Record number of new company registrations in 2020 is a distress signal

The Companies and Intellectual Property Commission (CIPC) reports that a record 510 000 companies were registered in 2020, a 32% leap over the 385 000 new companies registered in 2019.

That, says CIPC Commissioner Advocate Rory Voller, is not unusual in times of economic hardship.

“We saw this increase in registrations in 2008/9 during the financial crisis. It tells us that people are forming companies out of economic necessity. Many lost their jobs or found themselves working reduced hours or doing part-time work. We have noticed when this happens that people start forming their own companies in order to generate an income,” says Voller.

Those who are registering companies most likely intend to operate in the formal sector, but millions more who have lost either income or jobs end up in the unrecorded informal sector as a means of raw survival.

Pressure

The Small Enterprise Foundation (SEF) provides financial and educational support to informal sector operators. CEO John de Wit says its research confirms the CIPC data suggesting many people who lost their jobs or who are now working reduced hours have entered the informal sector as a way to survive economic hardship. The arrival of new entrants to the informal sector has intensified competition and forced many to shift either location or product lines.

Read: Revenues at 60-70% of pre-Covid level for informal sector entrepreneurs

“I would agree that when times are tough people don’t just sit on their hands, do nothing and hope someone else will save them. South Africans are very entrepreneurial and when the going gets tough, they get going,” says De Wit.

SEF stats show a 6% year-on-year increase in first-time borrowers, which is a proxy for people starting new businesses.

De Wit says while not particularly dramatic, the increase is nevertheless symptomatic of overall demand from new entrants to the informal sector, and might have been higher had SEF staff been able to move more freely through rural areas.

“Something we don’t fully understand yet is that it appears that informal sector businesses are now being impacted by the extended impact of Covid on the economy – in other words higher levels of unemployment and reduced income.

“All in all, the informal sector is going through a very difficult time, likely the most difficult in the 30 years that SEF has been working closely with this sector.”

The SEF’s research shows the informal sector is a giant safety net that directly supports 2.5 million to 3 million people, and many times more than this if dependents are included.

Relief with strings attached

As Moneyweb previously reported, informal sector operators were less than enthusiastic about the Department of Small Business Development’s offer of financial relief to micro-entrepreneurs during the Covid lockdowns in 2020.

A key condition for financial relief was the need for informal operators to formalise their businesses by obtaining permits to operate from the local municipalities, and to register with SA Revenue Services (Sars) and the CIPC.

SEF surveyed its members and found just 12% willing to formalise their businesses in return for cash assistance.

Read: Government’s miserable small business assistance put to shame by private sector

The SEF has disbursed more than R12.5 billion in loans to some 650 000 informal sector entrepreneurs since it was founded in 1992. In the past 12 months alone it disbursed R2.1 billion in 492 000 loans.

It has an astonishingly low bad debt rate compared with banks operating in the unsecured lending space, because all new borrowers are introduced by existing clients and are grouped into cells, each member of the cell guaranteeing the loan repayments of the others. This peer pressure keeps cell members honest and ensures loans are recovered.

For small and medium-sized enterprises (SMEs) operating in the formal sector, a range of other relief programmes were launched by government. The list of qualifying criteria is extensive, often requiring the assistance of accountants.

Changing role of accountants 

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says many of the organisation’s members have been flat out assisting SMEs to prepare financial statements and other documents for companies in difficulty.

“The SME sector is the real engine of the SA economy, and this is where most of the jobs are created – and destroyed,” says Van Wyk.

“The majority of our members [are] accountants to the SME sector, and they have had to adapt very quickly to the changing needs of business. Any small business faced with a sudden drop in income will have to look at ways to cut costs – and payroll is one of the first things they will look at.

“The role of the accountant is changing from one of bookkeeper and compliance box ticker to trusted advisor. They are having to become experts in survival strategies, and finding new sources of cash flow,” says Van Wyk.

“Every business taking strain at the moment is going to be focused on making it through [to] month-end.

“It does not surprise me that so many new companies are being registered, as this is a sign of the more general stress being felt throughout the economy. Of course, there are pockets of economic activity that are doing well, particularly where online delivery is a possibility. But for most SMEs these are unbelievably challenging times.”

The need to prepare for and recover from disaster

Van Wyk says the double blow of Covid lockdowns and recent riots in KwaZulu-Natal and Gauteng prompted Saiba to prepare a Disasters and Financial Planning Guide for members to assist clients recover from disaster.

It’s a sobering read that advises families and businesses to create evacuation and communication plans in the event that things get out of control, with the main focus on protecting life, health and property.

The harsh reality

Evans Maphenduka, executive coordinator for the Development Microfinance Association (DMA), an umbrella body for several microfinance organisations, says the increase in company registrations shows a trend of despondency among South Africans.

“Covid-19 has ravaged jobs, obliterated savings and left people grasping at straws in their efforts to survive. It is true that more and more South Africans that are losing their jobs, resort to registering businesses in a bid to provide for themselves and their families.

“However, registering a business does not necessarily mean that one will run that business and generate an income,” says Maphenduka.

“Experience has shown that many businesses that are registered get deregistered within three years, for failure to operate and comply with the many complicated statutes. Consequently, the registration of many businesses resulting from job losses is more a distress call that someone needs help than an indicator that more people are going into business.

“Many who register businesses do not even understand what that registration means. They do not have complete information on what registering a business means, least of all, the financial obligations that follow those registrations. Further, many have not had the opportunity to research and develop their business ideas and reduce them to proper and implementable business plans.

“As a result, it is not always true that registering a business is a sign that a new business has gone into operation,” says Maphenduka.

“It may be reasonable to assume that less than 10% of those registrations have resulted in the owners generating an income. The rest of the registrations are just desperate pleas for ideas on how to survive. The country must do more to improve the success rate [of business start-ups].”