Afzal Khan attempts to address the lack of awareness of some governmental sources of soft capital
Small medium entities (SMEs) are the building blocks of an economy. According to research performed in 2010,1 91% of the entities in South Africa are SMEs, of which 61% contribute to the country’s employment statistics. Of the 91%, 52–57% contributes to the country’s GDP. This study emphasises the importance of SMEs to any country’s growth. The economic boom in many countries has been due to their SME market.
Entrepreneurship in South Africa is sometimes defined as unique ideas, inventions and technologies. This definition is terrifying to the average entrepreneur. Consider China where entrepreneurship is simple … make anything as long as you are cheaper than the next guy.
The South African government has benchmarked against the global economy and understands the importance of providing fertile ground for all types of SMEs to spawn and grow. Many government initiatives are under way but perhaps we are not aware of them.
Our government has attempted to provide such support via a few mechanisms, namely:
• Preferential procurement and BEE codes
• Tax incentives for entrepreneurs and big business who work with entrepreneurs
• Provision of grant funding and soft loans
In this article I will deal with the last of the three and highlight some of the sources of capital so that you may further investigate them. However, be aware of the tax benefits for small business and those that partner with small business.
Also note that an offshoot funding structure has emerged due to the Enterprise Development requirement in the BEE codes. Private organisations provide soft funding for BEE companies in order to obtain their Enterprise Development points.
One of the four main ingredients required for an SME to spawn is cash flow. In our country as with other countries there exist entrepreneurs in our wider population. Unfortunately most tend to lack capital or the awareness of the sources of soft capital. Our history has exacerbated the lack of capital within a community. Hence the private sector invisible hand of Adam Smith cannot work to support entrepreneurs as there is no soft capital in the community.
However, there is a lack of awareness of some governmental sources of soft capital. These are discussed below.
Department of Trade and Industry (DTI)
Various grants are available to SMEs in various different sectors. The DTI has various programmes and grants in place to encourage new SMEs and to create employment in our country. These are summarised below.
The Black Business Supplier Development Programme (BBSDP)
This is a grant that encourages black businesses to grow by acquiring assets and operational capacity. The BBSDP allows for a maximum of R1 million investment to a 51% black-owned entity of which 50% of management must be black, as defined. Of the R1 million:
• R800 000, of which R400 000 is contributed by the DTI and the remaining amount is to be contributed by the entity, is to be used for machinery and equipment
• The remaining R200 000 is to be used to develop the business contributed in the ratio 80:20 between DTI and the recipient.
Co-operative Incentive Scheme (CIS)
This scheme is for co-operatives formed with five or more black members. A co-operative is a body of people who come together for mutual benefit either in a social, economic or cultural way. This scheme aims to promote co-operatives on a 90:10 cash basis grant by assisting co-operatives to meet their start-up requirements. The maximum amount that this scheme offers is R350 000.
This scheme is offered to co-operatives incorporated and registered in the Republic of South Africa (RSA) that are operating in emerging sectors within rural and semi-urban areas whilst abiding by the principles of co-operatives. This scheme is biased towards woman, youth and disabled individuals. Significant emphasis has been placed on this area by DTI.
Technology and Human Resources for Industry Programme (THRIP)
THRIP is a project between DTI and the NRF (National Research Foundation).This scheme was implemented to increase the high level technical skills for the industry and improve South Africa’s competitive edge through the development of technology. This grant is primarily aimed at engineering graduates. The THRIP fund capacity is R150 million. THRIP aims to develop these SMEs into large companies, expanding the networks and allowing these SMEs access to scientific expertise, equipment and facilities at partner research entities.
Incubation Support Programme (ISP)
This grant is aimed at initiating entities to allow them to develop incubator programmes and thereby create employment within the communities and in turn strengthen the economy. The programme is aimed at encouraging partnerships between the private sector, SMEs and Government in order to create sustainable growth within the economy by creating these incubator programmes. The ISP is available on a 50:50 cost-sharing basis between the government and the private sector. The ISP must offer the SME a cost-sharing ratio of 60:40. This is capped at R10 million a year for three years. The ISP also provides mentorship to develop the necessary services and grow the entity. The ISP lasts for two to three years in which time the incubator should become self-sustainable.
The costs that the ISP will cover include the business development services, market access, machinery, equipment as well as tools, the infrastructure of the entity that has to do with the creation of the incubators, feasibility studies, product or service development, as well as operational costs.
Capital Projects Feasibility Programme (CPFP)
This project is aimed at RSA enterprises in the capital goods sector that have the potential to boost expansion and employment within the country by attracting foreign investment. Feasibility studies in the capital goods sector play an important role in opening contract and project opportunities. This project is a cost-sharing (55:45) programme and includes the costs of the feasibility (50:50) that will increase local exports and stimulate the market for RSA goods and services. The grant is capped at R8 million.
