South Africa's SMEs face funding challenges despite renewed investor confidence

As South Africa officially steps into 2026, there are promising indicators suggesting a rebound in business and investor confidence.

With inflation easing, improvements in energy supply, and optimistic economic forecasts, the nation appears poised for modest growth after several years characterised by high costs and pervasive uncertainty.

Hiten Keshave, CEO and co-founder of Unconventional CA, has pointed out, the improving market conditions are concealing a more significant hurdle for small to medium-sized enterprises (SMEs).

“Many people think that once conditions improve, funding becomes easier to access. But the reality is that there’s still a big gap between the funding that exists and whether businesses are ready to qualify for it,” Keshave said.

Despite a burgeoning and diverse funding environment, the estimated SME funding gap has exceeded a staggering R350 billion.

This shortfall arises not from a scarcity of capital but rather from a profound mismatch between available funding and the readiness of businesses to meet the requirements necessary to secure it.

As capital returns to South Africa, a country that holds the largest stock of foreign direct investment in Africa at over $120 billion, commitments are flooding in across various sectors including renewable energy, infrastructure, and fintech.

The investment pipelines for 2026 are burgeoning with opportunity, indicating enhanced enthusiasm for deploying capital into the SME landscape.

However, access to funding is undergoing a transformation; it has become increasingly selective.

Funders are raising their expectations and placing heightened emphasis on financial controls, compliance martial, governance principals, and predictability in business operations.

According to the South African MSME Access to Finance Report by Finfind, more than 315 active funders currently offer upwards of 600 funding products across various modalities, including debt, equity, grants, and blended instruments.

Yet, approval is concentrated among a select group of businesses that can substantiate robust financial management, clear cash-flow forecasting, and operational resiliency.

For policymakers, investors, and lenders, the significance of the SME sector cannot be overstated, it comprises the majority of registered businesses and plays a pivotal role in job creation.

In 2026, one would expect the SME investment landscape to reflect a stronger financial position than in previous years.

However, this optimism is ambiguously at odds with the realities facing smaller enterprises.

Micro businesses, defined as those with an annual turnover below R1 million, constitute over 86% of funding applications and are responsible for more than 80% of SME job creation.

Alarmingly, they are often the least likely to receive funding approval.

Reasons for this disparity are strikingly consistent from the perspectives of investors and lenders.

Many SMEs remain heavily dependent on their owners; decision-making authority often rests with a single individual, while financial controls are weak and governance structures remain informal.

Furthermore, the intertwined nature of personal and business finances complicates risk assessments.

Keshave emphasized the simplicity of the underlying issues, “If a business can’t show steady cash flow, clear decision making, and the ability to operate independently of the owner, funders see it as a risk.”

Cost pressures augment these challenges. Although load shedding has lessened, electricity tariffs are projected to rise by more than 5% in the 2026-2027 financial year.

Meanwhile, logistical inefficiencies continue to drive up transport and inventory costs, further constraining working capital for businesses lacking strong balance sheets or credit histories.

Moreover, the standards for access to funding are increasingly dictated by quantifiable metrics. Credit approvals are significantly influenced by cash-flow clarity, tax compliance, accuracy of forecasts, and debt servicing capabilities.

For equity investors, the expectations are even more pronounced, with governance norms, risk management protocols, and basic environmental and social compliance becoming standard requisites.

This landscape is resulting in a pronounced divide within the SME sector. Businesses fostering formal financial management, diversified revenue streams, and at least six months of operational runway are finding themselves more favourably positioned to attract investment in 2026.

Conversely, those lacking these foundational elements face increasing exclusion, notwithstanding a rise in overall investment volumes.

As South Africa ushers in 2026 with signs of improving market conditions and renewed investor interest, the possibility for SME expansive growth is palpable.

However, whether this opportunity translates into sustained business development and increased employment hinges not merely on the influx of capital but significantly on how many businesses are prepared to meet the stringent standards attached to it.

Capital may indeed be on the rebound, yet the ability of SMEs to absorb it remains strikingly uneven.

BUSINESS REPORT