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

As the 2008/9 financial crash showed, people set up companies when times get tough.
People are forming companies to survive, but a host of challenges need to be overcome for a business to succeed. Image: Shutterstock

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].”

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Its mostly an indicator of forced entrepreneurialusm.

Employment in the public sector and private sector is just not there.

What is the statistics on companies successfully progressing to make say year 2,or 5,or 10?

My bet is that a significant number of those newly registered companies were due to cadres setting up PPE or vaccine distribution tender companies.

“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”.

I was talking the other day with a woman who bakes biscuits at home and sells them door to door in Khayelitsha, she normally makes about R1500/month. Her oven blew up in a power surge and her bank insisted she incorporate in order to get a loan for a replacement. How that helps with credit assessment defeats me, but registration certificates seem to be taking over from ID documents. Bureaucracy gone mad. It brought home to me what it’s like for relatively uneducated people to get anything done (and they do it with much better humour than I do). No wonder the likes of SAIBA are licking their lips.

She will probably pay off the loan in a few months and let all the formalities lapse.

As a sole proprietor it was impossible to obtain a permit to operate from CIPRO or any municipality. Even though I was providing essential services Eventually I just carried on and to hell with kopdoek zuma. Many probably probably registered because of this ineptitude of tje govt to recognise different business formats

It would be valuable to hear what other readers have to say. I suppose I’m upper-middle class (is that a thing even?). My peers are mostly home owners, often graduates (many post) and own businesses, or are employed at mid to senior corporate or practice as professionals. Two car families with staff is a fair description. In Canada or the US or Singapore this grouping would be very well off and very stable and very much at the heartbeat of an economy. My own financial ecosystem and that of my peers has been devastated. Savings depleted, businesses folded, staff cut or retrenched. I have a few friends doing well but they have typically got multi-generational businesses of some scale. The avergae working Joe like myself and so many of my friends are simply operating in a financial wasteland. Many of my large clients simply say that they are hanging on by a thread. Yes, the veneer of wealth is still very strong but I think the last 8 years of mega-corruption and the last 18 months of COVID has simply hollowed out the surplus of the 10-15% middle class. In other eras (say after the Great Depression, WW2 or the end of Apartheid) there would have been a resurgence, green shoots, new opportunities, new investors etc. A new dawn and new energy. That is not the case now. I know of not a single person, friend or client who has any faith whatsoever in investing in capital assets here in SA or is on an employment or growth drive. There is no resurgence because there is no faith. There is no TRUST. How can there be when the much vaunted new Finance Minister is essentially culpable in the blatant theft of R100m from a workers union? No doubt the human IP is here and drive to rebuild, frankly I’d love to but like many, I won’t rebuild here. Whats left and what is to come will just go into whatever is not ruled by these gangsters. Truly sad, beyond sad. Its hard on us but think of those in shacks this brutal Cape winter, I drive past them and think of their descendants, in 50 years they’ll still be living right there. That could all have been avoided and we could have been a fairly prosperous and stable society and poverty could literately have been mostly alleviated. The ‘invisible middle’ if you like .. we were needed to do that. But we won’t. I know I won’t. It’s over

“Veneer of wealth” is an accurate description of much of the current economy, and Disselboom can relate to @Pamplona’s layout of where we are now.

The need for serious political intervention for change of government is glaringly obvious; or shall we rely on the “ons sal self” model of local community self-management that will save the country proposed by Solidariteit/ Afriforum?

Indeed, a nice post and in my opinion a very apt view of the situation. I am very fortunate to have a business that has been running for over 60 years, multi generational, as you put it, but much of our client base is small 5 or 6 man operations and they have been destroyed by the lock downs and resulting slow economy, 50% have probably closed down, some are hanging by their nails, its soul destroying, these are good people who have invested everything into their business only to see it failing through absolutely no fault of their own. Will they rebuild? I doubt it, they are beaten down and struggling to keep body and soul together. No, they will not rebuild, no matter what some article may suggest, they can only take a finate number of knocks before they give in, and they are way over their quota.

I’m definitely with you on this one Pamplona, my business has just only broken even for the last 16 straight months, Risk/ Reward ratio way out the window! What’s more frustrating is that “the veneer of wealth” is made up largely of Non-Value add tendertrepneurs and SOE fraudsters!

So sad and so true. You told my story @pamplona. It’s like pushing a Boulder uphill. If load shedding, lockdowns, BEE, non-existent services, over taxation, looting, taxi violence wasn’t enough – add an armed robbery into the mix. When I asked the policeman to send the suspects number plate out to the police groups – his answer was “I have no data.
The veneer has shattered. It’s now time to move on. The Boulder had become too much to bear. The ANC have made it impossible to do business successfully.

Also why would you want to start up a new business and invest your capital and sweat-equity into it now when the government can, on a whim, determine that your business is non-essential and you have to shut down whenever they feel like scaring the public into staying home due to a virus with a 99.7% survival rate?

I find it absolutely disgusting, pig-headed, arrogant ( and sadly, no longer surprising) that even with all the constant, detailed reporting on the demise of our economy – the ANC government continues on this suicidal fiscal trajectory.

It is obvious that their policies are outdated and have failed. But the ANC has the comfort of knowing their Zombie voters will always elect them back into power. Year after year. Election after election. Democracy is wasted in Africa

There is a big drive for “locals” to own the economy. BEE, AA, EE, cadre deployment, gatekeeping, RET, theft, corruption etc. etc. You name it the cadre’s have thought of it.

The new owners seem to have neglected the thought that if they “own” an economy that has stopped functioning the value of their “ownership” will continue on the downward path to zero.

At some stage the penny drops (pun intended) that what is required for a economy to function is ability and skill. The very thing they killed off!!!

This is all just an anc con job. How many of these companies have submitted returns after the first year?? After the second??

Most of these “companies” specialize in one of the anc business activities listed in the first paragraph!! IT CREATES NOTHING!!!!

500,000 new companies formed in 2020!

How many are there in total? Sounds like we live in a one man one company country. The vast majority of companies must be dormant, there just can’t be millions of active companies?

Take into consideration the amount of people forming more than one company (tenfold in a lot of cases), purely for tax and risk purposes.

One will think that the devastation caused by looting, corruption, load shedding, and COVID 19 that the ANC will realize this devastation and will start doing something drastic like setting up a board made up of the best business men, entrepreneurs and politicians that are capitalistic orientated to come up with a solution but no, all they do is throw peanuts at the people till they will eventually run out of peanuts. What then?
I always thought since CR is a business man he would lead the country out of this doldrums he would leave the communistic behind him and come up with some solutions. But no! He is a man of leaden feet and is a caricature of the ANC. Useless.

End of comments.

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