We’ve all heard of mega-corporations like Apple, Meta, Alphabet, Tesla, Microsoft, and Amazon. They’re constantly in the news, employ thousands and generate billions in revenue. What you don’t often read about in the news, on Facebook or on Twitter are the thousands upon thousands of small and medium-sized companies that quietly go about their business every day, employing countless people, supplying products and services, and generating essential economic activity.
It’s ironic that we don’t hear so much about small and medium enterprises (SMEs), because they form the backbone of our economies. The World Bank estimates that SMEs account for 90% of all businesses worldwide and 50% of employment. Formal SMEs contribute up to 40% of GDP in emerging markets (with that figure climbing considerably if you factor in the informal economy) and provide 70% of employment. In South Africa, beset by record unemployment, stagnating growth, and flip- flopping economic policy, SMEs are nothing short of essential to our future. A report by the International Finance Corporation (IFC) estimates that micro, small and medium enterprises (MSMEs) constitute more than 90% of all formal business in the country, employ 50-60% of the workforce and contribute 34% of GDP. And yet the sector has stagnated. The IFC found that the sector grew from
2.019 million business in 2008 to just 2.309 million in 2017, a paltry 14.3% over nine years. South Africa’s early-stage entrepreneurship rate is three times lower than it should be, considering our GDP per capita, and compares abysmally with other African nations.
Challenges faced by the sector
The challenges facing all businesses in South Africa are well documented, but SMEs face a host of additional obstacles that see around 70% of them fail in the first year, compared with a global average of 20%. A range of surveys conducted on the sector found that competition from large firms, inadequate equipment or technology, lack of skills, crime and theft, difficulty finding customers, cost of labour and local economic conditions were all barriers to starting up and growing businesses. The one thing that almost all of them recorded was lack of funding.
Access to finance
Difficulty sourcing business finance is not a uniquely South African problem. The IFC estimates that the funding needs of 40% of MSMEs in developing countries are unmet. That equates to R81.5 trillion annually, 1.4 times the current late of lending to such businesses. Half of formalised SMEs don’t have access to formal credit. Locally, the picture looks a little worse. It’s estimated that three-quarters of MSMEs are rejected when applying for credit, and only 2% of fledgling businesses are granted bank loans. Many companies too large for micro-finance but too small to access funding through traditional institutional channels find themselves in the so-called “missing middle”. Uptake of the Covid-19 loan guarantee scheme devised by government in partnership with commercial banks has been slow – almost a year after it was launched, only R18.16 billion of the proposed R200 billion had been paid out.
A report by McKinsey & Company established that the reasons for this are twofold. Firstly, businesses have been reluctant to take on more debt in uncertain times. Secondly, many banks lack the agility and modern systems necessary to reach SMEs at scale, some require applicants to have a pre-existing relationship with them, traditional credit-scoring models prejudice SMEs, and many banks call for collateral on loans, which most small businesses simply cannot provide.
Alternative funding options
Filling the “missing middle” gap for these companies are alternative lenders like Cash Flow Capital, which offers a range of finance options including merchant cash advances, asset finance and trade finance solutions to help businesses make crucial investments, buy stock, fund the operational cycle, and increase their import and export volumes. Cash Flow Capital recognises that SMEs require not just funding but also guidance on how to manage their cash flow and grow their business. They provide quick, agile secured and unsecured finance with turnaround times as short as 24 hours and loan terms ranging from four months to three years. So far, they’ve supplied more than R2 billion in loans to help businesses flourish. It’s clear that SMEs are the lifeblood of the country, and thus so is funding for them. Partnerships between SMEs and supportive lenders can help grow this crucial sector of the economy and aid South Africa’s post-pandemic recovery.
Question One (30 Marks)
Critically analyse the role played by Small Medium Enterprises (SMEs) in South Africa.
Question Two (30 Marks)
Elucidate how has the Covid-19 pandemic changed the economic contribution of Small Medium Enterprises (SMEs). Evaluate whether this change will be permanent or temporary.
Question Three (30 Marks)
Examine the biggest challenges faced by Small Medium Enterprises in South Africa post Covid-19.
Answers on above questions on case study on SME
Answer 1: The role of small medium enterprises in South African economy can be identified from the fact that small businesses account for more than 90% of all the formal business in the country. It is the small and medium enterprises that account for employing 50% to 60% of the workforce and they have a major role to play in the overall GDP contribution in South African economy.
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