News
As funders, we ask Africa’s Enterprise Support Organisations (ESOs) to help small businesses build sustainable revenue, diversify their income and invest for growth. But often we fund these ESOs in ways that make it very hard for them to do the same.
Funders, Small Foundation included, have helped create this paradox, and it is funders who are best placed to change it. We are launching a new initiative to test one way of doing so: combining patient loans with tailored advisory support to help ESOs that already earn some of their own income to become sustainable in their own right.
ESOs play an important role in meeting the needs of SMEs across sub-Saharan Africa. Ranging from incubators and accelerators to specialist advisers, they give small businesses the skills, advice and connections that finance alone can’t. Many are locally rooted, with a deep understanding of the markets and entrepreneurs they serve.
But most depend on grants tied to specific programmes, and that shapes everything from who they hire to which services they offer. This is not an argument against grants. It is an argument against relying on them alone, and it raises a question that we believe all funders should be asking:
Are we financing and supporting ESOs in ways that best enable them to serve small businesses over the long term?
The limits of a grant-only model
Much of the enterprise support sector has historically relied on grant funding, often tied to specific programmes, activities or donor priorities. This funding has been essential in enabling organisations to reach underserved businesses, build local capabilities and deliver services that commercial markets would be unlikely to finance. Research by ISF Advisors (2023), covering 15 Business Development Service providers and 509 agri-SMEs in East and West Africa, found that 62% of enterprises did not pay for the support they received, illustrating the sector’s continued reliance on subsidised service delivery. Among the same enterprises, those paying for services recorded 47% annual revenue growth versus 19% among non-paying enterprises.
But the way grants are typically structured can create the wrong incentives. Funding follows programmes rather than the organisations delivering them. Overheads, systems and business development are capped or excluded. Short cycles make it hard to retain experienced staff, and when a programme ends, hard-won expertise often leaves with it. ESOs end up shaping their services around what funders will pay for, rather than what SMEs most need. And because their main customer is the funder rather than the business, the feedback that drives quality and innovation is weak.
Some ESOs serve businesses with very limited ability to pay, and for them grant funding, ideally more flexible and longer-term, remains essential. A growing number of ESOs already earn income through fees, contracts and partnerships, and want to grow it. Yet when they look for capital to invest in a new service line, a sales capability or better systems, they find very little. Most philanthropic funders offer only grants, and commercial lenders rarely see ESOs as creditworthy. These organisations fall into a gap between philanthropy and finance.
Testing a different approach
We have encountered organisations already on this journey developing revenue models that align their own success with the value they deliver to SMEs. Growing these models takes investment with longer time horizons and more flexibility than grants or commercial finance typically allow.
Returnable capital is not simply a different way of moving money. Repaying a loan requires an ESO to build services that clients value enough to pay for, which sharpens its focus on quality and on what SMEs actually need. It helps the organisation build a track record that can unlock further finance. And as capital is repaid, it can be recycled to support the next organisation, stretching philanthropic resources further.
Our new initiative will bring together a cohort of locally embedded ESOs across sub-Saharan Africa, combining tailored advisory support with access to patient loans. It will focus on organisations that have already demonstrated the ambition and potential to expand their earned revenue activities.
We are approaching this as a learning initiative, not assuming that returnable capital suits every ESO. We want to understand which business models fit, whether lending can be structured affordably, and how stronger organisations might translate into better services for SMEs. Where the approach does not work matters just as much, and will tell us more about the continuing role of grants.
Our interest extends beyond the participating organisations. We hope the evidence generated will inform how Small Foundation and other funders approach supporting the sector, and we would welcome conversations with funders exploring similar questions.
We will share more about how the initiative will be delivered, followed by a call for ESOs to take part early in the new year. If we want ESOs to help Africa’s small businesses become sustainable, we need to fund them in ways that allow them to become sustainable too. That is the ambition behind this work: to contribute to a stronger, more responsive and diverse ESO ecosystem, equipped to meet the changing needs of the businesses it serves.
