How to Invest

SME funding options in terms of the BEE codes?

Allocating a portion of your ESD budge to funding SME’s offers a number of benefits from earning points within the period of measurement and beyond to supporting the ability of the SME to service your demands earning you preferential procurement points too.

In terms of the codes and as at the date of this blog, January 2018, there are a number of mechanisms to provide funding to SME suppliers. These include grants, loans and equity.

Grants

Effectively a donation, grants are offered by way of an amount simply paid into the account of a business. You can specify how the grant should be applied but your ability to enforce it once paid is poor. A grant is a single year strategy where money is paid to a beneficiary and accrues points only for the year where it is paid out. There is no return on a grant payment. A grant does, however, offer a 100% point recognition.

Loans

Unsecured loans, which is high risk, accrues 70% recognition on the scorecard, while a secured or interest-bearing loan accrues only 50% recognition on the scorecard.

It is only the value of the outstanding loan amount that is recognised on the scorecard, therefore as the beneficiary makes monthly repayments, the outstanding value will decrease, meaning that the annual point’s allocation against that loan will decrease.

Imminent regulations will make it harder to issue loans as these will have to be issued under the conditions of the NCR and meet affordability criteria etc. It is expected that the loan will have to be managed on a monthly basis whereby monthly statements will be required to be sent out along with tracking monthly repayments.

This has been done to prevent “grants dressed as loans “in instances where the administration and compliance in loan origination, being non-core to a corporate, is utilised in any event and presented as a loan to verification agencies with a view to earn evergreen points on a single payment.

Equity

An equity investment is a long term, 5-year strategy which can be put in place for the first year and carry over for the next 5 years with no additional requirements on the sponsor business.

An equity investment is a secured investment with the potential of growth and accrues 70% recognition on the scorecard. In the tourism industry, an equity investment accrues 100% recognition on the scorecard. The equity investment is recognised for a period of 5 years which means that money is paid out only in the first year and continues to accrue points for the period it is invested without requiring additional payments

The equity investment aims to return the capital investment to the sponsor at the end of the 5-year programme which means that with this return, the equity investment strategy is the lowest cost per point strategy available on the market today. In addition, the outstanding value of the investment never decreases, so the allocated points never decrease and the full recognition of the investment value carries for the full 5-year period of investment.

Equity often is the most appropriate form of funding simply because a growing business cannot afford to service loan payments. A growing business burns cash and equity funding places no obligation of the growing business to utilise its free cash for anything other than growth investments. An equity investment is a better investment into an SME as opposed to a grant because it provides access to funding for an SME without providing a hand-out, which means that it is ensuring that the SME remains hard-working and dedicated to the growth of his business – it is teaching a man to fish as opposed to giving him a fish.

The LinkMakers fund, operated by Aurik, provides business development support in the structure which is a risk management and mitigating tool to ensure the long-term success of the SME (the value of the tax claw back almost covers the entire value of the business support further ensuring that the sponsor pays even less for a more robust programme).

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