What if you don't have collateral?

It can be very frustrating to be approved for finance, but then not be able to access the money due to a lack of collateral. Fortunately, the Small Enterprise Finance Agency (Sefa) may be able to help you! The National Government, in its bid to encourage entrepreneurial growth, set up the Khula Credit Indemnity Scheme which is managed by Sefa. The aim of this scheme is to assist in providing credit guarantees to small businesses that have applied for finance at the large banks. 

Another option is the Absa Thembani International Credit Fund. This fund exists to help small businesses that do not have collateral. It provides a letter of guarantee to the bank from whom you will be borrowing the finance. Details of how this fund works are provided below.

The Sefa Credit Indemnity Scheme works through partnerships

This scheme is only accessible through the lenders that Sefa has partnered with. Currently, these are First National Bank and Standard Bank of South Africa.  

You, as an individual, cannot approach Sefa directly to access the Khula Credit Indemnity Scheme. Rather, you must apply for a loan through one of the large banks and then request the bank to apply to Sefa for the Credit Indemnity Scheme.

How the scheme works

The scheme does not provide guarantees for 100% of the collateral the bank required for the business loan. The business owner will have to make some contribution towards the collateral amount, however, this can vary from 10% to 90% depending upon circumstances.

The Khula Credit Indemnity Scheme funds amounts from R10 000 to R3 million and it will be up to the bank to request the guarantee amount from the scheme.

Who qualifies?

One of the ways Sefa minimises its risk of losing money is to work through partners. So before an application can be made for the credit guarantee, Sefa knows that the bank has already vetted the entrepreneur and, if the collateral issue can be solved, the loan will be granted.

Over and above the lending criteria of the bank, Sefa also requires that the following terms are met:

  • The owner must be involved in the day-to-day running of the business on a FULL-TIME basis.
  • The business activity (that is, the work it does) must be situated in South Africa.
  • Sefaneeds to be convinced that the business is able to repay the loan. 
  • Sefa only funds for-profit companies that are economically viable. 
  • The business owner with controlling interest (shareholding) in the company applying for the loan, must be a South African citizen. 
  •  The borrower must have proven and sufficient entrepreneurship skills as well as the knowledge, skills, and experience directly related to the services offered by the business. 
  • The entrepreneur must provide their own contribution towards the business loan.
Be persistent

If you are applying for a loan from one of the banks Sefa has partnered with to offer this product, then make sure you request that the bank accesses the Credit Indemnity Scheme. Sometimes you can encounter employees who are not familiar with the scheme. If this is the case, insist that they find someone within their organisation who understands how the Credit Indemnity Scheme works.

Absa Thembani International Guarantee Fund

This fund exists to provide collateral guarantees for previously disadvantaged small business owners. You would need to apply for a loan and be approved for finance by one of the major banks. Then you can approach Absa to fund the collateral guarantee for this loan. They only provide guarantees for collateral amounts of R50 000 to R10 million.

If you are approved for the guarantee, you will be charged an initial fee of .05% of the value of the collateral and an interest rate of 3.3% of the collateral amount.

Eligibility criteria:

  • The entrepreneur(s) must be South African citizens.
  • The ownership must be at least 51% black.
  • Enterprise proposal must prove to be viable and create sustainable jobs.
  • The total guarantee requirement by the enterprise should not exceed 75% of the credit facility required and, not exceed R10m.
  • Preference is given to rural, or women, or youth-owned enterprises.
  • Loans guaranteed to legal entities (e.g. CIPC registered companies, registered co-operatives as opposed to individuals).
  • You must have an ABSA banking account or be prepared to move your business account to ABSA.
If you fit these criteria, then contact your nearest Absa branch to discuss how you can access this fund.

Government agencies

Some of the government funding agencies, for example, IDC and NEF, will try to work with you to reduce the amount of collateral required for the business loan. Make sure you ask whether they can help you if you are lacking the collateral needed for the loan.

Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service, we are not required to be a registered finance provider as we do not loan money directly.