The missed opportunity : SMMEs in the South African economy Entrepreneurs in South Africa

W e’ve all heard it before: small, micro and medium enterprises (SMMEs) are the hope of an ailing South African economy with low growth prospects and high unemployment; SMMEs are positioned to provide job opportunities and to contribute significantly to the GDP. SMMEs are the key to job creation and also globally known to be the mechanism to generate new jobs in society. Globally, over 95% of enterprises are SMMEs, which employ 60-70% of the working population. But then there is the current reality. The SMME sector in South Africa provides an attractive and largely under-tapped market opportunity for the country’s economic growth through funder opportunities and corporate supplier development. The National Development Plan envisioned that by 2030 SMMEs will contribute 60-80% to GDP increase, and generate 90% of the 11-million new jobs in our country. But, despite these ambitions, South Africa continues to have one of the highest unemployment rates in the world, with a 2018 Q4 unemployment rate of 27.1%. This is an official definition of unemployment, with a wider definition of unemployment putting the figure at beyond 35% of the total population. In addition, a 2018 study by the Small Business Institute, leveraging IRP5 tax returns and corporate income tax data provided by the South African Revenue Services, the national treasury and existing research, shows that there are only about 250 000 SMMEs in South Africa, accounting for just 28% of formal jobs in the economy. This is despite SMMEs accounting for nearly 98.5% of the number of formal firms in the economy. South Africa also has a concentration of power sitting in only a few employers (mostly government and large corporates), leading to 56% of jobs coming from only 1 000 employers — and these jobs are growing at a faster rate than what SMMEs are creating. We have BBBEE codes driving investment in enterprise and supplier development each year and this gives rise to a plethora of opportunities for SMME development, funding as well as commercialisation and access to market. It is evident through the Small Enterprise Development Agency (SEDA) SMME Quarterly Update and related estimates that SMMEs are not growing as expected. So why aren’t we seeing the dividends of all this goodwill and good intention? Why is South Africa not changing its high level of unemployment and managing to see the benefits of a supportive environment that facilitates the survival and growth of small businesses, resulting in increased, sustainable job creation? Access to funding In many SMME forums the issue of access to funding is discussed as the biggest and most critical component of SMME growth. Access to finance is noted time and again as one of the primary challenges for SMMEs in the country, requiring urgent attention. Despite the country’s strong formal financial sector as well as opportunities for funding through developmental finance institutions, private equity, venture capital and other grants, small and informal businesses still struggle to access finance. Most business owners and founders use their own personal savings or borrow from “friends, family or fools”, as the Enabling Environment for Sustainable Enterprises (EESE) survey findings show. A 2010 FinMark trust survey found that 87% of small formal sector firms had never accessed credit, while the 2016 GEM survey found “problems with finance” led to 28% of entrepreneurs closing their businesses in 2016. Through conversations with entrepreneurs and multiple studies into this access to finance issue, it becomes evident that South African SMMEs have found a way to innovate for finance, after hitting many brick walls when trying to access funding. SMMEs are “bootstrapping” their businesses through their own savings and finding ways to access loans to finance delivery on invoices. Entrepreneurs in South Africa in many ways have found ways to innovate for finance that their businesses need, usually after becoming disillusioned with the “many” opportunities for funding available to them. The Global Entrepreneurship Monitor (GEM) reports show that South Africa has one of the highest business start-up failure rates in the world. Minister of Trade and Industry Rob Davies confirms that over 70% of new businesses fail in less than two years of being in operation. This results in a thin pipeline for funders such as development financial institutions, commercial banks and venture capital funds. This thin pipeline is also a function of the risk appetite of such funders, leaving a gap in the funding value chain for funding opportunities for early stage startups, which simply do not meet the funding mandate criteria of many funders. In addition to the funding criteria, there is also a challenge cited by SMMEs that may be ready for finance (they have viable business models, match available finance, and have the necessary security) but are unable to secure the finance they need, due to their lack of finance readiness, i.e. they are unable to produce the financial documentation required by funders to assess bankability and affordability, in order to The missed opportunity: