Cheaper Capital and Smarter Structures Can Reduce SME Funding Costs

South Africa’s retirement and pension fund business holds combination assets exceeding R5,84 trillion, but the nation’s small- to medium-sized enterprise (SME) financing hole is put at about R350 billion.

At the 2026 Anglo American Impact Finance Network (IFN) InvestFest, a panel dialogue on mobilising institutional capital featured funders from the Industrial Development Corporation (IDC), the Public Investment Corporation (PIC) and the SA SME Fund.

The panellists emphasised that the issue is just not a scarcity of cash. It’s how offers are structured: who absorbs the primary loss if issues go incorrect, and what the mortgage finally prices the founder.

That is the place blended finance is available in. By layering concessional funds, grants and industrial capital, it reduces threat for cautious traders and lowers borrowing prices for small companies. At the IDC, mixing concessional and industrial funding is making loans extra inexpensive for SMEs, whereas on the SA SME Fund, first-loss capital helped draw within the first institutional investor to its second fund.

But blended finance is just not a mechanism that may repair all the pieces. Used properly, it’s a bonus. Used badly, it turns into a crutch.

This article unpacks how these buildings work, what they imply for the price of capital, and the way SMEs and traders can use them properly. Whether you’re an founder in search of inexpensive funding or an investor weighing threat, understanding these layers issues.

The Blended Finance Capital Stack Explained

Think of blended finance as layered capital. At the underside sits the riskiest layer, the place first-loss capital sits. It’s typically provided by governments, grant makers or household places of work. Above it sit traders who need commercial-grade returns. This contains mezzanine or junior debt suppliers. And on the prime, debt suppliers and guarantors. Because the underside layer absorbs losses first, the layers above develop into safer to enter. The result’s a deal that may fulfill traders with very completely different threat appetites.

An instance of this kind of layered capital is the PIC’s local weather fund. The PIC dedicated about R300 million on behalf of the Government Employees Pension Fund (GEPF) to the SA-H2 Fund, a blended finance initiative managed by Climate Fund Managers (CFM) and Invest International to spice up South Africa’s inexperienced hydrogen macro economy.

The cause capital strikes on this approach is as a result of South Africa is an rising market. For initiatives resembling clear power, the place bankable long-term agreements are arduous to safe, blended finance reduces threat for traders whereas guaranteeing the challenge and its social impression are a hit.

“Finding the correct mix and getting the appropriate elements in play is vital, to have the ability to then preserve the three tiers glad and provides everybody the return that they need,” defined Julian Mixon, Associate Funding Principal for the PIC.

Cheaper Credit: How Blending Lowers the Cost of an SME Loan

For a small industry, the query is easy: what’s going to this mortgage price me? At the IDC, the reply could be surprisingly beneficial. Through its partnership programmes, the company manages funds on behalf of presidency and cross-border companions and blends them with its personal industrial funding. Naomi Mtshali, Regional Manager on the IDC defined that within the entity’s manufacturing competitiveness programme, 80% of a mortgage comes from concessional funds at 2,5%, whereas the remaining 20% comes from the IDC. That mixed price is way decrease than a totally industrial mortgage.

The IDC method works as a result of it balances affordability with threat administration, making large-scale manufacturing initiatives viable that might in any other case be rejected by conventional lenders.

Grants as a Bridge to Bankability

Not each industry that wants funding is able to borrow. Many lack the fairness contribution a non-public lender requires, and that is the place grant funding can change the equation. The IDC additionally manages grant programmes, and it has discovered that the grant portion, as soon as it goes into the industry, improves the fairness place and offers the funder the construction it must say sure. In impact, the grant doesn’t substitute the mortgage. It makes the mortgage potential.

The mechanics of the grant-to-bankability bridge:

• Collateral substitute: Overcomes the dearth of fastened property required by industrial lenders.
• Balance sheet strengthening: Lowers debt-to-equity ratios by introducing free equity-like capital.
• Track document creation: Funds early proof-of-concept and turnover technology to fulfill financial institution threat standards.
• Capacity constructing: Finances formal monetary administration techniques, audits, and compliance.

“The grant portion goes into the industry to truly even present construction, which, you realize, to your fairness ratio, it actually gives that construction for the industry in order that we are able to then fund,” mentioned Mtshali.

Debt or Equity: Matching the Instrument to the Business

Blending is just not solely about value. It can also be about choosing the proper instrument. For a small industry elevating R5 million, fairness can look engaging till the total price is counted. Funders sometimes count on returns of round 15% to 16%, and an exit should finally be managed. That is why the IDC’s small industry unit leans in direction of debt, reserving fairness for its strategic industry items and leaving early-stage fairness to enterprise funds constructed to hold that threat.

The panellists defined that whichever instrument a industry finally ends up with, somebody needs to be prepared to hold the early threat. For a small borrower, that’s typically a growth finance establishment (DFI) prepared to cost the mortgage in a different way. But the identical query applies one step up the chain, the place pension funds determine whether or not to again the funds that again SMEs. There, the query is just not “what’s going to it price?” however “who takes the primary loss?”

First-Loss Capital: The Key that Unlocks Institutional Money

Pension funds ask that query extra rigorously than anybody. Trustees carry a authorized obligation, and “unproven” is an uncomfortable phrase in an funding committee. This is the place first-loss capital earns its preserve: it takes the primary hit if issues go incorrect, so the traders above it could possibly take a primary step.

An incredible instance of how first-loss capital reduces the danger and value of SME loans is the SA SME Fund. The SA SME Fund is a non-public sector-led fund of funds created by the CEO Initiative with capital from over 50 massive JSE-listed companies, alongside R500 million from the PIC managed on behalf of the Unemployment Insurance Fund (UIF). This hybrid backing enabled it to take larger dangers on first-time and transformation-focused fund managers.

Because these weren’t conventional allocators of capital, the fund might do issues a standard fund of funds may not. It backed first-time managers and constructed new funds from scratch, together with the University Technology Fund and a biotech fund.

Those have been bets that wanted proof. So the fund put aside a portion of the endowment from its first fund as first-loss capital. It was sufficient to convey the Consolidated Retirement Fund (CRF) into its second fund as the primary institutional investor. As Fund Principal for the SME SA Fund. Lumka Mlambo defined, “That form of protecting draw back safety was actually vital for them.”

The construction is just not free, although. Mlambo was clear that fund managers have to be cautious about how a lot blended capital they tackle, and she or he argued that the federal government ought to assist present it to unlock senior capital. That is a good place, but it surely invitations a more durable query, and one the panel didn’t dodge: how lengthy ought to this help final?

What SMEs and Investors Should Do Next

Blended finance is not going to repair each hole out there, but it surely is likely one of the most sensible instruments out there for closing the space between capital and companies. For SMEs, the message is evident: get investment-ready, show your market, and ask funders and DFIs about blended or grant-supported programmes.

For traders, it’s time to construct buildings that reward and share threat pretty, leverage fund-of-funds diversification, and plan for the purpose the place concessional help falls away.