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Development Finance Institutions

  • Entrihub chats to Khanya Okumu, Enterprise, and Supplier Development Specialist. Khanya talks about Development Finance Institutions.

    Question 1: Can established businesses apply for DFI funding?

    Khanya: Anybody can apply, but not everybody's gonna get in. I think yes, so there is DFI's that look at the different size of the market right through from the early stage and that's generally also your grant funders because if you think about the businesses that are at the startup stage. Those are the ones that it's either grant or equity because they can't afford anything else. You have well-established businesses where the value of unlocking that additional potential can only be achieved through additional funding and so yes they are very well established businesses that also benefit from DFI funding.

    Question 2: Incubator vs accelerator

    Khanya: Just in general I think the entrepreneur road is a very tough one to walk and the amount of support that's needed from a pre-investment point of view can't be emphasized enough. I think we speak a lot about accelerator programs and incubator programs and probably not enough people know what those are. I just want to elaborate a little bit on that so from an accelerator point of view. The idea is that it should be a quick turnaround and so as I mentioned in it I have some sort of accreditation or certification that's required to unlock a market whereas an incubator is over a longer-term 12 to 18 months. Where you're taking a business which could be a concept stage and walking that pre-funding journey with them and even you know creating or opening up the markets for them this is something that DFI's do. I think understanding that as an entrepreneur, it's a tough journey to walk and the support that's provided by DF eyes in my experience is really underplayed because getting the funding is one thing but what do you do after that and so and to not take for granted the support that comes with that. It's as I say it's about building sustainable viable businesses where development is not just being able to say you know this women-owned business and have created 50 jobs. It's looking at the broader development that's happening from a community point of view as a result of that finding.

    Question 3: Do entrepreneurs need to pay for this support?

    Khanya: Sometimes. Generally, for the businesses we have worked with, it's a form of grant funding. The non-financial support, non-financial for the entrepreneur because obviously somebody's got to pay for it. Our view is that you can't give someone funding and then expect them to pay you for that same service you're just taking your own money back that cancels out it doesn't make sense. It's that additional support that is over and above the funding which the entrepreneurs generally don't need to pay for. There are instances though where to show skin in the game, to show their commitment they would be asked to pay a portion so for example if it's identified that it would be great for a said entrepreneur to and to attend a course at Gibbs as part of their development and the agreement is the DFI pays 90% they pay 10%. Those are the kind of things that's negotiable because it's not just about that point in time. The things that I learned at any Business School you'll still recall five years down the line and by that stage she may have repaid the facility. Our view is it's not just about enabling the entrepreneur for a point in time but it's almost ongoing.

    Question 4: What type of funding products do DFI’s offer?

    Khanya: It's different for businesses which are different stages. For a start-up, for example, we all know how they're viewed as high-risk. If you were to price that loan nobody would take that finance would be too expensive. In that case, the option for the entrepreneur is either to take for the DFI to take an equity stake which makes sense because at the end of five or seven years you know there's an exit strategy. It's a partner direct partner in your business to assist you as the business grows. There's also you know subordinated loan way. If the business is not at the growth stage, so not a startup but not established but in that middle ground where a loan would actually cripple the business but equity it doesn't make sense for it and so in that case subordinated loans are also quite useful.

    Question 5: Do DFI’s charge a different interest rate compared to traditional banks?

    Khanya: The important thing to remember is that these entrepreneurs generally, in the development space are the unbankable market. To approach a commercial bank really they would either not get the funding or they'd be priced right out of the market. Naturally, the funding in the DFI space would need to be lower than that of a commercial bank. It's a bit of a schizophrenic thought because, on the one hand, you're taking on high risk and high risk tells us that we need to price for that but on the other hand, you're taking on people who are deemed and unbankable and so it's almost giving the opportunity. There's that mind of yes or risk-takers but we're actually quite risk-averse and so marrying those two schools of thought is kind of a DFI it's like your head is not it's like shaking but generally, the pricing would be it would be lower.

    Question 6: Do DFI’s require collateral?

    Khanya: It depends, so if you're an entrepreneur who is looking for working capital or bridging facility or contract finance. Generally, there is no security to put up there as such. They could perhaps ask for an unlimited charity shop or a session of a bank account or a session of stock but if we're honest those aren't it's no real security in the true sense of the word. Where DFI does give funding for asset finance for example if you're purchasing equipment or machinery. They would in that case take security by either registering a general covering notarial bond or a special notarial bond. I think just need to caveat that because it's important to think about where the funds for the DFI's are coming from. Generally, if they're not from an endowment fund there would be funds that belonged to the people either through tax or some other form. It's important to be able to take that money for only the reason of being able to then recoup it and be able to find another business and so that for me is the main reason that idea if I would take security.

    Question 7: What are the timelines associated with applying for DFI funding?

    Khanya: It varies. Unfortunately, it probably does take much longer than it should especially if you're thinking of the supply chain space where an entrepreneur has either received a contract which they need funding or a tender. The turnaround time there needs to be quick so that they can execute the contract. There tends to be quite a bit of backlog so as a result of the influx of applications that's generally where things take longer because the filter process is from application photo you know who sent through the right information. There's the top analysis and then you start engaging with the client and for due diligence. Generally, the period can take anyway from six weeks to six months but it depends if there's a lot of moving parts so was all the information available, has the client been you know communicating with the person that's allocated to the job and also has all the submission that all the information that's been submitted follow all the right requirements. Those are the things generally and then, of course, the capacity of the team that's looking at the deal. Those are the things generally that make the process long. It is a problem and it is a frustrating point for a lot of entrepreneurs because the conversation isn't about is there funding anymore. Everybody knows that there's funding but it's about will I get it in time. I concur with that point because and it is something that needs to be changed within DFI's at large.