South Africans are nothing if not innovative. If you’ve thought of it, there’s probably someone out there selling it already. From your Ouma’s braai seasonings business to your cousin’s jewellery pop-up, we all know someone with a promising side business that is taking its baby steps into the market.

In fact, small- to medium-sized enterprises (SMEs) make up an astonishing 98.5% of all businesses in South Africa, according to a McKinsey study. Micro and small businesses are an essential part of our economy, keeping millions in employment, however informally.

Yet they have consistently struggled to access the funds they need to grow, keeping many in a perpetually shrunken state. For starters, obtaining loans from banks is onerous, and often unsuccessful.

Enter enterprise supplier development funds (ESDs). These provide a wide range of support aside from just debt-based capital, like marketing access and entrepreneurial mentorship. Most major retailers have an ESD attached to them, and there are hundreds of government-affiliated ones.

One such ESD is the Shoprite Next Capital division, which has come onto the scene to provide a no-nonsense alternative to traditional funding.

While the division doesn’t see itself as a traditional competitor in the lending business, it provides loans to its own suppliers. The criteria include a business’s growth potential, revenue income and, crucially, the creativity of the product.

“Because we’ve already got this long-term relationship with the supplier, you’ve got data in the system with regards to how they’ve been performing,” explains Maude Modise, Shoprite’s enterprise and governmental relations executive.

“Therefore, it gives us an accurate analysis of whether this is a business that we can actually lend credit to, and [whether] they will be able to pay it back.”

Tall orders for small players

Traditional risk criteria such as evidence of tax status and financial statements are typically required by banks – but according to the 2025 Finfind MSME Access to Finance report, only 36.8% of local SMEs actually have financial statements. Worse, less than a quarter of businesses use formal accounting systems.

Traditional funders also often require collateral from these small businesses, when more than half of SMEs in South Africa have no collateral available at all. When they do, it is usually in the form of their essential machinery or equipment.

The report shows that the size of a business correlates strongly with its financial stringency, so banks generally veer away from businesses with a turnover of less than R10m a year.

This leaves a huge portion of SMEs out in the cold, as the overwhelming majority of small businesses (85.6%) applying for financing have a turnover of less than R1m a year.

It’s a harsh world, but Allon Raiz, CEO of business incubator Raizcorp, says that, in all fairness, “there is a far better sentiment towards SMEs than there was before. If I look at 25 years ago versus today, the banks have certainly shifted.”

In his view, “there is a counter-responsibility for entrepreneurs to ‘speak bank’ – in other words, present financials in a way that a bank can consume [them]”.

It’s a fair point – if a business cannot undertake financial management practices, it’s entirely understandable for a bank to ask wider questions about the business’s overall management plan.

Raiz believes that, these days, there is “more money chasing good businesses than there are good businesses chasing money”. Many businesses just don’t have the growth potential, unique selling point, or demand pool to be economically viable.

Falling through the cracks

Yet the issue remains that most of South Africa’s SMEs are still small mom-and-pop-style businesses, and they simply don’t have the capacity or training to “speak bank”. That doesn’t mean they should be looked over.

Next Capital is aware of this and so chooses to fund the businesses falling through the cracks of traditional funding. Modise says it only takes on suppliers with a turnover of less than R5m a year.

Of course, taking on these businesses is not without risk, she says. “It’s a tough industry, and obviously everybody’s trying to recoup the money they invest, right? But for us, it’s really about empowering SMEs because they play such a huge role within the economy, but also, they bring innovation to the landscape.”

Next Capital is especially keen to take on businesses that are unique – it wants “a product that solves a problem”, according to Modise.

Raiz finds this approach “interesting”, because it “combines demand with funding. A big gap in many businesses is demand.”

By already having the intel on whether a business’s products are in demand, with a healthy margin, these retailer ESDs cut down on a lot of the risk that comes with funding SMEs.

The carrot-and-stick approach

Yet Raiz warns of the downsides in only running with an ESD, especially a retailer.

The main danger that comes with single mega-funders like this is the threat of exclusivity. “You go there with an exclusive arrangement, and then you live and die by their rules,” he says.

Because these big retail funders have so much control, a small business can end up at the mercy of its supporters. And if the funder decides to cancel or change its contracts, it can kill the company, as its avenue to market may shut down.

When a retailer approached one of Raiz’s customers, a chocolate business, to exclusively stock its stores, he said “not a chance”.

“I’m not supplying them. They can get it from somebody else, because they have killed another chocolate business prior to [this].”

Still, what to do when you simply can’t be picky about who is keen to lend you cash? After all, the failure rate for South Africa’s SMEs in the first five years is a staggering 70%-80%.

Anything that helps bridge this capital gap – and tackle the country’s growth and unemployment nightmare into the bargain – is surely a positive step.