As it heads into the next five years with 2017/18 financial year having come to a close, State-owned development finance provider Small Enterprise Finance Agency (sefa) will focus on delivering financial assistance that responds to current market needs.

In the 2018/19 financial year, the agency will intensify its efforts to deliver its mandate to aid in addressing the challenges of poverty, inequality and unemployment amid a tough business environment, with South Africa’s economic activity remaining fairly subdued. 

Founded in April 1, 2012, sefa is a wholly owned subsidiary of the Industrial Development Corporation. The agency provides financial products and services to qualifying small, medium-sized and microenterprises (SMMEs) as well as cooperatives as defined in the National Small Business Act of 1996, amended in 2004. The small business sector has been identified by the National Development Plan as having the potential to create 90% of the 11-million jobs envisaged by 2030.

Up until March 2017, the agency had approved loans amounting to R4.4-billion  and disbursed R4.3-billion to close to 242 000  SMMEs and cooperatives, which in turn  created or sustained about 258 000 jobs, says sefa CEO Thakhani Makhuvha. 

“A development finance institution such as ours is expected to play a counter cyclical role, particularly during the economic downturn, by assisting small businesses to stay put during these rough times. Therefore, we need to be innovative in our intervention and provide finance to small businesses.”

Technology Push

A critical element that will strengthen the agency’s delivery model, especially in the informal sector, over the next five years is the introduction of technology, such as mobile banking, that will provide its clients with digital access to its services, states Makhuvha.

“We want to reinforce our penetration of the market and find innovative ways to support small businesses. We must use technology, namely mobile applications, and find out how we can best automate our activities, such as the application process, throughout the life cycle of the client,” he says. Another key question is how best to speed up processes, without being negligent, when providing funding to reduce manual intervention and improve information flow with regard to the progress of loan applications, as well as to identify problems sooner rather than later.

Challenges Faced

sefa supports sustainable small companies that are black-owned, women-owned, youth-run, businesses in the rural and  township areas, as well as those that are owned by entrepreneurs with disabilities. 

To better service entrepreneurs with disabilities, the agency launched a dedicated fund called the Amavulandlela Funding Scheme in December 2016, which offers loans at a fixed interest rate of 7%.

However, Makhuvha admits that sefa’s engagement and funding of entrepreneurs with disabilities needs greater attention to better identify such entrepreneurs and the type of businesses they operate. 

Further, with the majority of South Africa’s unemployed being youth, Makhuvha warns that the situation “is a time bomb” and, therefore, emphasises the importance of the youth starting their own companies. But the challenge lies in identifying young entrepreneurs with viable business propositions and how to effectively collaborate with youth-run businesses.

Market-Related Products

Products that sefa has developed over the past five years that address  tight market conditions faced by the country’s SMMEs are its asset finance, term loans and contract financing options. 

Makhuvha explains that the agency encourages entrepreneurs to own their own assets. Thereby, through its asset finance/term loan options, sefaoffers finance of up to R5-million to enable small businesses which have secured contract work in the engineering or mining sectors to acquire plant equipment. 

Small businesses which do not have the machinery needed to fulfil the terms of a contract are advised against hiring this equipment, as this will increase their overhead costs. 

Contract financing speaks to providing small businesses with funding so that they can deliver on contracts. “For example, most of our clients have construction contracts from government but need start-up capital to execute the scope of work. These contracts are invariably awarded through tenders and some companies squeeze their margins in their bids. Therefore, it is important to know the contract size and the profit margins involved,” Makhuvha states.

sefa strongly believes that, if done well, contract financing presents less risk if the agency is able to secure cessions of contracts.

Additionally, the need for a new product called Invoice Discounting has been identified and the agency expects to introduce this finance option between April and June this year. 

Invoice Discounting, which Makhuvha admits is not a new concept, is focused on providing SMMEs with capital upon verification of an invoice to fund their day-to-day operations while they wait for corporates or State companies to pay, as they only do so 30 or 60 days after the invoice date.  After the invoice has been paid, sefa will recoup its loan, as well as a fee.

Makhuvha emphasises that the agency is addressing the market failure to support those that cannot be easily funded elsewhere. “We are committed to take risk, but this is a calculated risk. Our role is to strike a balance between development impact and sustainability.

“We receive more enquiries than we approve, with only 30% to 40% of loan applications going to the next stage. This is not a grant, this is a loan that needs to be repaid so we can lend to others,” he concludes.