16 Types of Funding for Small Businesses: Explained

We understand how important having access to funding at the right time can be, especially during slow periods or seasonal fluctuations. 

Very few small businesses in South Africa have access to funding due to strict lending requirements and slow processing times.

Even though there are over 2 million SMEs, they only account for a fraction of the country’s outstanding business loans. 

The good news is, there is more than one solution.

Rapidly evolving technology means: your SME is not confined by the dictates of traditional financial institutions. There are alternatives available that are faster to access and have less stringent requirements than bank loans.

Traditional private funding:

1. Traditional bank loans

2. Working capital finance

3. Bridging finance

4. Credit cards

5. Revolving credit facility

6. Business incubators

7. Angel investors

8. Venture capital

Government funding:

9. Business grants

10. Equity funding

11. Incentive opportunities

Other types of SME and private funding:

12. Crowdfunding

13. Asset financing

14. Equipment financing

15. Inventory financing

16. SME financing platforms

Read on to learn about the different types of small business funding in South Africa you could be eligible for. 

 

 

Traditional Private SME Funding in South Africa

Private financial institutions offer various types of funding like revolving credit facilities, merchant cash advances and term loans. When researching how to get small business funding in South Africa, you likely think of applying for a loan at your local bank.

However, besides traditional bank loans, public funding can also come from government firms, incubators, angel investors and fintechs that see potential in your business idea.

Here, we explore the 16 different types of funding available for small businesses:  

1. Traditional bank loans

A traditional bank loan in South Africa can be secured or unsecured. A secured loan is backed by collateral, while an unsecured loan does not require collateral.

Secured loans typically offer lower interest rates and larger amounts, but you risk losing the pledged asset if the business defaults.

Traditional loans have stringent requirements and are slower to access than alternative funding solutions.

 

 

2. Working capital finance

Working capital is not a one-time lump sum. As opposed to a traditional bank loan that comes in the form of a one-time lump sum, working capital functions as a line of credit or capital that can be dipped into for day-to-day business operations when it’s needed.

As an alternative funding provider geared towards meeting the needs of South African small and medium-sized enterprises, Lula’s Cash Flow Facility can be used to support your business’s working capital needs.

You can apply for up to R5 million in funding. Funding solutions are tailored to your business through a full digital experience, and you can access your funding within as little as 24 hours.

3. Bridging finance

Another alternative to bank loans is bridging finance. This type of finance also known as a bridge loan, is a short-term form of funding that is designed to cover an immediate financial need until a more permanent funding source becomes available.

It can be used to cover immediate costs between expected payments. It provides quick capital to address a time-sensitive opportunity or urgent expense, usually with a repayment term of a few months up to a year, or longer. 

An example is seen here in this case where a small manufacturing business completes a large order for a major client, but the client’s standard payment terms are 90 days.

The manufacturer needs capital to cover the immediate payroll, purchase new raw materials for the next job, and pay urgent utilities. The business can secure a bridge loan against the value of the outstanding invoice. When the client pays the invoice 90 days later, the business can use those funds to immediately repay the bridge loan principal and interest.

4. Credit cards

Whereas regular loans provide an upfront sum repaid over a set term, a credit card gives you access to a revolving line of credit that you can repeatedly borrow from up to a set limit. 

Credit cards tend to have much higher interest rates than bank loans, and come with late and overdraft fees. 

Business credit cards can be useful for making daily business transactions, or if you need to issue cards to employees to make purchases on the business’s behalf. However, spending limits are typically too low for credit cards to be used as working capital.

If you’re using a credit card for SME funding, remember to pay off your debt in time to avoid being charged interest. 

5. Revolving credit facility

Like credit cards, a revolving credit facility gives you access to a replenishable line of credit that you can draw down from to a set limit. 

A revolving credit facility tends to have a much higher limit than a credit card, making it a great financing option for SMEs’ operational purposes and keeping a healthy cash flow when income is sporadic.  

Our Cash Flow Facility enables businesses to access up to R5 million in funding – only paying for what they use, when they use it.  The facility gives you quick, continuous access to funds* (*subject to a credit assessment) that you can draw down from when you need it.

