Capital (Grade 10 NSC Matric Economics): Revision Notes
Capital
Introduction to capital for small businesses
Small, micro and medium-sized enterprises (SMEs) play a vital role in South Africa's economy. These businesses are actually more important job creators than large corporations, employing more South Africans than big companies do. However, SMEs face a significant challenge when it comes to accessing the capital they need to start up and expand their operations.
The main problem for SMEs is that traditional banks and investors are often reluctant to lend money to small business owners. This hesitation occurs because many entrepreneurs don't own valuable assets like land, houses, or commercial buildings that can serve as collateral (security) for loans. Without collateral, lenders view SME loans as high-risk investments, since there would be nothing to sell if the business fails and cannot repay the debt.
The lack of collateral creates a significant barrier for SME financing. Traditional lenders require security that can be sold to recover their money if the business fails, but many small business owners simply don't have access to valuable assets like property or equipment to offer as security.
To address this challenge, both the South African government and private sector organisations have created special initiatives. These programmes aim to make capital available to SMEs at reasonable interest rates, helping to level the playing field for small business owners.
Once SMEs obtain capital, they typically use these funds in several ways:
- Starting new business ventures
- Purchasing property and equipment
- Covering working capital needs until the business generates steady income from sales
Capital to acquire businesses
Business Partners
Business Partners is a specialised organisation that focuses on investing capital, skills, and knowledge into new or growing SMEs. The South African government recognises the importance of this initiative and maintains a 20% ownership stake in the company. The remaining 80% is owned by major private sector shareholders, including well-known companies like Rembrandt, Sanlam, Billiton, Old Mutual, Anglo American, De Beers, and the four major banks.
This organisation has specific criteria for its investments. Business Partners only works with formal SMEs that require funding between R150,000 and R15 million. Before making any investment, they carefully assess the viability of the SMME to ensure it has a realistic chance of success.
Business Partners maintains strict investment criteria to protect their funds and ensure successful outcomes. They only consider formal businesses (not informal traders) and require thorough viability assessments before approving any funding applications.
An important feature of Business Partners' approach is that they take a minority stake in the businesses they support. This means they own less than 50% of the company, allowing the original entrepreneurs to maintain control while Business Partners protects its investment through partial ownership.
Capital to acquire property
National Empowerment Fund (NEF)
The National Empowerment Fund (NEF) serves a different but equally important purpose in South Africa's economic landscape. This fund specifically aims to correct historical discrimination by providing opportunities for previously disadvantaged individuals to acquire property and business ownership.
The NEF operates through a unique structure where it markets investment units in a trust. This trust owns shares in state-owned enterprises, creating opportunities for wealth creation and economic participation. Importantly, only individuals from previously disadvantaged groups are eligible to participate in this scheme, reflecting its role as an economic redress mechanism.
The NEF's focus on previously disadvantaged individuals reflects South Africa's commitment to addressing economic inequalities created during apartheid. By providing access to property and business ownership opportunities, the fund helps create wealth in communities that were historically excluded from economic participation.
This approach helps address the historical inequalities in property and business ownership that resulted from South Africa's apartheid past, giving previously excluded communities access to capital for property acquisition.
Working capital needs
Eccles Associates and supplier finance solutions
Small businesses often face cash-flow problems even when they have secured orders or contracts. This typically happens when SMEs need to fulfil large orders or supply goods and services to parastatal (state-owned) organisations, but lack the upfront capital to purchase materials or cover operational costs while waiting for payment.
Eccles Associates (EA) is a corporate finance and financial advisory firm that addresses this specific challenge through its Supplier Finance Solution (SFS) programme. This programme specifically targets SMEs that provide goods and services but struggle with the timing gap between incurring costs and receiving payment.
The timing gap between when SMEs must pay for materials and labour versus when they receive payment from clients creates a common cash-flow challenge. Even profitable businesses can struggle to grow because they can't afford the upfront costs of larger contracts while waiting 30-90 days for payment.
The SFS programme allows qualifying SMEs to borrow working capital to bridge this gap, enabling them to accept and fulfil larger contracts that they might otherwise have to decline due to cash-flow constraints. This type of financing is particularly valuable for small businesses looking to grow by taking on bigger clients and projects.
Key Points to Remember:
- SMEs employ more South Africans than large companies but struggle to access traditional bank financing due to lack of collateral
- Business Partners invests R150,000 to R15 million in formal SMEs, taking minority stakes while allowing entrepreneurs to maintain control
- The National Empowerment Fund (NEF) specifically helps previously disadvantaged groups acquire property and shares in state enterprises as part of economic redress
- Working capital financing through programmes like SFS helps SMEs bridge cash-flow gaps when fulfilling large orders or contracts
- Both government and private sector initiatives work together to make capital more accessible to small businesses at reasonable rates