Unit stands surety for entrepreneurs SA IS encouraging small business development and fostering black economic empowerment. However, all too often new entrants lack the track record needed to satisfy potential clients.

Loni Mamatela, senior account manager in the international finance department at the IDC, says performance guarantees are proving very useful for smaller companies that often lack the track record of some of their better-established counterparts.

In SA it has become common practice for newer, smaller entrepreneurs to win tenders, often in construction, and the company calling for bids will require that a performance guarantee is furnished to convince the corporation that the contract will be fulfilled appropriately, he says.

The guarantee is forfeited if the supplier fails to meet its obligations under the contract or tender, and this provides the customer with some protection against a failure to perform.

However, very often these entrepreneurs simply cannot provide the guarantees out of their own resources and they cannot get commercial banks to provide this support.

Therefore, the IDC, with its greater appetite for risk, is able to fill this niche in the market, Mamatela says.

The IDC does not believe in wasting its resources and carries out a thorough due diligence on each applicant to make sure that its client is able to deliver, he says.

The due diligence provides the main tool for assessing the applicant's ability to meet his contractual obligations, and we can then provide a guarantee so that the service provider can be awarded the contract or tender. He says the IDC's performance guarantees are playing an important role in helping smaller companies provide reassurance to their suppliers.

Nor is the IDC competing with commercial banks as these institutions often require that companies to put up a sum equal to the guarantee before they will issue a performance guarantee. Therefore, obtaining a guarantee from a commercial institution is usually beyond the resources of most small companies, he says.

These companies simply do not have that amount of cash available, and if it was not for the IDC they would lose their contracts. An example of performance guarantees at work is road-builder Mivami Construction, which has been able to win several road-building tenders.

We have provided the company with guarantees to enable the company to construct roads in two East Rand townships. The IDC also provides advanced payment guarantees that can be very useful in particular circumstances, such as those confronting the boat-building industry, Mamatela says.

For example, a South African boat-builder might be approached to build a boat for a foreign customer, he says.

The builder will require a deposit from the buyer, but many overseas buyers are reluctant to pay unknown South African companies until they receive delivery, he says.

We sell a lot of boats to Americans, but they want a guarantee that they will either receive the boat as ordered, or their money back, before they will pay the deposit, Mamatela says.

Once again we come into the equation and facilitate these orders by providing the necessary guarantees, he says.

(Business Day (South Africa) Via Thomson Dialog NewsEdge)