FASA and DSBD sign MOU for MSME franchising funding

The Franchise Association of South Africa (FASA), has, after extensive consultations, finally signed a Memorandum of Understanding (MOU) with the Department of Small Business Development (DSBD) to create a conducive environment for small business development in the franchising arena. This initiative stands to benefit the industry by ensuring that potential and deserving franchisees are funded through a funding mechanism and structured support developed by government for business development.

At a recent online presentation both the DSBD and the Small Enterprise Development and Finance Agency (SEFDA) presented their new initiatives and funding models for the benefit of established franchisors and would-be qualifying franchisees, in order to create and open up funding initiatives for Micro, Small, Medium Enterprises (MSMEs).

According to Mr Phillip Phaahla of the DSBD, responsible for the department’s enabling environment, policy development and support intervention, the MOU with FASA is a partnership to assist in cultivating and funding credible franchisees to invest in sustainable businesses. “We plan to improve co-ordination, integration and mobilisation of efforts and resources toward the creation of an enabling environment for the growth and sustainability of MSME’s and Co-operatives in the small business sector, anchored on the SMME policy of the department and approved by cabinet.”

The DSBC will implement its mandate of providing financial and non-financial support to small enterprises through the Small Enterprise Development and Finance Agency (SEFDA) and FASA, with its strong small business format, has been brought in as a key partner. The MOU with FASA outlines the tripartite relationship in respect of

creating a better way of funding small businesses;
outlining a better way of handling applications and roll-out;
provide training for small businesses to upscale;
To train and support those businesses.

Challenges of MSME access to finance

The global population of MSMEs is reported to be 65 million, by far the majority of businesses in the world, representing about 90% of businesses and more than 50% of employment worldwide. In South Africa there are an estimated 2.6 million entrepreneurs running 3.2 million MSMEs who contribute 2 to 3 million formal full time jobs in SA. They contribute 40% towards GDP.

According to Fred Makgato, FASA’s CEO, despite the government’s investment in the MSME sector, financial support interventions for MSMEs remain uncoordinated and fragmented resulting in low survival rates of MSMEs and stagnant growth. Access to finance remains one of the biggest challenges experienced by small businesses, with 63.62% of enterprises reporting it as a source of concern. “A key impediment to the extension of credit to the MSME sector is that commercial lenders consider these businesses to be high risk borrowers, particularly because many entrepreneurs have little or no assets to pledge as collateral to back the loans and few MSMEs keep financial records to indicate the financial performance of the business.”

As lending models of the development finance institutions have adopted a profit orientated approach which impose strict criteria for successful loan approvals, this has created market failures that result in credit market not operating optimally. Credit extension to MSME’s is perceived to be attracting high transaction costs because of the small loan amounts of funding required and bad credit histories. This has created a challenge wherein almost no lending is extended to micro or small enterprises requiring loan sizes below certain thresholds set by financiers.

In setting up their Funding Policy, the DSBD has set out some guidelines that will ensure measurable outcomes that include:

