In the vibrant but often volatile landscape of entrepreneurship in South Africa, SMEs are the lifeblood of economic growth, job creation and innovation. Yet, these businesses are being quietly crushed — not by competition, poor ideas, or a lack of ambition but by funding deals they so desperately need to survive.
Receiving that long-awaited call or email that their funding is approved is an all-too-common scenario for most South African entrepreneurs. For most SMEs, this heralds relief and excitement.
Sadly, that high quickly fades when the term sheet lands. This single document is the real test. Packed with dense legalese, including collateral requirements, guarantees, repayment terms, equity splits and default clauses, they have the potential to sink even the most promising business deals.
For many entrepreneurs, especially those raising capital for the first time, these terms appear impenetrable, overwhelming and unfair but, far too often, in their urgency to keep the lights on, entrepreneurs sign them anyway.
I recently spoke to a business founder going through this process. After months of engaging a potential funder, he was overjoyed when his application was approved but the deal came with strings so tight, it took months of back-and-forth negotiation to conclude. Meanwhile, his working capital continued to dry up and, ironically, he now stands on the brink of closure despite having secured funding.
The real issue, though, is not just the complexity of these agreements but their imbalance. Too many term sheets — particularly those under the guise of enterprise development or transformation — come loaded with conditions that strip founders of ownership, decision-making power and future wealth.
I’ve seen multiple deals that looked good on paper but ended up collapsing under the weight of restrictive clauses. Far too often ,it is black entrepreneurs left shouldering the biggest fallout. These development-oriented deals may appear noble and tick the right boxes for compliance or empowerment, but dig a little deeper and you will find clauses that effectively hand over the reins of the business to the funder.
Things like equity-based terms that dilute ownership, convertible loans with murky triggers and repayment schedules that ignore the realities of early-stage business cash flow are major red flags.
Let us not overlook the elephant in the room either; most SMEs don’t have the resources to access experienced commercial lawyers to comb through 30-page term sheets. As a result, they’re often pressured to accept or decline within impossibly short timelines — and some are even discouraged from negotiating altogether.
Remember, a bad deal today can derail years of hard work tomorrow
So what is the solution?
It is time for funders, especially development finance institutions (DFIs) and private investors claiming to support transformation, to take a hard look in the mirror. Be honest and ask yourself whether the terms you are offering are truly developmental or if they’re lifeboats with holes in them.
SMEs need terms that reflect the real-world context and limitations that entrepreneurs in South Africa face. Knowledge is power here and it is important that SMEs do not treat the term sheet as a take-it-or-leave-it scenario. Push back, ask questions and, where possible, seek independent advice — even if it means pooling resources or leveraging networks.
Remember, a bad deal today can derail years of hard work tomorrow.
This is not just a legal issue but an economic one too. If we’re serious about inclusive growth, we must make sure the game is not rigged from the start. We need more ecosystem players like incubators, legal clinics and funding readiness programmes to provide term sheet literacy and negotiation support to SMEs.
As for the entrepreneur I mentioned earlier, I truly hope his story ends well. I keep coming back to that iconic line from The Godfather: “I’m going to make him an offer he can’t refuse.” Funding agreements are certainly a gift to today’s SME — but they need to know they can refuse them. It’s crucial that we don’t let the fine print become a ticking time bomb disguised as opportunity.
• Mtwentwe AGA(SA) is managing director of Vantage Advisory and host of the SAICABiz Impact Podcast
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