Sustainable funding options for small business
Access to funding is deemed to be the key limiting factor resulting in slow growth within the small business sector.
By Kobus Oosthuizen
Why is it then, that despite the large number of preferential lending options available from both governmental and non-governmental institutions, sustainable small business growth is not conforming to our expectations?
With the high failure rate amongst small enterprises, funders are hesitant to proceed unless the underlying causes can be addressed. The answer is vested not only in the access to suitable funding structures, but also in the availability and affordability of business skills training, coaching and operational support.
Appreciating the fact that entrepreneur assessment and operational support has a big part to play, for the purpose of this article we focus on the issue of gearing, the related cost of capital and the effect thereof on the cash flow of a business.
Funding, and the optimum structure thereof, remains a pertinent element of ensuring a business has an optimal chance of success.
Over the past decade various development funding institutions have introduced funding products aimed at addressing the lack of own contribution that so often thwarts the dreams of aspiring emerging entrepreneurs. The problem, however, is that no matter how friendly the repayment terms and interest rates, a shortage of own contribution will always result in higher gearing. The reality is that any new small business, where the equity component of the establishment cost is not supported in some manner, will have a reduced chance of success. The fact that capital comes at a cost, and eventually has to be repaid, will ultimately erode the profitability and cash flow of the business.
In an effort to combat over-gearing and reduce lending, aspiring small business owners were encouraged to consider going into partnerships or to recruit co-shareholders. This approach, however, gives rise to other complications that may ultimately delay the setting up of the business.
In an attempt to address the problems faced by aspiring small business entrepreneurs, a number of equity enhancement initiatives driven by government-run or government-influenced organisations and the private sector, have emerged. Below follows a brief overview of some of the initiatives and programmes aimed at stimulating small business growth, especially amongst emerging entrepreneurs.
Corporate Enterprise Development Funding
Larger corporate institutions are obliged to expend a certain percentage of their profits towards enterprise development as part of their Corporate Social Investment (CSI) obligations. In the hope of ultimately benefitting from such investments, the funding is applied towards enterprise development within their existing sphere of economic activity. The company may, for example, invest in enterprises involved in their supply chain in the hopes of securing the supply of certain commodities or services.
Another avenue available to corporates to channel CSI funding, is to provide reputable commercial small business lenders with funding to support the equity contribution of applicants who, despite meeting all other criteria, fall short of the funder’s own contribution requirements. The repayment of the equity enhancement portion would often be open for negotiation, taking into account the profitability and cash flow position of the enterprise.
Department of Trade and Industry (DTI)
Recognising that equity shortage is a constraint to the development of small black owned businesses, the DTI introduced the Black Business Supplier Development Program (BBSDP) grant scheme. In terms of the BBSDP any business with 51 percent black ownership may qualify for grant funding to expand his business.
The limitation of this program is that it only extends to existing businesses.
Negotiations are under way with the DTI to investigate the possibility of new franchised businesses being classified as existing businesses by virtue of the fact that the business system already exists. If successful, many more aspiring black entrepreneurs will be able to access this funding opportunity.
The Jobs Fund
Although the size of individual Jobs Fund applications requiring a minimum investment of R10-million may be a limiting factor, it does provide yet another mechanism through which borrowed funding could be leveraged at the back of a subsidy to establish small to medium sized businesses.
Jobs Fund applications are a complex affair and the compliance procedures are justifiably stringent, which may put the opportunity just outside the boundaries of what a small enterprise could reasonably manage.
However, by pooling resources, a definite opportunity exists for utilizing the Jobs Fund to establish franchised businesses where the number of jobs created in relation to the investment meets the fund’s requirements. SA Franchise Warehouse has submitted such a “block” application on behalf of a number of franchisors. If successful, 50 percent of the total setup cost of the franchises to be established over the next three years would be funded through this grant scheme.
The second window for applications closed at the end of May and the processing of applications by the Development Bank of South Africa (DBSA) is underway.
At SA Franchise Warehouse our mission remains to promote and play an active role in the development of franchised businesses, especially amongst emerging concepts. Our SA Franchise Warehouse publication is an important tool in the execution of our strategic objectives as we involve ourselves in initiatives that support the pursuit of our mission. While such initiatives are mainly centred around the recruitment and evaluation of franchisees for introduction to franchisors, another strong focus for us at present is accessing government, social investment and other sources of grant funding to assist franchisees in the establishment of their businesses.