Improving coordination in the MSMEs and Co-operatives access to the finance ecosystem;
Coordinate the aggregation of data on the small business sector across various datasets to enable a fully informed measurement of the state of the finance ecosystem to gather much-needed information on businesses.
Improve the provision of start-up capital through centralised funding structures in partnership with the private sector using best practices funding models. The DSBD is collaborating with the Department of Trade, Industry & Competition (the dtic) to implement the Transformation Fund which is aimed at addressing the market failures including the limited access to start-up funding.
In determining what funding instruments are required during the cycle of small enterprises and enable an environment in which those services can be provided to all MSMEs and Cooperatives, the DSBD is reaching out to established entities like FASA with a view to concluding a partnership that will provide franchise specific financial and non-financial support in that sector.
To improve business development support, especially with regards issues relating to financial management of MSMEs and Co-operatives such as the use of appropriate financial products and the informed interaction with Financial Service Products through improved coordination of the Business Development Support services, SEDFA will provide Business development support through a network of regional offices and incubators to de-risk funding to MSMEs and make the sector attractive to financiers. To-date 126 incubators were established countrywide.
De-risking MSMEs finance through credit guarantees such as the Khula Credit Guarantee (KCG) scheme is being reconfigured under the Financial Sector Development & Reform Programme (FSRDP) in order that it be strengthened.
The implementation of a Movable Asset Collateral Registry (MACR) which represents a credit infrastructure aimed at broadening assets classes that can be used as security for loans such as inventory (stock), cash and cash equivalents, account receivables, livestock, machinery, equipment and others. The MACR Steering Committee comprises representatives from the NCR, DoJCD, National Treasury, SEDFA, SARB and other players will look at the alternatives to traditional credit guarantees for MSMEs.
Establish simplified business registration and more affordable legal processes to deal with business registrations and for winding up of MSME business operations. This is being done in consultation with the International Finance Corporation and Department of Justice and Constitutional Development who are discussing the possibility of implementing the South African insolvency regime for MSMEs.
Credit information systems for small businesses to promote a holistic and comprehensive solution to the credit information infrastructure problem for MSMEs by extending the information to also include alternative information to that currently being used. The DSBC is collaborating with the SA Credit & Risk Reporting Association (SACRRA) to collect business (MSME) credit data. This aims to reduce information asymmetry between lenders and borrowers, improve access to credit for MSMEs and enhance the function of the supply of credit and risk products among businesses.
Easing small business’s cash flow constraints through timely payments and invoice factoring. The regulations enforcing timeous payment of invoices to small businesses must be codified into law. Furthermore, a liquid, transparent and accessible invoice factoring market is required and will be enables as part of financial sector development. An Ombud Service to be established by the DSBD to deal with late payments of MSMEs and other matters.
Affordable and appropriate insurance for small businesses including co-operatives will be investigated through conducting a comprehensive demand-side survey by role players to inform both industry and policymakers with in-depth insights into insurance needs of small businesses – resulting in the design of appropriate insurance products for MSME’s
Improve and monitor MSMEs and co-operatives access to finance markets ensuring that the finance ecosystem which is better aligned to the needs of these groups. The DSBD should constantly examine the structure of the market to identify shortcomings in the current structures, monitor the range of financial products and services to assess to what extent the whole life cycle of the sector is covered.
Recognizing the importance of and disadvantages facing informal enterprises, recognize their contribution to economic growth and improve informal MSME’s access to the finance ecosystem to de-risk them.
Create accessible funding environment for targeted groups such as youth, women, and persons with disabilities by engaging with organisations representing them to ensure that there is alignment of demand and supply of support programmes.
Incorporate digital financial services in MSMEs and Co-operatives access to finance by developing dedicating funding instruments that focus on using digital financial services in business transactions and to protect MSMEs.
Improve Microfinance Institution’s capacity to deliver sustainable financial solutions to unserved and underserved microenterprises through a public/private partnership model to build the capacity of a range of Micro Finance Institutions to reach all microenterprise market segments in the country including townships and rural areas.
Improve Co-operatives access to finance and develop dedicated funding instruments focusing on the entire Co-operatives lifecycle and a review made on the minimum capital requirements imposed by the Prudential authority which constrain Co-operatives Banking Institutions (CBIs) use of funds for growth purposes.

The role of the Small Enterprise Development and Finance Agency (SEDFA)

Government funding in the past has been problematic as franchises operate to very high ethical standards with strict operational and set up criteria relying on speed in respect of allocation of space, timelines etc, in selling and setting up a franchise. According to Fred Makgato, FASA’s CEO, “one of the major issues with funding through the old Sefa was the red tape involved – where applications took long, if ever finalised, or got lost in the system or were never attended to. This resulted in lots of frustration both with franchisors that work to strict timelines when rolling out a franchise, and potential franchisees not getting the funding fundamentals sorted in time.”

According to Zolisanani Ngxobongwana of SEDFA, a new entity has been formed from sefa combining two departments – business development and support, the other is the lending division. SEDFA’s vision is to empower SA’s small enterprises for inclusive growth, transformation and sustainable employment. Their aim is to deliver targeted financial and non-financial support, develop co-operating banking institutions, and strengthen the capacity of intermediaries to provide quality support to small enterprises.

