COVID-19 has radically altered the business funding landscape, especially for smaller enterprises. Some investors and programs have suspended new applications, while many new relief initiatives have been introduced to keep SMEs afloat.
What can we expect as lockdown restrictions get lifted and our economy re-opens?
#1 Empowerment-exclusive government funding
Long before COVID-19, there was a clear shift towards government funding getting aligned to empowerment policies. A valid B-BBEE certificate has been mandatory for many government agencies for years, and some investors (e.g. the National Empowerment Fund) finance black entrepreneurs exclusively.
The various COVID-19 relief funding programs introduced by government bodies are simply an extension of this trend. Both the Department of Tourism and Department of Small Business Development have insisted on treating B-BBEE compliance as an application requirement.
The president himself has spoken openly about using COVID-19 to reconstruct the economy so that it is “inclusive, empowering to women, young people and to black people in the main”. The funding implications appear obvious: government finance for SMEs will increasingly and explicitly prioritise target demographics.
Going forward, I expect majority black ownership to become a mandatory qualification requirement, essentially transforming every government lender into an extension of the National Empowerment Fund. However, in addition, I expect more nuanced empowerment requirements, with funding programs positioned exclusively for women, youth, or rural entrepreneurs.
#2 More innovative commercial funding
Many specialist investors and fintech solutions have emerged to capitalise on the SME funding failures of traditional lenders. COVID-19 has dealt them a curveball: how do you finance an inherently high risk market when the immediate future is so uncertain and fluid?
Their only option is to adapt by innovating further. I expect we will see even further specialisation (e.g. investors that only fund specific sectors or projects) as well as creative investment structures (e.g. mezzanine debt with quasi-equity earn-outs). Some lenders (e.g. Spartan Finance) have already begun.
The advantage for small business owners is that they will be able to choose from more nuanced funding solutions. However, a growing selection of increasingly novel or sophisticated options may make it harder to find the right investment partner, and may also drive up finance costs.