sustainability of small businesses is by providing development funding. This is because the SME sector is of great importance as it contributes to job creation and is an engine of growth for the economy.
In recognition of the role small businesses play, the government has prioritised the promotion and development of small businesses in an effort to reduce the SME failure rate and to help small businesses to grow.
SME Guides To Government Funding In South Africa
The funding landscape
There is great demand for funding in South Africa. According to the SME South Africa Landscape Report, ‘An Assessment of South Africa’s SME Landscape: Challenges, Opportunities, Risks and Next Steps’ (Landscape Report), the majority of small business owners surveyed said they are actively looking for funding however, the vast majority (94%) had not received any kind of funding from the government. Only 6% said they had received funding of this kind.
Of the 6% of business owners who noted that they had received government funding, the largest share pointed toward government grants (21%) as the key funding mechanism used. Business owners indicated that they have received funding from other government structures such as the DTI (17%), the NYDA (16%), SEDA (15%), and the GEP (15%). A small portion (13%) of these business owners did indicate ‘other’ government avenues that they have pursued to secure funding, including the Umsobomvu Youth Fund, the National Film and Video Foundation, and the Gauteng Department of Enterprise Development.
Government funding challenges
The Landscape Report points to a number of reasons for the low uptake of government funding, primarily a lack of accessibility to and knowledge about the various funding options available to the small business community, as well as a lack of funding readiness.
Darlene Menzies, CEO of Finfind, an innovative online platform linking finance seekers with matching SA funders highlighted.
“Most entrepreneurs don’t know where to start when it comes to applying for finance. The world of funding is largely foreign territory to them, and learning to navigate it can be a challenge. Applying for finance is a daunting task. When you ask about Government funding, the common response is that they know there is funding available, but that it is very difficult to secure. If you are successful, it takes forever for the funds to be paid to you, which often occurs after the opportunity which required funding has been lost.”
To combat this, recommendations in the Landscape Report are additional or improved support for SMEs looking to secure finance, including more information about SME funding to be made available, such as where it can be accessed and the requirements for each fund.
To address the lack of funding readiness, the report recommends that the government take initiative to train and mentor business owners on business fundamentals such as how to write good business plans, how to integrate accounting systems and better manage their businesses.
TYPES OF GOVERNMENT FUNDING AVAILABLE
The South African government provides several different forms of funding, such as grants, tax incentives, loans and equity finance options.
A grant is an award of money that is non-repayable, the government lending agency provides for 100% of the financial need. These types of grants are often once-off opportunities to assist new businesses. The receiving business is obligated to spend the funds in a manner specified by the provider.
These grants do not provide for 100% of the financial need, they typically finance from 35% to 100% of the applications. The business owner is required to fund the balance of the finance required for the project.
Incentives are paid after the event has occurred, unlike grants where the money is provided for a project. Business owners are able to claim back the portion of the approved project that the incentive addresses. Like grants, incentives do not require that you repay the money.
A tax incentive means that the business may deduct a certain amount from the money it owes in tax. The government offers tax incentives to encourage businesses to engage in a specific activity (such as employing young people) for a certain period of time.
In this instance, the government provides the business owner with finance to grow the business in exchange for a percentage ownership of the business and a share of profits as well as a lump sum when they exit.
WHAT YOU NEED TO APPLY FOR GOVERNMENT FUNDING
The requirements for specific government instruments will differ depending on the specific grant or incentive.
However, it’s important that all businesses looking to access funding be compliant with all relevant regulatory and statutory requirements such as be registered with the CIPC and registered for tax with SARS.
Additional requirements to access government funding are BBBEE and financial compliance, including annual financial statements, management accounts and tax clearance.
“Record keeping is essential if you would like to access developmental finance in the future. You need to ensure that you have a strong bookkeeping administrative system, accountants that would ensure you remain tax compliant and provide you with regular management accounts and annual financial statements,” says Rawjee.
Rawjee is the founder of Uzenzele Holding, a niche consulting firm that specialises in helping entrepreneurs access development funding in the form of government grants, incentives or loans from institutions like the Department of Trade and Industry (DTI), Industrial Development Corporation (IDC), National Empowerment Fund (NEF), and Small Enterprise Finance Agency (SEFA).
Below are the most common requirements for applying for funding.
- Basic business plan
- Feasibility plan
- Strategic plan
- Trading licence/ permit to trade or business licence (if applicable)
- Cash flow projections
- Outstanding debtors (i.e. customers who owe you money)
- Up-to-date management accounts (i.e. income statement, balance sheet and cash flow statement)
- Latest annual financial statements
- Latest VAT statement
- Last three/six months’ bank statements
- Tax clearance certificate
Besides these documents, they will ask for the following supporting documents to confirm statutory compliance and to validate the information on funding applications:
- ID documents of owners
- Marriage certificates of owners (where applicable)
- Company registration documents
- Office lease or mortgage agreement
- Shareholder agreements
- Share register
- Proof of business address
- Relevant business licences, accreditations or registrations