The objectives of the CPFP are to:
• Increase domestic and foreign investment
• Create employment
• Create demand for RSA goods and services
• Create upstream and downstream links between SMEs and BEE firms
The criteria for the projects are:
• New projects, expansion of existing projects and stimulating existing projects
• Feasibility study fulfils the objectives of the CPFP
• Minimum local content (50% for goods and 70% for services)
• Project must have a chance of success
The scheme pays the full cost of the feasibility study and the rest will be paid as per milestone achieved.
Clothing and Textile Competitiveness Improvement Programme (CTCIP)
This is a grant designed for the clothing and textile manufacturing industry. It is directed at the international market for quality and affordable clothing. This grant is aimed at individual companies or clusters (a group of manufacturing companies).
• The programme cost-sharing grant ratio entails that investment is given to RSA ordinary clusters in the ratio of incentives given of 75:25. The grant cannot be used for machinery, equipment, commercial vehicles, land or buildings. The grant is capped at R25 million over the period of the programme implementation.
• The cost sharing ratio for national clusters is:
Year 1: 100% Investment grant
Year 2: 95% Investment grant
Year 3: 90% Investment grant
Year 4: 80% Investment grant
Year 5: 70% Investment grant
Manufacturing Competitiveness Enhancement Programme (MCEP)
The purpose of this grant is to improve manufacturing competitiveness in the South African manufacturing and services support market. The feasibility study is done on a cost-sharing ratio of 50% for applicants with total assets with a historical cost of at least R30 million and for applicants with less than R30 million in historical cost of total assets is 70%. To get this grant applicants need to submit a pre-feasibility study that shows projections of a minimum of R30 million. The feasibility cost is capped at R7,5 million.
The tax benefit of this grant is as follows:
• 7% of manufacturing value added (MVA) (enterprises + R200 million in assets)
• 10% of MVA for enterprises with an asset value of R30 million to R200 million
• 12% of MVA for enterprises with an asset value of R5 million to R30 million
• 15% of MVA for enterprises 100% BEE with an asset value of below R5 million
MVA is calculated as follows: sales/turnover – sales value of imported goods – sales value of other bought-in finished goods – material input costs used in the manufacturing process
Enterprise Investment Programme (EIP)
This programme is for the manufacturing sector. This investment grant is between 15% and 30% towards machinery, equipment, plant, and customised vehicles. The incentive is capped at R200 million per application. For less than R5 million of investment, the benefit is up to 30% payable over three years. If the investment is between R5 million to R200 million, the benefit will be 15% over two years. Foreign investment projects include the cost of transporting the qualifying machinery and equipment to RSA as part of the grant.
Qualifying expenditure includes machinery and equipment, land and buildings acquired as part of the investment projects and commercial vehicles.
This programme has two parts to it:
• Manufacturing investment programme (MIP): This grant is for the promotion of manufacturing in metal fabrication, chemicals, plastic fabrication, pharmaceuticals, furniture, automotive and components.
• Tourism support programme (TSP): This is for the creation of jobs outside the main tourism destinations (Cape Town, Durban and Johannesburg). The government understands the importance of this sector in its economy. The TSP offers grants of +30% of qualifying capital investment by enterprises investing less than R200 million.
Foreign Investment Grant (FIG)
The objective of this grant is to provide support for the actual cost of transport of qualifying new machinery and equipment. This is to attract foreign direct investors to set up operations in RSA. The grant covers 15% of the value of the imported machinery and equipment to a maximum of R10 million.
Product Incentive (PI)
This grant is also for the clothing, footwear, textiles and leather goods industries. The benefits are limited to a maximum of 10% of MVA (sales-materials input costs). The grant is payable on proof of qualifying expenditure.
Sector Specific Assistance Scheme (SASS)
This grant is a re-imbursable grant and is re-imbursed in the ratio of 80:20. The grant comprises two parts:
• SSAS generic funding: Funding of a non-profit organisation that grants R50,000 for establishment of an export council. There is a matching grant of up to R1 million based on membership income of 2:1 for operational costs.
• SSAS project funding: This is a re-imbursable grant that is given in an 80:20 cost sharing to export councils, joint action groups (JAGS). It is for SMEs, woman, youth and disabled persons.
• SSAS: Project funding for emerging exporters: This project compensates an entity in respect of activities aimed at the development of South African exporters. This fund benefits a person by paying for a return fare economy class as well as accommodation and transport as well as exhibition costs and marketing materials. The amount per project is capped at R1,5 million.
Seda Technology Programme (STP)
This programme provides for a maximum grant of R1 million. Of this R1 million,
R800 000 is to be used for tools, machinery and equipment of which 35% is contributed by the DTI. The remaining R200 000 is to be used in the business development programme on a 50:50 basis.
The object of this grant is to empower South African women in the arts and crafts sector. This fund is to ensure the quality production of commercially viable products by women with the relevant skills.
Isivande Women’s Fund
This fund is managed by the DTI. Its purpose is to promote the economic empowerment of women. The grant is allocated to a company owned and managed by women (60%) which has existed for two years. The loan is from R30 000 up to
Critical Infrastructure Programme (CIP)
The grant covers the development costs from 10% to a maximum of 30% towards the improvement of the critical infrastructure. This amount is capped at R30 million.
