If you own or work at an SME in South Africa, you know how important having access to funding can be.
However, finding the right small business funding takes a lot of work. To do this, you need to do a lot of research and find out what types of funding for small businesses are out there.
But hold up – why do businesses need funding in the first place? In short, small business funding helps you keep cash flow smooth and prepare for unexpected challenges.
Having no access to financial support, on the other hand, means that you risk:
- Not having enough working capital to cover unforeseen costs due to external factors like load-shedding, labour strikes or material price hikes.
- Operations halting temporarily if client payments are late and income dries up.
- Missing opportunities for business expansion because you’re locked in a cash flow cycle.
Not having access to credit could even push you to use personal loans or riskier financing in a desperate bid to keep your business from going belly up.
However, the truth is that very few SMEs and start-ups in South Africa have access to proper business funding due to stringent requirements and high interest rates.
Even though SMEs make up 98% of registered SA companies, they only account for a fraction of the country’s outstanding business loans, according to a paper by the Organisation for Economic Co-operation and Development (OECD).
Knowing what types of funding are available for small businesses and how to access them can give you a huge advantage over most of your competitors.
Here we explore the 16 most popular types of funding available for small businesses in South Africa, including:
Traditional private funding
- Traditional bank loans
- Working capital finance
- Bridge financing
- Credit cards
- Revolving Credit Facility
- Business incubators
- Angel investors
- Venture capital
Government funding
- Business grants
- Equity funding
- Incentive opportunities
Other types of SME and private funding
- Crowdfunding
- Asset financing
- Equipment finance
- Inventory financing
- SME financing platforms
If you’re a business owner, read on to find out what types of small business funding in South Africa you’re eligible for.
Don’t let a lack of funding hold back your business’s potential. Explore our funding options and access up to R5 million within as little as 24 hours with our fast-track application process.
Private SME funding in South Africa
Private financial institutions like banks provide many types of funding. If you’re wondering how to get business funding in South Africa, you probably first think of visiting your local bank.
However, besides banks, private investment can also come from investment firms, incubators, private investors and fintechs that see potential in your business idea.
1. Traditional bank loans
Business loans from banks tend to be traditional one-time lump-sum loans that are paid upfront and have fixed repayment terms.
Borrowing costs depend on current interest rates and the high fees traditional lenders often charge.
Only about 9% of small businesses access traditional bank loans, a recent McKinsey report shows, because of stringent requirements and complex loan applications that can take ages to get approved – if at all.
2. Working capital finance
Like a traditional bank loan, working capital finance is a one-time lump sum paid upfront to the borrower.
Unlike bank funding, however, working capital finance requires no collateral or other equity to get funded.
Lula’s alternative funding is an example of a provider that gives fast access to working capital through an easy digital application form, no stringent requirements and approval within as little as 24 hours.
3. Bridging finance
Another alternative to bank loans is a capital advance. This type of funding can be used to cover immediate costs between expected payments.
The key difference between a traditional loan and a capital advance is that where bank loans have fixed repayment terms, capital advances are short-term loans with flexible repayment terms. This way, business owners can more efficiently cover cash flow gaps.
4. Credit cards
Whereas regular loans provide an upfront sum repaid over a set term, credit cards give 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 are good options for making daily company purchases and issuing cards for employees. 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 paying high interest rates.
5. Revolving Credit Facility
Like credit cards, a revolving loan gives you access to a replenishable line of credit that you can repeatedly borrow up 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.
SME funding provider Lula adds that “a credit facility or revolving capital 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.”
Lula’s Revolving Capital Facility lets business owners borrow up to R5 million at much lower interest rates than a credit card and has no early repayment fees. The facility gives you fast, continuous access to funds, and has a very low cost of capital when used for short-term financial needs.
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, SeedEngine 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 check their boxes, they might be willing to provide a hefty sum 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 is comparable to angel investors 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 the 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 100% of an 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 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 the:
- Agro-Processing Support Scheme (APPS), 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
Grant funding isn’t the only type of loan for small businesses that the South African government provides. Under some circumstances, the government funds SMEs in return for a share in the business. Some of the above institutions and grants do this.
11. (Tax) Incentives
While not a direct form of funding, government incentives can provide financial support to small businesses by providing 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
With a lot of private funding inaccessible to South African SMEs, there are many creative ways to raise money that provide much-needed access to business funding. Here are some of them:
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 GoFundMu 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 a lot of purchase orders, you can use them to apply for asset financing.
Asset financing collateralises your equipment or inventory or provides an advance on purchase orders to give easier access to top 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
Instead of collateralising equipment, you may need to purchase new equipment. Equipment finance is a type of business loan or funding that small businesses use to finance the purchase of equipment necessary for professional services or to run a business.
Let’s say you want to finance renewable energy to stay operational during power outages – equipment financing could fund your solar panels upfront at a fixed-term repayment.
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 Revolving Capital 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 funding with funding options being expensive or out of reach?
Alternative small business funding solutions like those offered by Lula are bridging the funding gap by providing fast and accessible funding for small businesses in South Africa.
The digital application process is easy, 100% online, and you can get approval within as little as 24 hours. Instead of needing you to meet stringent requirements, Lula can assess your creditworthiness through smart real-time analysis of your transactional data.
This is the application process:
- Lula assesses the application and provides a commitment-free quote
- If accepted, the funds are transferred to your chosen bank account within as little as 24 hours
With a financial partner like Lula, you don’t need to worry about cash flow gaps or lack of funding, nor do you pay for funds when you’re not using them.
It’s this type of flexible financing that can power small businesses through cash flow turbulence and help them gain an edge over the competition.
Don’t let a lack of funding hold back your business’s potential. Explore our funding options and access up to R5 million in as little as 24 hours with our fast-track application process.
