KETSO GORDHAN AND CLAUDIA MANNING: New government-private sector funding model is unlocking SMME growth

Funding is the lifeblood of small, medium-sized and micro businesses (SMMEs), and plays a profound role in their ability to grow and expand their businesses, create jobs and contribute to the overall wellbeing of our economy.

Despite their ambition and appetite for growth, the vast majority of small business owners are often unable to realise their potential because they have no means of accessing the finance required. Nearly half of SA’s more than 2-million SMMEs are formal businesses with revenues from R500,000 to R20m a year, yet research shows that fewer than 10% are able to access or qualify for funding from the formal banking sector.

A deft new government-private sector funding model offers the prospect of making more capital available to lend to SMMEs by facilitating the entry of a new class of investor to the SMME lending market — traditionally viewed as being too risky for most institutional investors.

This new model encompasses a partnership between the public and private sectors, with the government providing a first-loss layer of capital to derisk the investment and to help attract investors. The SA SME Fund has recently used this approach to raise a new SMME debt fund, with R100m of first-loss capital from Gauteng geared up twice, with R100m each from the Industrial Development Corporation (IDC) and the SA SME Fund.

The R300m Gauteng SMME Crisis Partnership Fund is aimed at providing funding to small businesses based in Gauteng, and was launched in July 2022. The fund, managed on a no-fee basis by the SA SME Fund, has committed capital to seven private sector intermediaries that in turn have disbursed loans to SMMEs in amounts ranging from R25,000 to R5m per loan. 

These intermediaries are part of a small but growing new breed of reputable nonbank lenders that have emerged over the past decade or so. They play a valuable role in providing SMMEs with access to a range of financial products they are typically unable to access from the formal banking sector, including purchase order funding, asset-based finance, merchant cash advances and working capital.

Yet they too struggle to access affordable funding and so their capacity to expand their services to reach more SMMEs remains constrained. The Gauteng SMME Crisis Partnership Fund represents a small step to try to bridge this gap and enhance their ability to scale their operations.

Each of the seven selected intermediaries is a reputable lender providing SMME clients with specialist types of funding, and all have a track record of strong financial performance, low default rates and strong governance.

Crede Capital Partners and Profit Share Partners provide purchase order funding to SMMEs that have contracts to supply larger corporates. Spartan SME Finance is a provider of asset finance and working capital, while Bridge Taxi Finance provides loans for the purchase of new taxis, and Mobile Macs offers a rent-to-buy facility to scooter drivers in the burgeoning motorbike delivery industry. Retail Capital provides merchant cash advances to tens of thousands of restaurants, taverns, pharmacies and other retailers, with loans based on the retailers’ credit card receipt track record.

Indlu Living has developed a funding model for township housing that offers a real and meaningful prospect for solving the housing crisis as well as building intergenerational wealth — it provides the funding, as well as manages the construction and rental of backyard rooms, using only the income stream from the rentals to service the loan. With the loan repaid after five years, the homeowner is able to derive all the rental income, thus using their “RDP home” to unlock long-term value, and so a pool of township economy property entrepreneursis created.

One year on, the Gauteng SMME Crisis Partnership Fund has advanced more than 1,000 loans to these intermediaries, some of whom have already recycled their capital, enabling their initial capital to reach even more SMMEs. Also significant is that these intermediaries experience extremely high repayment rates, with defaults typically under 5%. Yet many of them still struggle to access capital for on-lending to their SMME clients.

We believe the fund’s innovative structure could serve as a template for how to make capital more accessible to these nonbank lenders, enabling them to reach more SMMEs at scale. The model has caught the attention of President Cyril Ramaphosa, who announced in his state of the nation address that a R10bn fund would be set up with the SA SME Fund, the government providing R2.5bn. The SA SME Fund is confident that this funding, in the form of first-loss capital, can effectively unlock a substantial amount of private sector capital that could be mobilised to support and facilitate the commercial success of SMMEs across the country.

This model is a win-win: the government’s first-loss capital is vital to unlock investment in these underfunded sectors. For investors it opens new markets that offer appropriate returns. For SMME business owners it enables them to access capital at affordable interest rates and without giving away equity, to grow their businesses, communities and economy and create jobs.

The success of the Gauteng SMME Crisis Partnership Fund proves that partnerships between the government and the private sector can deliver more than either of them can individually. It is a model worth replicating across the country.

• Gordhan is CEO, and Manning principal, at the SA SME Fund.