Export Marketing and Investment Assistance (EMIA)
The DTI assists South African exporters by organising events in which local products can be showcased to international traders. The DTI bears all costs of these exhibitions.
• Group outward-selling missions: This is aimed at foreign buyers wanting to conclude orders with South African exporters.
• Group outward-investment missions:
This is aimed at foreign investors wanting to invest in the South Africa.
Both of these grants assist with investment/export seminars and conferences, market research missions and lobbying missions. Exporters are compensated for the following: return economy airfare, subsistence allowance per day, transport of samples, and marketing materials to a maximum of R100 000 a year. Under this grant, 50% of patent registration costs in a foreign jurisdiction are covered.
Film and television incentives
The South African government offers incentives to promote this industry.
• Foreign film and television production and post-production incentive:
− Foreign films and television productions shot in South Africa on location has an incentive of 20% of the qualifying South African production expenditure (QSAPE).
− Shooting in South Africa on location and conducting post-production with a qualifying South African post-production expenditure (QSAPPE) of R1,5 million attracts an incentive of 22,5% of QSAPE and a cumulative 2,5% is added on for the QSAPPE.
− Shooting in the RSA and conducting post-production of R3 million will result in an incentive of 25% of QSAPE and 30% of QSAPPE (a cumulative 25% added to the additional 5%).
− Foreign post-production with QSAPPE of R1,5 million will attract an incentive of 22,5% of QSAPPE.
− Foreign post-production of QSAPPE of R3 million will attract an incentive of 25% of QSAPPE.
• SA film and TV production and co-production:
− The incentive is available to qualifying South African productions with a total budget of R2,5 million.
− The rebate is calculated at 35% of the first R6 million of QSAPE and 25% of the QSAPE on amounts above R6 million.
This loan funding is provided to BEE SMEs that are incorporated and working within South Africa. The funding offered can be from R10 000 to R3 million. SIZWE/FABCOS will contribute 90% and the remaining 10% is the entity’s contribution. This is repayable over a period of five years at a rate of prime +3%. This fund is operated in conjunction with SIFA/Khula.
Loans and equity investments are available to the public on researched and tested products.
Business Partners offer two options:
• They obtain a shareholding and retain it for five years whilst participating in shareholder and director meetings. They also offer guidance in management matters. During these five years if surplus cash is available they advise to pay the other shareholders loans. After five years they either sell to a third party or to the existing shareholder.
• This option is a normal loan in which they provide a term loan, usually five years. Depending on the risk and business model it will be prime +?. Loans can be from R500 000 up to R10 million.
RED DOOR FUNDS
Nedbank in conjunction with Khula offer SMEs loans.
This is an agricultural loan for the crop establishment and re-plantation of crops. For this loan, a cane delivery agreement needs to be in place. The entity needs authority to occupy the land. The loan starts from R1 300 and goes as high as R15 500 per hectare.
Anglo Khula Mining Fund
The equity stake taken cannot exceed 49% of the issued share capital. The amount offered is between R1 million and R20 million.
Small Business Development Fund
Godisa Supplier Development Fund
The focus of this fund is the development of BEE-owned companies (SMEs) in Transnet’s procurement chain with focus on rail and port business. The fund amounts to approximately R165 million of which an average of R5 million will be granted per project.
The funding amount starts at R500 000 and is capped at R5 million. The fund will contribute 90% and the remaining 10% must be contributed by the entity. The entity must be owner-managed. The loan must repaid within five years.
UMSOBOMVU YOUTH FUND
This fund is managed by Business Partners. The SME would require an amount of R150 000 to R3 million to purchase a new or existing franchise which is viable or has the potential to be viable. A 30% shareholding needs to be held by a black South African youth who must be operationally involved.
This fund is managed by the Nations Trust and Micro Enterprises.
• Micro Enterprises:
− This loan is available to a South African black youth aged between 18 and 35 years requiring a loan capped at R20 000.
− The business must operate in the Eastern Cape, Free State, Limpopo or Mpumalanga.
− The South African black youth must be operationally involved in the entity.
• Nations Trust Youth Enterprise Finance:
− Applicant needs to be an 18–35-year-old black South African youth requiring a loan of not more than R50 000 to operate an existing business in affixed place or expand an existing business.
Youth co-operative finance
The registered co-operative must have a shareholding of at least 50% black youth with a stable and credible management team requiring a loan of not more than R500 000. All members of the co-operative need to be operationally involved. The funds must be used to start up a business or expand an existing one.
These are a few of the funding sources available from government. However, for each of these a professional business plan will be required, which can be obtained from your local CA(SA). ❐
1 Joshua Abor and Peter Quartey, Issues in SME development and Ghana and South Africa, International Research Journal of Finance and Economics 39 (2010), http://www.smmeresearch.co.za/userfiles/file/Issues%20in%20SME%20development%20in%20Ghana%20and%20SA.pdf.
Author: Afzal Khan is Tax Partner at RAFT