“A credit facility or cash flow facility is appealing for small businesses in South Africa because it provides them with flexible access to funds that they can use as needed. It offers a convenient way to manage cash flow fluctuations, cover expenses, and seize business opportunities without having to apply for new funding each time,” says Garth Rossiter, Chief Risk Officer of Lula.

6. Business incubators

Suppose you’re running a start-up or early-stage small business with a strong business plan and high growth potential. 

In that case, business incubators might be eager to provide start-up capital and help you in business development through their expertise and network. 

Incubators sometimes offer grants to help start-ups get off the ground, partnering with government or non-profits to set up cheap (sometimes free) funding with socio-economic targets like black empowerment. 

Business incubators often provide seed capital to start-up entrepreneurs or connect them with angel investors, venture capitalists, and other types of funding for small businesses while preparing them to scale. 

Some of the most well-known business incubators in South Africa are Raizcorp, Seed Engine and Awethu Project, an accelerator programme focused on social entrepreneurship. 

7. Angel investors

Like business incubators, angel investors are always looking for small businesses in their early stages with a strong business plan and high economic growth potential. If you meet their criteria, they may be willing to provide a large some of seed capital in exchange for equity in the business. 

You can attract angel investment by joining platforms that connect entrepreneurs with angel investors, like the South African Investment Network, Johannesburg-based Jozi Angels, and the female empowerment-focused Dazzle Angels.

Keep in mind that finding an angel investor who believes in your business takes persistence (and a lot of pitching), a solid business plan and a strong network.

Working with angel investment means you also have to give up a share of equity and, while you gain an experienced business partner, you also relegate partial control over the company’s direction in return for funding. 

For many early-stage start-ups, however, the upsides outweigh the potential downsides of this type of equity funding.

8. Venture capital

Venture capital (VC) is comparable to angel investment in that it can provide small businesses with funding in return for equity. 

Venture capital firms are business funding companies that focus on investing in early-stage businesses with a high potential for scaling and profit, and are often willing to spend a lot of money to see that growth. 

More than with angel investors, you risk losing control and dilution of ownership when using venture capital for business growth. This type of equity funding isn’t for every business owner – but if you’re in the start-up business, willing to take risks, and run highly scalable start-ups, venture capital could be your ticket to the moon. 

The VC funding ecosystem in South Africa is a mix of private VC firms, corporations with VC divisions, government-backed funds, angel investors, incubators, and development finance institutions, like the Small Enterprise Finance Agency (SEFA).

A prime example of this type of hybrid venture funding is the SA SME Fund. This private development programme is a R1.4 billion fund created by JSE-leading companies with the help of government to invest in high-potential SMEs and start-ups. The fund has a mandate to allocate 50% of its capital to black African-owned businesses. 

Government Funding

Funding doesn’t have to come from a bank or private investor. The South African government recognises the funding gap that exists for SMEs – and is willing to do something about it by creating more small business funding options. 

The National Development Plan (NDP) proposes that for South Africa to overcome poverty, the SME sector would have to grow significantly, and expects that by 2030, 90% of new jobs will be created by the SME sector.

The SA government created various institutes to offer different types of funding for small businesses, the biggest ones being SEFA, the Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF). 

9. Government grants

Grants are non-repayable awards where the government lending agency provides for 100% of the SME’s financial needs. These grants are often one-time opportunities to assist new businesses, and the receiving business must spend the funds as specified by the provider. 

Cost-sharing grants don’t cover 100% of a small business’s financial needs – but instead, provide SME funding of up to 35% of the financial needs or more. The business owner provides the remaining part of the SME funds. 

Some of the key government grant schemes in South Africa are: 

• Agro-Processing Support Scheme (APSS), which targets SMEs in food and beverage value addition, fertiliser and feed production, fibre processing and furniture manufacturing 

• Black Industrialists Scheme (BIS), which targets black-owned industrial SMEs 

• Co-operatives Incentive Scheme (CIS), a 100% grant that aims to improve the viability and competitiveness of co-operative enterprises 

• National Youth Development Agency (NYDA), which offers grants and non-financial support to young entrepreneurs

• Growth Fund, which offers grants and other support to small businesses where permanent jobs are being created 

10. Governmental equity funding

Government equity funding is a form of investment where a government agency or state-owned development bank provides capital to a private company in exchange for a percentage of the business.

