Ways that businesses can raise capital in South Africa
Capital is the lifeblood of business, a crucial ingredient for business sustainability and growth. Access to capital is vital for financial stability for firms of various types, sizes and those operating in diverse industries. Access to funding or capital is one of the significant challenges that face businesses, especially start-ups and small-medium enterprises (SMEs). As South Africa has one of the most advanced diverse and robust financial markets, ranked the best in Africa by Barclay’s Africa Finance Market Index 2017; investors and entrepreneurs have a variety of options they can turn to for capital.
South Africa has some of the largest commercial banks on the continent with major brand names such as Standard Bank and ABSA, formerly Barclays Africa, with a footprint over many African countries. First National Bank and Nedbank, make up the rest of the big four banks in South Africa. All four banks have specific loan offerings and support services for businesses of all sizes. Moving from the private sector, South Africa has several public finance options through government departments like the Department of Trade and Industry, also known as DTI(www.thedti.gov.za) and the various agencies that fall under it.
Funding options will usually come in either debt or equity varieties for most businesses. There are also increasingly new and innovative solutions being offered by new players looking to disrupt the traditional financial system, using telecommunications technology to connect to a broader funding network.
The most common way to raise capital is via taking up debt, with terms agreed upon regarding paying back and the interest on the loans. Regarding the options where a company or business decides to take up loans, there are numerous options and institutions. In South Africa, one can usually take the route of the major financial institutions, the big four banks of ABSA, FNB, Standard Bank and Nedbank. Getting funding via traditional banks may be the most difficult as banks tend to fund businesses with a proven record.
Concerning the public sector, the state has a variety of organisations set up to fund business; this is at national, provincial and even at local government level. The DTI is one of the critical places to start in terms of getting capital as the department has various schemes for international investors with support being provided for initiatives that support national goals, such as skills development, job creation, and transformation. The DTI provides financial support for activities such as “manufacturing, business competitiveness, export development and market access, as well as foreign direct investment”.
The public sector also has development finance institutions, such as the Industrial Development Corporation (IDC), the Development Bank of Southern Africa (DBSA) and the Public Investment Corporation (PIC). The IDC and DBSA are important finance vehicles which have a focus on large-scale projects, with the IDC looking to boost industrialisation in the country through investments in areas such as agro-processing, mineral beneficiation, while the DBSA funds many infrastructure projects.
A business can also look beyond the traditional lenders in private and public sector and look at the growing alternative lenders market. In South Africa, some alternative lender firms include Lulalend (www.lulalend.co.za) and Retail Capital (www.retailcapital.co.za) which both focus on funding small businesses which would not typically qualify for traditional bank loans. Yoco describes alternative lenders as “digital credit providers”. These are businesses that do not have the infrastructure and operating costs of ordinary banks, and therefore gain a competitive edge of offering low-interest rates and more flexible repayment options.
There are a growing activity in South Africa in the equity space with venture capitalists (VCs) and angel investors. Investors in this category offer funding in exchange for a stake in your business.
Nicole Crampton, writing for Entrepreneur Magazine (www.entrepreneurmag.co.za) describes Venture Capitalists as firms “comprised of professional investors” with the capital they generate coming from diverse sources like corporations, individuals, pension funds, foundations, and individuals. VCs can typically get involved in four stages concerning their investment: at Idea Generation, at Start-up, during Growth, and finally at the Exit. The exit is where a VC could help a company go public, such as launching on a stock exchange. Some Venture Capital companies can be found via the Silicon Cape Initiative (www.siliconcape.com) a Cape Town based NPO that brings together venture capitalist firms and angel investors. Some Venture Capital firms include 4DI Capital(www.4dicapital.com) and Invenfin (www.invenfin.com)
According to payment company Yoco (www.yoco.co.za) “Angel Investors are typically wealthy individuals who invest their own money in start-ups or small businesses, in exchange for a share in the business”. Yoco also says VCs “are often former entrepreneurs, who want to support entrepreneurship in general and do so by investing and mentoring entrepreneurs”. There are many websites in South Africa aimed at linking entrepreneurs and angel investors, two of which include the Angel Investment Network (www.investmentnetwork.co.za) and Angel Hub Ventures (www.angelhub.co.za).
The opportunities of the internet have also seen the growth of a new form of raising capital called crowdfunding, where an individual or start-up will aim to secure small amounts of funding from a large group of people, via a platform such as Kickstarter or GoFundMe. People can also use social media to market themselves and raise such capital. Typically, an entrepreneur would propose an idea which could be a technological invention, a service or a project, and using a specific website such as those listed above, try to raise funds. Crowdfunding can be arranged in various forms. One way is via donations, where no returns are expected by those giving finance, except for the goodwill that the entrepreneur will use the money for the intended cause. The other forms include debt crowdfunding where funders expect returns with interest on the loans; and also, equity crowdfunding, where people invest in return for a small stake in the business. Crowdfunding sites in South Africa include Indiegogo (www.indiegogo.com), Thundafund (thundafund.com), and Startme (www.startme.co.za/)
One of the oldest forms of raising money is via bourses, or stock exchanges, where private companies list on exchange where they sell shares of their company in exchange for capital. South Africa has the biggest stock exchange on the African continent, the Johannesburg Stock Exchange (www.jse.co.za) with a market capitalisation of US$1,06 trillion dollars more than double the country’s GDP which around US$295 billion.
The South African stock exchange market is also seeing some competition with four new exchanges given licenses between 2016 and 2017. South Africa’s new exchanges include ZAR X (www.zarx.co.za), A2X Markets( www.a2x.co.za), 4 Africa Exchange (4ax.co.za) and Equity Express Securities Exchange (www.eese.co.za).
Another important mechanism for funding in South Africa is that of grants, which unlike loans or equity, do not require repayment with interest or giving up a stake in one’s company. However, grants still have stringent requirements and those looking to receive them have to meet specific criteria. In South Africa, with transformation being a crucial policy objective, grant recipients tend to need to meet particular transformation targets, such as black ownership in their ventures.
The DTI is a source of many grants such as the Support Programme for Industrial Innovation (SPII) which is designed to promote technology development in South Africa by providing finance for the production of innovative products and processes. DTI also has the Critical Infrastructure Programme (CIP) aimed at leveraging investments by supporting infrastructure that is critical in lowering in the cost of doing business. This is a cost-sharing incentive scheme made available on completion of an infrastructure project.
There are also agencies linked to the DTI and the Department of Small Business Development. These include the National Empowerment Fund (www.nefcorp.co.za) , the Small Enterprise Finance Agency (http://www.sefa.org.za) and the Small Enterprise Development Agency (www.seda.org.za). These agencies have provincial offices which will cater for those seeking their services in relevant regions.
Eastern Cape Funding Institutions
As provinces across the country are diverse and have unique circumstances; beyond the provincialized offices of national departments there are specific institutions that specifically cater to provinces. In the Eastern Cape we have a number of state entities which provide business support and capital, and these include the Eastern Cape Development Corporation (www.ecdc.co.za), the Eastern Cape Rural Development Agency (www.ecrda.co.za)
Sinethemba Zonke is a political risk analyst and commentator focused on Africa