BUDGET 2019: SME’s need more funding

Budget 2019 calls for government to start driving growth for small to medium enterprises (SMEs) if these businesses are to survive a tough, sluggish economy and over-indebted consumers.

“With the country’s balance sheet looking decidedly precarious and Eskom’s saga affecting small businesses as they are unable to trade without power, government has to support the SME sector - the lifeblood of our economy - that has been taking significant strain in the last couple of years,” says Karl Westvig, CEO of Retail Capital, an SME funder that has helped over 6000 SME businesses in the last year with funding for expansion.

“Unfortunately, I think SMEs will be ignored with the current focus being on financial restructuring as the biggest dilemma government faces is how to run a country with R445-billion of debt that has the potential to cripple South Africa,” he says.

“With the economy only growing at 1% there needs to be a significant investment in the SME sector and we would welcome an increase in access to funding which government can support, a lower regulatory burden and lower utility costs such as electricity and fuel,” he pleads.

Last year we saw President Ramaphosa announce an outlay of a mere R1,5billion into a Small Business Fund to be shared among over 2 million small businesses.

“At face value, it might sound like a lot of money, the reality is that this investment barely scratches the surface when it comes to materially changing the plight of SMEs,” says Karl. “We would like to see a significant increase to that value and for government to demonstrate how it's been applied and what impact it has had.”

“Realistically, the Fund should be increased by twenty-fold to make any real difference,” he suggests.

Retail Capital has advanced almost R2 billion to SMEs since 2011. This leads to business growth and more employment. An estimate figure of 12 500 jobs have been created over 8 years through additional funding provided to SME’s by Retail Capital.

Last year the President also made a commitment that 30% of procurement will go to the SME sector and township operators would like to hear an update on how this is proceeding.

Support needed
According to Westvig, government must support the existing SME funders in the market.

“Just as they have done with the R9-billion Jobs Fund announced in 2011 where funding went to commercial entities and aiding in job creation, more needs to be done with the Small Business Fund.

Westvig says that while companies such as Retail Capital and others who are raising funds to aid the sector by lending money based on cash flow, if their books are too small, they cannot lend much.

“If government could provide funders like us with guarantees then we would be able to raise more capital for funding at lower rates. The biggest issue is when government creates funds for specific sectors but gets caught up in red tape and those governing the funds who aren’t experienced in that particular sector.”

Overcoming challenges
Of course, government is facing significant challenges when it comes to the SME sector.

“Not only does South Africa have a low GDP growth rate, but high levels of consumer debt mean customers do not have disposable income as they are spending a large amount on servicing their debt. Furthermore, rising expenses following increases in water, electricity, VAT, and petrol see consumers and businesses carry much higher cost structures also negatively impacting disposable income.”

Adding the uncertainty with the rollout of blackouts, this means there are times when SMEs cannot trade. This, in turn, reduces confidence in the economy and in government.

“Business owners are not investing in their businesses as they do not believe their markets are growing. But doing nothing is not the answer as it just leads to declining turnover and the SME entering into a death spiral.”

Impact of upcoming elections
We have always seen a hold back in investment in the SME sector prior to political events like elections,” he says. “We are already seeing fewer applications for funding and we are expecting business owners to hold back in terms of investment in their businesses for the whole of April while they wait to see the outcome of elections.”

Rethinking business models
Westvig feels that small business owners must relook their business models to survive 2019.

“They need to adapt and be innovative. For example, a business could change its offering by upgrading its premises, undergoing an internal refurbishment or using digital channels to attract new customers.

“It is all about the value the SME is offering. This extends to its supply chain and whether better suppliers, better terms, and better products can be found. By investing in training staff more, potentially bundling products and services, and other value-adds, SMEs can differentiate themselves from their competitors.”

Enabling environment
Unfortunately, SMEs operate in a complex, fragmented sector that is also highly regulated.

Government has tried to simplify tax admissions but for a new business owner it is just overwhelming.

Westvig adds that the addition of the Protection of Personal Information Act (Popia) and other new laws, it is incredibly complicated to run a business, meet regulatory requirements, and still drive growth.

“There is no silver bullet solution and government must realise it cannot provide the relief needed on its own. Therefore, it must support those businesses already servicing the SME sector and help them to scale.”