The Gauteng provincial government, the Industrial Development Corporation (IDC) and the SA SME Fund have set up what they call a “groundbreaking” R300 million SME Crisis Partnership Fund for small businesses in the province.
The public-private partnership aimed at promoting entrepreneurship was announced yesterday in Tembisa, Ekurhuleni.
There are more than two million small businesses in South Africa – many of them in townships – that do not have access to or do not qualify for funding from the formal banking sector. This hampers their ability to grow their business, take on larger projects and create new jobs.
The SME Crisis Partnership Fund is intended to remedy this. Each of the three partners has contributed R100 million to the fund, with the provincial government providing a first-loss guarantee, meaning it will compensate lenders if the borrower defaults.
In a statement, the partners said they believe this model, which uses the government’s underutilized first-loss capital to attract funds from the private sector, is a “game-changer” as it improves township economic integration – Businesses in the region and a blueprint that can be replicated and scaled nationally.
To date, the Fund has signed three agents but has already committed to a total of six, with a seventh to be announced shortly.
The three intermediaries are Indlu Living, which helps homeowners fund backyard room development and finds tenants through an app; Profit Share Partners, a fintech company that provides financing to small businesses; and Crede Capital Partners, a financial services firm that provides transaction advisory, risk and investment management services. They will begin providing working capital and wealth financing to hundreds of small businesses and entrepreneurs.
The SMME Crisis Partnership Fund will double Indlu Living’s loan book, allowing it to fund approximately 70 new real estate entrepreneurs in Tembisa, which in turn will benefit other small businesses in the communities, including handymen.
The SME Fund, set up five years ago to help entrepreneurs and SMEs grow their economies, provides capital to intermediaries (non-bank lenders) who provide either debt or equity to small businesses.
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Indlu Living, explained Claudia Manning, director of the SME fund, was chosen because of its interesting business model. Indlu helps set up back room accommodations for RDP homeowners, who then rent out anywhere from six to 25 rooms. The homeowner does not have to pay for the construction since 85% of the rental income serves the loan while the landlord keeps the rest.
“At the end of the five-year lease, the homeowner would be an entrepreneur who rents out many rooms… He would be making both an income and generational wealth because after five years his home would be worth significantly more than it was before. They’re micro-entrepreneurs who use their RDP home as an asset that they can use the way middle-class people use their real estate as an asset,” Manning said.
Indlu is also seeking Council approval for zoning and plans.
Credit reports are never part of the decision, she explained — Indlu bases its decisions on the likelihood of renting units. Tembisa, which is a desirable residential area due to its proximity to industry in the metro, was an obvious township for Indlu to start in due to the high demand for accommodation.
“Many of these tenants would live in shacks, but with the provision of more affordable housing, they could move to formal housing with adequate services.”
Indlu has received R50 million for affordable housing, while Profit Share and Crede share R60 million for their supply chain funding, which helps small businesses across Gauteng fund projects. SMEs, which would normally have to wait 30 to 90 days for customers to pay, could apply to the partners for financing to carry out their contracts. Partners provide upfront capital and are then repaid once the customer pays the SME.
“With those kinds of loads, you can, you know, 30 million rand in credits recycle many, many times over a two-year period, which is the size of this fund. The partners will support many hundreds of companies because they use the same capital. We are also funding some others that we have not signed yet.”
Any small business can apply for the funding, she said, from home builders to shopkeepers, tavern owners or manufacturing companies.
“The fund is not focused on a specific sector as our partners are active in different parts of the economy.”
Fifty-one percent of the capital was to go to black South Africans, with the remainder going to other South Africans and legal residents. BM/DM