Small and medium sized enterprises (SMEs) and entrepreneurs are often heavily reliant on traditional debt to fulfill their start-up, cash flow and investment needs. Debt and equity are however, traditional tools that have needed to be tweaked in order to better meet the needs of the end-users: the SMEs. 

Debt

This is money loaned to an organisation that must be repaid. Just like a normal bank loan made to a business or individual, the investor aims to get their money back plus interest.

Equity

This is providing working capital (ie. funding) to an organisation in exchange for a portion of ownership of the organisation. This can be thought of as shares of the company. The appeal for the investor is that if the company makes a profit, then so too does anyone with a portion of equity. The investor can also sell their shares later for profit.

Grants

This is the traditional donations-style support, where money is simply given to the organisation. The investor doesn’t expect to get it back, they have no expectation of financial return (profit), only expectations of social return (impact).

In the past, access to these traditional tools has been limited or restrictive to say the least for small to medium business owners but fortunately, the landscape is shifting and statistics on micro finance in sub Saharan Africa shows us that the rise of digital and mobile banking in particular, are making the greatest mark.



• Adult population without access to financial services: 80%
• Adults who send or receive domestic remittances: 48% 
• Credit taken from family and friends vs. a formal finance institution: 41% vs 6%
• Active depositors: 16.5 million
• Active borrowers: 6.5 million
• Adults with a mobile money account: 12% vs 2%
• 40% of Africans own a mobile phone, and Africa leads in the development of mobile banking services, with 64 million subscribers using mobile payment services

Shifting the System

With the onward push of technology and greater creativity being exercised by investors and SMEs seeking funding alike, we’ve seen shifts in the system coming into play. Some of these include:

Blended Finance

Blended Finance is a development finance model that combines concessionary loans or grants, usually provided by the public sector, with private investment. It aims to alleviate the development funding constraint by de-risking investments into the sector and directing more private capital towards projects or geographies that would otherwise be perceived as too risky for traditional investors.

Peer to Peer Lending

Peer-to-peer lending (P2P lending) is an alternative financial service that involves lending money directly to peers, or unrelated individuals, without the intermediary assistance of a bank or financial institution. As a form of social fundraising, peer-topeer lending allows fundraisers to cut out the middleman and appeal to their target audience directly. Most peer-to-peer loans are unsecured (not backed or guaranteed by assets), meaning more people can access them, and can provide borrowers with better terms than they typically would get elsewhere. P2P lending services normally operate in online marketplaces, which bring together lenders and borrowers. These marketplaces also provide additional services to facilitate lending,such as credit verifications, lending models and payment processing.

Social Fundraising and Crowdfunding

For as long as church bake sales and charity carwashes have been around, social fundraising has permeated societies across the world in many different forms. Communities and individuals often unite around a specific cause or event, and pursue creative means of fundraising to achieve a related set of objectives. Since then, numerous other platforms have emerged, as the social fundraising sector continues to grow. The world’s largest funding platforms are Kickstarter and Indiegogo, along with Seedrs and Crowdfunder, all founded between 2007-2011. In Africa, crowdfunding platforms include Kiva, an international platform, and Thundafund and StartMe, both based in South Africa. These crowdfunding business models often vary in terms of repayment: some models utilise “rewards” (products or services) as compensation, while others use interest-bearing or equity structures to compensate investors.

Diaspora Funding Platforms

The African diaspora is a largely untapped resource for development finance purposes. When referring to the African diaspora, it is important to remember that these are people living in a community outside their shared country of origin who still maintain strong ties to their homelands or ancestral communities. These complex and ever-changing communities typically manifest the strong desire to invest back home. Diaspora funding platforms were thus developed to provide a way for the diaspora to invest impactfully in their home countries. Diaspora funding platforms, typically set up as online portals, provide effective and efficient avenues to connect diaspora to investment opportunities, providing a structured, transparent and reliable way for the diaspora to invest in worthy ventures back home.

Outcomes Based Funding

An outcomes based contract is an agreement between a funder and service provider whereby payments are contingent on the achievement of pre-agreed, measurable outcomes. This stands in contrast to a traditional contracting where funding is based on inputs and activities regardless of whether outcomes are achieved or not. These funders are typically governments, country donors, multilateral institutions and philanthropic foundations. The benefits would include paying only for what works which means that all stakeholders work intentionally and collaboratively toward that end. Learning is accelerated with short feedback loops and wasteful expenditure minimized. Instead of being tied to a set of inputs service providers are able to adapt their programmes according to real time data leading to bottom up innovation. It also drives down costs as providers, being assessed on the same basis, can create efficiencies within their own delivery models to outperform the competition

Group Savings and Investment (stokvels)

A stokvel is a savings or investment society to which members regularly contribute an agreed amount and from which they receive a lump sum payment. There is a typical misconception in South Africa today that stokvels are a finance tool used mainly by those in a lower income bracket. The 2017 Old Mutual Savings and Investment Monitor, however, shows that there’s been an 11% increase in stokvel members among those earning R40 000 per month or more, from 46% in 2009 to 57% in 2017.This means that stokvels are progressing steadily from “…villages to cities, from money under mattresses to savings accounts” and now, increasingly from mere savings to instruments of investment. 

So where to from here, Entrepreneur?

Although ground breaking work has been done in the innovative financing space for decades, it does seem as though we are at the beginning of a journey. If you’re uncertain of where to go from here, here are a few suggestions:

• Speak to your peers
• Get professional advice and training if need be
• Consult with stakeholders
• Become part of a network of similar entities innovating in this space
• Identify outcome areas that would be good pilots for innovative financing
• Try – fail – try again

*Extracts taken from the Innovative Finance in Africa Review produced by the UCT GSB Bertha Centre for Social Innovation & Entrepreneurship with the support of the Flanders Government