Unlike a loan, the capital does not have to be repaid through fixed monthly instalements. Instead, the government entity acts as an investor, earning a return on its investment when the company pays dividends or when the shares are sold (an “exit”) upon a sale, merger or Initial Public Offering (IPO).

11. (Tax) Incentives

While not a direct form of funding, government incentives can provide financial support to small businesses through tax returns or relief. Some examples are: 

• Small Business Corporation (SBC) Tax Relief, where SBCs pay no income tax on part of the taxable income.
• Accelerated Depreciation, which allows small businesses to deduct a portion of the cost of new equipment.
• Employment Tax Incentive, which reduces the employer’s tax based on wages paid.
• Turnover Tax, which offers a flat-rate tax for businesses that have an annual turnover below R1 million. 

Other Types of SME and Private Funding in South Africa

Despite how challenging it is for SMEs to access funding in South Africa, there are other creative ways to raise money. Here are a few different ways:

12. Crowdfunding

Crowdfunding is a way of raising private funding from individuals through websites and platforms.  

When crowdfunding, you set a fundraising target for a specific business goal and then market the fundraising webpage as well as you can. Individual investors who want to contribute can donate money until the target amount is raised. 

This type of funding for small businesses allows you to raise capital without necessarily incurring debt or giving up equity. Instead, individuals who pledge an amount can be ‘rewarded’ with a product, service or some token. 

Popular crowdfunding platforms are Kickstarter, IndieGoGo, GoFundMe, Thundafund and Uprise Africa. The first two require a strong marketing campaign to attract funding, while GoFundMe caters to events, challenging circumstances, and charitable causes. Thundafund and Uprise Africa are especially dedicated to crowdfunding African entrepreneurs. 

13. Asset financing

If you have valuable assets on your balance sheets or several purchase orders, you can use them to apply for asset financing. 

Asset financing collateralises your equipment or inventory. It also provides an advance on purchase orders to give easier access to funding. 

It’s a popular type of funding for small construction businesses (where it’s also called construction finance), in the manufacturing industry (manufacturing finance), or in other industries where heavy equipment is frequently used or large project invoices are managed.  

14. Equipment financing

Equipment finance, also known as asset finance, is a type of business funding designed to help businesses acquire essential operational assets. It’s a strategic way for your business to obtain necessary tools, technology and machinery without straining your working capital.

Let’s say you want to purchase new machinery to scale operations – equipment finance would enable you to fund the new equipment upfront.

Unlike a standard business loan, equipment financing is an asset-backed credit. This means that the equipment itself – the machinery, vehicle, or technology acquired, serves as collateral for the loan.

15. Inventory financing

Inventory financing is a type of retail financing that can help business owners smooth cash flow gaps between high-demand seasons and inventory purchases. Some inventory finance collateralises a business’s inventory and has late repayment fees. 

A Cash Flow Facility, Lula’s answer to inventory financing, for example, has flexible repayment terms and can be accessed within as little as 24 hours.

16. SME financing platforms

Is your SME in need of business funding, and financing seems expensive or out of reach? 

Alternative small business funding solutions are bridging the funding gap by providing easier access to funding for small businesses in South Africa. 

At Lula, our application process is fully digital and can be completed online in minutes. If you qualify, you can get approval within as little as 24 hours. Instead of needing you to meet stringent requirements, we fast-track the assessment process through a smart real-time analysis of your transactional data. 

The application process is straightforward:

• Fill in your basic details in the online application form.
• Take a selfie with your mobile device and submit.
• Upload your ID and bank statements.

Partner with us as your funding provider, and you won’t need to worry about cash flow gaps or a lack of funding. 

It’s this type of flexible funding that can power your small business through economic uncertainty and help you gain the momentum you need to achieve sustainable growth. 

Don’t let a lack of funding hold back your business’s potential. Access a capital boost today and win tomorrow.