Joining hands to make small businesses work

12 July 2015 - 02:00 By Toby Chance

In surveys, small businesses cite access to finance as one of the top three challenges they face. But providers of finance say the opposite: there is a scarcity of fundable small businesses out there. Solving this conundrum will create the 11 million new jobs we need to reduce unemployment from 36% to 6% by 2030.South Africa's small-business finance ecosystem is a classic case of the market failing to match supply and demand, and the government failing to fill the gap.In the case of debt finance or loans, the private sector is risk-averse, especially retail banks. Startups find it hardest to get bank loans, as do survivalist businesses, but for different reasons. The former require collateral, which few have. The latter are below the radar of most commercial funders, but too numerous for the government to cope with.story_article_left1The Small Enterprise Finance Agency has focused on survivalist businesses at the expense of high-growth businesses. This has come at a high cost to the taxpayer, with on average only 1.5 jobs created per business financed. The agency's cost-to-income ratio is 160%, compared to the 50% to 60% of commercial banks.The Small Enterprise Foundation, which replicates the model of Bangladesh's Grameen Bank, boasts a 98% repayment rate on loans made to microenterprises.In equity finance, the private sector is showing some interest in the Treasury's tax incentives for venture-capital funds. But these incentives are not attractive enough to lure institutional investors to provide scale.Private-sector business incubators take stakes in businesses with potential to grow, or offer support services, including mentorship. They have tapped into corporate spend on enterprise and supplier development.From the government's side, the National Empowerment Fund targets only majority black-owned businesses, while the Industrial Development Corporation looks for large-scale investments. The Department of Trade and Industry offers grants for machinery and other incentives. But its Incubation Support Programme is bedevilled by bureaucracy.The Jobs Fund - the government's biggest play in this category - has focused on job-creation grants rather than the growth of new businesses. An exception is the Riversands Incubation Hub near Diepsloot, but this is just getting off the ground.Choosing which of the three main sources of finance to go for - debt, equity or grants - is bewildering for most small businesses. Each carries different risks and rewards. Too much debt can cripple cash flow; giving up equity is easy at first but expensive in the long run; and grants can prop up businesses which have no economic right to exist.The most successful funding models combine different financing classes backed up with training, support and mentorship.story_article_right2Anglo American's Anglo Zimele and SAB's Kickstart programmes are, perhaps, the best examples of corporate enterprise development at scale. But the government plays little part.Can we learn from these successful models and deliver social impact and market-friendly returns at scale, using both public- and private-sector money to find and support viable small businesses?The answer is to create a hybrid fund manager which blends all funding sources into a wholesale vehicle backed by training, mentorship and support at the point of loan.Minister of Small Business Development Lindiwe Zulu should merge the Small Enterprise Development Agency and the finance agency into a public/private partnership vehicle, run by investment and development professionals, along the lines of the defunct Small Business Development Corporation.That corporation, founded in 1981, was very successful, but political pressure saw the public/private partnership being dissolved in 1995, leaving the public-sector parts struggling. The private-sector part (now Business Partners) continues to deliver good investor returns and beneficiary growth, but on a small scale.In South Africa, social and economic impact are often indivisible. To maximise penetration and capacity, the new entity should offer equity, loans and support through existing banks, microfinancers and business incubators, with government grants providing a first-loss guarantee.This approach brings big business and government to the small business funding party, at scale.Chance is an MP and the DA's spokesman on small-business development

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