Franchisors interested in gaining a better understanding of our initiatives and how it could be of benefit to them, are welcome to contact us.
kobus@safw.co.za
+27 12 661 8678
By Kobus Oosthuizen
Why is it then, that despite the large number of preferential lending options available from both governmental and non-governmental institutions, sustainable small business growth is not conforming to our expectations?
With the high failure rate amongst small enterprises, funders are hesitant to proceed unless the underlying causes can be addressed. The answer is vested not only in the access to suitable funding structures, but also in the availability and affordability of business skills training, coaching and operational support.
Appreciating the fact that entrepreneur assessment and operational support has a big part to play, for the purpose of this article we focus on the issue of gearing, the related cost of capital and the effect thereof on the cash flow of a business.
Funding, and the optimum structure thereof, remains a pertinent element of ensuring a business has an optimal chance of success.
Over the past decade various development funding institutions have introduced funding products aimed at addressing the lack of own contribution that so often thwarts the dreams of aspiring emerging entrepreneurs. The problem, however, is that no matter how friendly the repayment terms and interest rates, a shortage of own contribution will always result in higher gearing. The reality is that any new small business, where the equity component of the establishment cost is not supported in some manner, will have a reduced chance of success. The fact that capital comes at a cost, and eventually has to be repaid, will ultimately erode the profitability and cash flow of the business.
In an effort to combat over-gearing and reduce lending, aspiring small business owners were encouraged to consider going into partnerships or to recruit co-shareholders. This approach, however, gives rise to other complications that may ultimately delay the setting up of the business.
In an attempt to address the problems faced by aspiring small business entrepreneurs, a number of equity enhancement initiatives driven by government-run or government-influenced organisations and the private sector, have emerged. Below follows a brief overview of some of the initiatives and programmes aimed at stimulating small business growth, especially amongst emerging entrepreneurs.
Corporate Enterprise Development Funding
Larger corporate institutions are obliged to expend a certain percentage of their profits towards enterprise development as part of their Corporate Social Investment (CSI) obligations. In the hope of ultimately benefitting from such investments, the funding is applied towards enterprise development within their existing sphere of economic activity. The company may, for example, invest in enterprises involved in their supply chain in the hopes of securing the supply of certain commodities or services.
Another avenue available to corporates to channel CSI funding, is to provide reputable commercial small business lenders with funding to support the equity contribution of applicants who, despite meeting all other criteria, fall short of the funder’s own contribution requirements. The repayment of the equity enhancement portion would often be open for negotiation, taking into account the profitability and cash flow position of the enterprise.
Department of Trade and Industry (DTI)
Recognising that equity shortage is a constraint to the development of small black owned businesses, the DTI introduced the Black Business Supplier Development Program (BBSDP) grant scheme. In terms of the BBSDP any business with 51 percent black ownership may qualify for grant funding to expand his business.
The limitation of this program is that it only extends to existing businesses.
Negotiations are under way with the DTI to investigate the possibility of new franchised businesses being classified as existing businesses by virtue of the fact that the business system already exists. If successful, many more aspiring black entrepreneurs will be able to access this funding opportunity.
The Jobs Fund
Although the size of individual Jobs Fund applications requiring a minimum investment of R10-million may be a limiting factor, it does provide yet another mechanism through which borrowed funding could be leveraged at the back of a subsidy to establish small to medium sized businesses.
Jobs Fund applications are a complex affair and the compliance procedures are justifiably stringent, which may put the opportunity just outside the boundaries of what a small enterprise could reasonably manage.
However, by pooling resources, a definite opportunity exists for utilizing the Jobs Fund to establish franchised businesses where the number of jobs created in relation to the investment meets the fund’s requirements. SA Franchise Warehouse has submitted such a “block” application on behalf of a number of franchisors. If successful, 50 percent of the total setup cost of the franchises to be established over the next three years would be funded through this grant scheme.
The second window for applications closed at the end of May and the processing of applications by the Development Bank of South Africa (DBSA) is underway.
At SA Franchise Warehouse our mission remains to promote and play an active role in the development of franchised businesses, especially amongst emerging concepts. Our SA Franchise Warehouse publication is an important tool in the execution of our strategic objectives as we involve ourselves in initiatives that support the pursuit of our mission. While such initiatives are mainly centred around the recruitment and evaluation of franchisees for introduction to franchisors, another strong focus for us at present is accessing government, social investment and other sources of grant funding to assist franchisees in the establishment of their businesses.
Franchisors interested in gaining a better understanding of our initiatives and how it could be of benefit to them, are welcome to contact us.
kobus@safw.co.za
+27 12 661 8678
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