SA’s SMEs face onslaughts from every direction

The current economic climate has had a big impact on businesses. With the rising food, fuel and energy prices, [everyone, but most especially] the most vulnerable households have been adversely impacted.

It is common knowledge that the level of consumer spending affects everything, from prices and investment decisions to the number of workers that businesses can employ. The knock-on effect has exacerbated unemployment and inflation to levels that we have not seen in decades.

However, the most damning risk to business operations and sustainability has been the perpetual disruptions caused by extensive power cuts.

Against this backdrop and with limited options, the majority of South Africans have their backs against the wall.

The 2023/24 fiscal year is uncertain for other reasons too. Growth prospects are tied to developments in the global economy, with the US and Europe skirting recession, while domestically, the socio-political and security situation remains particularly difficult.

Read: Global economy’s 2023 outlook: all eyes on inflation

SMEs are the lifeblood of South Africa’s economy, [providing employment], making up more than 98% of businesses across the country and contributing 39% towards the country’s GDP. If this contribution is set to increase in 2023 and beyond, government and the private sector – which has the power and influence to enable entrepreneurs and SMEs to be sustainable financially, operationally and environmentally – will have to stand by their policies, regulations, interventions and convictions to support them.

Reform economic and employment policies

Working capital is one of the key pillars of support and development for this sector. Equity finance is important for start-ups, high-growth and especially high-risk enterprises. SME participation in the country’s venture capital and private equity has been limited to date.

Obtaining finance and securing a line of credit is the first step to giving budding enterprises the resources they need to take off, or to giving established businesses the capital they need to scale up.

Small businesses benefit from a low interest rate, as it reduces the cost of debt and encourages more consumer spending.

However, the South African economic landscape has changed. As of November 2022, the repo rate stands at 7% and the prime lending rate is 10.5%. The SA Reserve Bank Monetary Policy Committee will need to tighten monetary policy [further] by increasing interest rates gradually and cautiously, while keeping a close eye on inflation expectations and the level of the exchange rate to turn the tide.

Many small businesses are thus cutting back on borrowing, paying down debt or delaying expansion plans to buffer the price increases by suppliers.

The tough economic climate has put the brakes on growth in the SME sector and fewer job opportunities has vastly contributed to the unemployment rate of around 27.9%. Labour regulations, indirect labour costs and skills shortages are also areas of concern.

Subsidising the employment of young South Africans may be the only practical and politically possible way to provide more job opportunities.

Sustainable alternative energy resources

Load shedding has become the single biggest constraint to South Africa’s economic growth. As the fleet of coal-fired generators age, falling energy generation capacity has prompted further electricity cuts, at its [current Stage 6 level demonstrates].

Unfortunately, South Africans should expect load shedding to continue for the foreseeable future, which effectively means that businesses cannot count on the situation getting any better any time soon.

Read:
South Africa could experience load shedding for the next decade – CSIR
Just find the wretched money for the diesel!
Price of power from Eskom to go up nearly 19%

Unreliable electricity supply causes uncertainty for small businesses [regarding decisions] to invest in growing their businesses at this time. When businesses experience load shedding the majority are forced to close their doors because they cannot function and not all of them have the privilege of alternative power supply.

Any optimism that there will be light at the end of the tunnel of the energy crisis in the short- to medium term, given the constant ramp up of load shedding stages, dissipates with each passing day.

SMEs will need to reduce their dependence on Eskom if there is to be any prospect of rekindling the economy and creating jobs.

This situation requires investment in alternative energy supply and/or green resources and infrastructure to mitigate the loss of production. These interventions however have a substantial cost and require access to capital, at a time where financial and other lending institutions have tightened their belts regarding the criteria for credit facilities.

Access to funding

There are various sources of finance for SMEs, broadly categorised into equity or debt financing. Besides the challenges in overcoming the stringent qualifying criteria imposed by risk-aversive lenders, procuring debt in the current interest rate environment could ring the death knell of a small business which is already encumbered with debt.

To assist eligible businesses to [overcome] access to finance constraints and [recover from] Covid-19 lockdowns, the July 2021 unrest, and disasters like the floods in KZN, National Treasury launched the Bounce Back Support Scheme on 25 April 2022, that comprises a loan guarantee mechanism of R15 billion, with a smaller equity-linked scheme.

According to National Treasury, businesses with a maximum turnover of R100 million per annum will be eligible to access the scheme.

The maximum loan amount will be set at R10 million per business and a minimum loan amount of R10 000.

While this is a good start in providing funding to SMEs, more needs to be done.

The conventional financing model is inappropriate for this market; the South African market needs to develop a different, more appropriate model for evaluating risk and individuals. Financial institutions are inherently risk averse, but funding mechanisms must be developed to evaluate and fund according to track record and [based on a company’s ability to] display the appropriate level of business acumen, rather than the traditional credit profile.

Conclusion

SMEs will continue to face the present economic setbacks as a result of high inflation and interest rates, increased supplier costs, lower demand, expensive access to finance and business interruption due to unreliable energy supply in 2023. The increasing cost of funding will deter entrepreneurs from taking debt and existent enterprises from further lending to fund growth and expansion projects, putting a dent in any prospects of significant job creation.

The impact of load shedding has long been documented since the outages first began more than a decade ago. Rising fuel prices, even prior to the Russia-Ukraine war, have not only dramatically increased running costs and company expenditure, but also emphasised the issues surrounding our rail and transport networks, and their importance to business.

Unfortunately, none of these circumstances have a quick fix and the only saving grace for SMEs is to dig deep, weather the storm and exhibit the same resilience they did during the pandemic.

Notwithstanding the impending challenges, businesses of all sizes need to fervently embrace technology and its unprecedented benefits.

This will be a key differentiator of their success or failure, growth or demise.

Shawn Theunissen is founder of Property Point and Entrepreneurship to the Point