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SME funding: A stuck record

The case: Great policies but poor implementation.

JOHANNESBURG – Government has identified the funding and development of SMEs as critical to the country’s development but at the same time, as the story goes, funding these new ventures is falling behind.

Polo Radebe, chief executive of Identity Partners, an SME advisory and fund management services firm, says that “we talk big about SMEs but we have done nothing to address their funding issues.” To substantiate her point, Radebe uses the example of Khula (now Sefa – Small Enterprise Finance Agency) which has planned to disburse R737 million to SMEs in the 2013/14 financial year.

Radebe says that it has failed to achieve its objectives because of the lack of skills and understanding about financing new businesses and because of its use of retail intermediaries which do not readily respond to the needs of SMEs. Some of Sefa’s challenges include the use of financial service intermediaries and banks which leads to high operating costs. It costs Sefa 40 cents from every one rand to disburse funds. In comparison the IDC only spends 10% of its disbursements on operating costs.

The annual Global Entrepreneurship Monitor (GEM) 2012 report also identified access to finance in South Africa as a major stumbling block to early stage entrepreneurship – 43% of respondents in the report viewed it as a major constraint, particularly for new and emerging firms.

But it’s not all bad news

Despite these challenges, Christo Botes executive at SME specialist risk finance company Business Partners, says that “we are finding that South African SMEs are still growing and that there is still an appetite for SME finance. For this reason we are aiming achieve finance approvals of over 1 billion over the financial year.” The funds will be split between real assets, traditional family-owned, lifestyle and growing businesses as well as high impact and risk deals.

Business Partners also has a venture capital fund which was launched last year to grow high potential ventures.

Mark Elias, CEO of Seed Engine, a business accelerator in Johannesburg which links entrepreneurs with angel and venture capital investors, says that venture capital investors look to bring value into new start-ups by investing in them but at the same time securing that funding is not an overnight process. Elias adds that the entrepreneurial funding ecosystem in South Africa is fragmented and that there are pockets of success whether that’s in incubator programmes or accelerators – the challenge is to weave that together.

Radebe says that the one region in the country which is nailing venture capital funding is Cape Town, through projects such as the Silicon Cape Initiative, which is positioning itself as the Silicon Valley of South Africa. However, she adds that in South Africa not every new business is geared towards requiring venture capital. Some new businesses are filling a unique gap in an existing yet congested market whilst others are not novel ideas.

Radebe says that South Africa should learn from countries such as Bangladesh and India which have formed public/private partnerships which have responded to their unique funding challenges.

It is not yet clear whether Business Partners will be partnering with government but the company hopes to invest in high growth businesses with high job growth potential in technology, bio-technology, renewable energy and the agro-processing sector.

Botes adds that South Africans should not be afraid to invest beyond the Limpopo because of the impressive growth that Africa has shown. He adds that “every local service provider hired, or every supermarket that a South African retail chain opens north of the Limpopo, provides opportunities for supply chains back home.”

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