SEDFA’s Hybrid Distribution Models include the following:

Model One: Wholesale Lending Channel

Its aim is to increase access to finance by MSMEs and Co-operatives using financial intermediaries, by leveraging private and public-sector finance and technical know-how. Through this channel, SEDFA lends to financial intermediaries that have a broader reach. It is primarily targeted at sectors where SEDFA strategically is not best equipped to assist directly. The WL channel focuses on specific products that complement DL offerings, to extend the reach of SEDFA and deliver support to MSMEs and co-operatives in a cost-effective manner. Its products and services mainly include business loans, equity, fund management services and, to a limited extent, structured finance solutions.

Model Two; Direct Lending Channel

The Direct Lending (DL) programme implements tailor-made solutions to MSMEs and co-operatives that require support for business start-ups or expansions through the provision of finance to be utilised for the acquisition of assets and working capital.

Financing Products/Instruments

Asset Finance – Instalment Sale Agreement (ISA)
- Asset Finance is one of the most effective ways through which SEDFA provides funding for developmental purposes.
- This is a provision of finance for the acquisition of fixed assets for use in the operation or expansion of the business, with each advance repayable monthly on an amortised basis including interest.
- Although development impact is a key financing consideration, such transactions supported by SEDFA must be financially viable, economically and socially sound, technically feasible and environmentally sustainable.
- ISA’s should be fully secured by clients to the full value of the asset and ceded to SEDFA before clients take delivery of such assets.
- For vehicles financed under ISA, the asset must be installed with a tracking device at the expense of clients.
- The tracking company must not this intent and give SEFA access to such tracking device for the recovery of the vehicle in the event of a default.
- Clients also have an obligation to return to SEDFA any asset that has been financed by SEDFA in the event of clients having difficulty in amortising the loan.
- The sale of such asset by SEFA shall be used to either offset or reduce the outstanding amount.
  Clients remain liable for the difference between the proceeds (net of selling costs) from the sale of such asset and the outstanding loan amount.
Term Loans
- The purpose of term loans is to finance longer term working capital requirements, specific capital acquisition and/or business expansion projects.
- The useful life of the asset to be financed as well as the cash flow projections should be used as a guideline in determining the tenure for a term loan facility.
Eligibility Criteria – Direct Lending
- Natural Persons; Applicants must be SA citizens, with valid SA identity documents. Naturalised South Africans are defined in terms of BBBEE Act No 53 of 2003; SEFDA may set additional preference eligibility criteria in line with government policy interventions.
- Juristic Persons: legally constituted including sole traders with a fixed physical address, partnerships, co-operatives, non-profit organisations that function as social enterprises, close corporations, private companies (Pty) Ltd and public companies (LTD).,
- The financial operations must be conducted within the borders of South Africa, and the controlling interest (100%) of the business enterprise must be held by a South African citizen with a valid SA identity document.
- The applicant shall ensure that the business maintains a staff compliment consisting of at least 95% SA citizens with a valid SA identity document throughout the duration of the loan tenure.
- At least one member/shareholder should be operationally involved in the business.
- The project must demonstrate ability to generate the level of business development impact as stated in the SEDFA Corporate Plan such as job maintenance and or creation and economic empowerment.
- The business should be sustainable and commercially viable with specific reference to loan repay-ability.
- For direct lending loan facilities qualifying criteria will be 51% black ownership.

Risk taking by the entrepreneur can be reflected in own financial contribution, equity and personal sureties.

For further information on how to participate in this initiative and for more details on exclusions and other funding programmes such as Township & Rural Entrepreneurship and the Youth Challenge Fund contact:
Business Development Support – 086 010 3703 – info@seda.org.za; SEDA
Lending & Investments – 012 748 9600 – helpline@SEDFA.org.za; SEDFA
Customer Support / complaints & appeals – complaints@SEDFA.org.za