PODCAST | R88m fund set up by SAB Foundation fund to help tackle SME financing gap

The SAB Foundation has announced the launch of an R88m Financing for Impact Fund in partnership with Lead Impact Capital and the National Treasury's Jobs Fund.

The purpose of the fund is to provide affordable financing to qualified alumni of its entrepreneur programmes.

SMEs are lauded as the job creators of the future, but there is a major stumbling block to this theory as creating jobs relies on business growth, and business growth requires finance.  

Through its work with entrepreneurs over many years, the SAB Foundation became concerned about the financing gap in SA. SMEs often don’t have collateral and are perceived as high risk by the investment community.

“This perceived risk translates into businesses not qualifying for finance, or when they do, interest rates can exceed 20% — with some short-term cash flow lenders charging interest rates as high as 30%,” says Bridgit Evans, executive director of the SAB Foundation.

“This leads to a high default rate, further discouraging investors from lending into this market — which creates a vicious cycle. Investors have a fiduciary responsibility to protect assets and many have been negatively affected through the non-repayment of loans. If SA wants to grow the economy and create jobs, we need to find innovative financial products that don't pass on the high interest rates to SMEs.”  

“Together with Jobs Fund and Lead Impact Capital, we are testing a model to address this, by mitigating risk in three ways.  Firstly, when possible, entrepreneurs must cede contracts to the foundation. Secondly, the Impact Fund is underpinned by grant capital, allowing interest rates to remain affordable at between prime minus two and prime plus three.”

“Lastly, while most financiers only meet the business owner for the first time when they come to borrow money, this fund is only lending to entrepreneurs the SAB Foundation has already spent at least two years mentoring and training. This offers the advantage of using other metrics to assess the entrepreneurs’ character and their likelihood of honouring the loan.”

Evans says eligible candidates are graduates from the SAB Foundation's Tholoana Enterprise Fund and Programme, the Social Innovation and Disability Empowerment Awards, and the Social Innovation Fund, who are looking to grow their businesses and create new employment opportunities.

“The finance can be used for asset and equipment, growth or purchase order and cash flow financing. Loan sizes will range from a minimum of R200,000 to a maximum of R10m and entrepreneurs must provide sufficient proof to support the loan amount applied for,” says Evans.

“SA has a comprehensive enterprise and supplier development ecosystem, more than many other countries. We need to find a way to build a bridge between this community and mainstream investors, because it is our best interests to maximise business growth.” 

Najwah Allie-Edries, head of the Jobs Fund, says: “We have partnered with the SAB Foundation to tackle a key funding gap that affects SMEs, specifically those referred to as the ‘missing middle'.” 

“These enterprises are generally too small to access funding from traditional financiers and too large to access micro finance options. Through the partnership, SMEs will secure the capital and support they need to drive enterprise growth and further job creation.”

With the Financing for Impact Fund, the SAB Foundation and Lead Impact Capital aim to show the SA financial and investment community that small businesses with innovative business models are worth investing in. 

“If we are able to demonstrate that all loans are repaid, we will use this as a model to attract further finance so entrepreneurs with growth and job creation potential are not held back by a lack of access to affordable capital,” says Evans.

“Our aim is to build a model that can be scaled and replicated by others.”

Visit the SAB Foundation's website for more information. 

This article was sponsored by SAB Foundation.