Johannesburg - Access to funding is listed as one of the biggest challenges facing entrepreneurs in South Africa.
According to the Small Enterprise Development Agency (SEDA), a large number of South African start-ups do not make it past the three-year mark owing to a funding deficiency. Those that do survive the first three years, often require recapitalisation to grow.
However, how such funding is designed is not always suited to the SMEs business model and needs.
Such is demonstrated by Nungu Diamonds’ recent experience with a local funder. Nungu Diamonds, a privately black-owned boutique jeweller that prides itself on offering bespoke diamond experiences to its customers, recently found itself in a funding dilemma.
A business development fund intended to accelerate their growth resulted in a stressful and frustrating encounter due to poorly structured repayment terms.
In 2016, De Beers started a development programme that the founder of Nungu Diamonds, Kealeboga Pule, was a part of. The vision to help build businesses in the diamond space that are 100% South African owned, and predominantly black-owned.
“In 2019, a leg of funding that became part of the programme took place. There was R3 million from Anglo-American Zimele and it was a three-year contract we had with them where the money was intended to purchase rough diamonds.
“On average, depending on your manufacturing capabilities, it will take you anything between two to three months to polish a parcel of rough diamonds, and another two to three weeks to certify those diamonds,” said Pule.
Unfortunately, Pule said the structure of the funding was poor and put the business at a disadvantage.
“The manner in which the funding was structured was poor where a business was expected to pay back a certain percentage of interest 30 days into receiving the loan, you’re using the principle to pay back the loan even before you make a sale and that sets back a business,” he said.
Thankfully, the R3 million loan has since been repaid in full. The jeweller was among five companies that were selected to be part of an initiative aimed at promoting Diamond Beneficiation in South Africa.
Despite the setback, Nungu Diamonds successfully managed to steer itself back on track and has followed through with its growth plan born of a partnership with Pluczenik, a Belgium-based diamond cutter and polisher.
Their target to attract at least R100m worth of foreign investment into their new home, the OR Tambo Industrial Development Zone (IDZ) in Gauteng, is well under way.
“We are fortunate to have been able to repay this debt, albeit it was a difficult time for us at Nungu Diamonds. Yet, we have learnt so much from the process. As we know, South African SMEs face a huge funding gap, and that often leaves them exposed to all sorts of rigid and unscrupulous operators who set entrepreneurs back due to ill-fitted solutions,” said Pule.
“In our case, the repayment terms were stringent, particularly when considering the recent downturn in the economy as a result of the Covid-19 pandemic and its related lockdowns,” said Pule.
On the lessons learnt, and advice to small businesses, Pule said entrepreneurs must carefully consider available options.
“My advice to SMEs is that one must carefully consider available options and despite the urgency, take time to shop around and do the necessary comparisons of the interest charges and repayment terms.
“Even better, ask your accountant to assist with the calculations so that you negotiate reasonable terms for your business. Most importantly, don’t be afraid to negotiate; you are in a partnership with the lender after all,” said Pule.
“In the past year, we have successfully introduced new technology to our operations which has increased productivity and accuracy in yield retention. This technology couldn’t have come at a better time as it has enabled us to introduce a stunning Christmas range for our clients and would-be brides.
“And because we are passionate about job creation, we will use our move to the IDZ to increase our workforce from 30 to 100 in the diamond-cutting and polishing arm of the business," continued Pule.
Undoubtedly, one of the highlights of the year for Nungu Diamonds and Pluczenik South Africa is the upcoming visit of the Belgian Ambassador, Paul Jansen, to their premises in the coming week in preparation for the state visit of King Phillippe and Queen Mathilde next year.
“Who knows, perhaps Nungu will be blessed with the opportunity to gift Her Majesty with a bespoke diamond necklace,” concluded Pule.