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90% of SMEs knocked by low economic growth – report

SME owners don’t harness the benefits of technology, possibly fearing it – Karl Westvig from Retail Capital.

NOMPU SIZIBA: Currently 90% of SMEs in South Africa are struggling to cope in a low-growth economy, with the other 10% managing to fare better for one reason or another. That’s one of the findings of the “Roll with the Punches” SME report released by Retail Capital last week. While government seeks for the small business sector to be the main driver of job creation by 2030, [the report argues] that government is not lending sufficient support to the sector to make this a reality.

Well, to take us through the survey, and perhaps share some tips on how SMEs can be more resilient in these extremely tough economic times, I’m joined on the line by Karl Westvig from Retail Capital. Thanks very much, Karl, for joining us. Whatever role we play in the company, we pretty much all know that it’s a tough environment. But what were your findings about some of the issues small businesses are having to contend with?

KARL WESTVIG: Firstly, the astonishing thing was that 90% of the people we surveyed said that they were struggling, which was probably not a big surprise, that very high number. The main issues, we found, were things like lower demand, people seeing lower turnovers, growing expenses, with certain things like utilities and cost of goods putting a squeeze on their margins. And often things like not getting the service they expect, downtime in electricity, the rolling blackouts. And in the Western Cape the water issue.

So they’ve been hit from all sides by squeezed margins, higher costs and so forth.

NOMPU SIZIBA: For small businesses engaging with government, what were they saying about their ability to secure contracts on the basis of things like competitive pricing and merit, as there have been misgivings in the past about needing to have a contact on the inside in order to better secure something.

KARL WESTVIG: We didn’t specifically cover government contracts. This is a sort of general entrepreneurship. But certainly very little support from government in terms of supporting them, whether with funding or making it easier and easier to run your business. Certainly there is a lot of red tape required when they need to procure government contracts, or large contracts, they require the certificates – they require tax certificates, they require all sorts or other red tape, which makes is harder and harder to manage.

NOMPU SIZIBA: Your report suggests that SMEs are still complaining about a lack of willingness on the part of commercial banks to lend them money. That’s quite interesting, because in recent months and years banks have begun to pipe up about missing an opportunity in the SME sector, with one particular bank recently launching a zero-fee bank account for small businesses, and an app that helps businesses with their overall understanding of how to better run their business.

Do you think we’ll perhaps see more traction in the next few years, as clearly the banks do realise it’s a missed opportunity if they don’t connect with SMEs?

KARL WESTVIG: I certainly agree. Up to 60% of business owners said they are not getting access [to loans] from banks, and traditionally banks have been asset-backed lenders. So if you don’t provide some or other form of security, they generally won’t lend to you. Banks after a number of years have now started lending in the unsecured space at a personal level. But, as soon as you are a business trying to borrow money, they want to see balance sheets, cash-flow forecasts, and so on. So there are still very high hurdles from banks to get access to funding.

NOMPU SIZIBA: What were your findings are around SMEs being financially savvy, because it does seem that a lack of financial knowledge is often an inhibitor to success.

KARL WESTVIG: What you often find in the smaller businesses is they don’t have the same disciplines that you find in larger corporates. They can’t afford to hire CAs to manage their books. So what we’d like to see is them spending more time putting in the effort around keeping their books up to date. If they want to access funding from formal sources, they are going to need to have proper books, proper governance, and completely understand what the true viability of the business is.

NOMPU SIZIBA: It’s interesting that, of these small businesses you canvassed, 65% of them were women. So it would seem that with high unemployment – and we know that women are big victims of the scourge – women are just getting out there and doing something, anything, to make ends meet. You hear stories of grandmothers waking up at the crack of dawn to cook and sell vetkoek and the like to get their children through school.

KARL WESTVIG: Many people are being forced into setting up their own businesses. There was probably a slight bias – and we do find women respond better to surveys. We are typically seeing, in the smaller businesses we fund, that 50% are women, and women-owned – so a slightly higher bias in terms of responding. But people are forced out of formal employment into running their own business, or don’t have formal employment and are forced into that business.

NOMPU SIZIBA: So, apart from not always being on top of their finances, in what other areas are SMEs seemingly falling short?

KARL WESTVIG: I think a big thing SME owners miss is technology. I think they have this fear of technology, and yet more and more business is driven through digital. We just have to look at Black Friday last week and Cyber Monday today. Many businesses are now doing more and more business online.

Most of the technology is actually freeware. You don’t have to pay a lot of money for technology. At a minimum, businesses should have a proper Google business profile, they should be on Trip Advisor if they are in that sort of space. They’ve got Instagram, Facebook to promote themselves. So there is a lot of social media and technology that they can embrace, which will bring more customers to their business.

NOMPU SIZIBA: In order to remain resilient – you’ve just touched on technology, for example – what are some of the areas that SMEs can work on to survive the slowing economy with slower demand patterns? How would you say the 10% small business stories survived through the tough time?

KARL WESTVIG: So 80% of the people that we surveyed said that they are successful because of hard work. There is no short cut in running a business, and any entrepreneur knows that it’s a 24/7 job; it’s not an eight-hour-a-day job.

Second, the key thing was a positive attitude. Our suggestion was to build a network of people around you, have a business approach to finding problem-solving issues, and there is no short cut – it’s hard work.

NOMPU SIZIBA: Where around the country can small businesses go to get advice and support?

KARL WESTVIG: That’s a great question. I think the starting point would be online. I think there are many great websites that promote the wellbeing of SMEs. They cover things like how to market yourself, how to manage your books, and how to raise Ffunding. Many resources are available online.

NOMPU SIZIBA: And in terms of government, we know that Finance Minister Tito Mboweni put out an economic policy paper, not speaking much about small business, but certainly saying that he wants the funding that’s available from government agencies for small businesses to be more centralised. Do you think that would help?

KARL WESTVIG: I think they need to take a big look at how they support SME owners. We have a north-of-R3-trillion economy, and the amount of money government puts into small businesses is probably in the R5 to R10 billion mark. It’s a drop in the ocean. I think if they want to be serious about supporting SME owners and making it a proper channel for job creation; they need to commit a lot more funding to it.

NOMPU SIZIBA: Yes. Just what are the stats around SMEs? We know that they constitute at least more than 50% of the economy, but they don’t quite create the jobs.

KARL WESTVIG: They are certainly a very large employer. We think they are north of 50% – well, certainly government plans for 90% of the new jobs in the next years to be created by the SME sector. But you don’t do that without supporting it. You can talk about it, but you need to make the investment. I think what tends to happen is the departments that are highly politicised tend to get the lion’s share.

NOMPU SIZIBA: That’s right. In your view, would you say that the government’s Department of Small Business Development hasn’t really had the sort of impact that you would have expected when it was introduced?

KARL WESTVIG: I’m personally disappointed. I think a lot more can be done. I also think that they tend to put very high hurdles in to access the funding. There isn’t a lot of funding necessarily in terms of the broader spectrum of the economy. When they deploy money it can be successful to an extent, the jobs fund is one of them. They do create jobs and there are private-sector initiatives that use jobs-fund money to promote that. But I think, in perspective, it’s small, considering the size of our economy.

NOMPU SIZIBA: Many thanks, Karl, for chatting to us this evening.

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