‘Engines of growth’: SMEs need support to boost SA economic recovery

South African SMEs need support to enable them to help with the country’s economic recovery. Small businesses fulfil a vital function in the South African society and, therefore, a move to support small business is a move to support the economic growth of the country.

The onset of COVID-19 in 2020 and the subsequent energy crisis dealt deafening blows to the small and medium-sized enterprises (SME) industry.

Role of SMEs in economic recovery

“Now, as the sector and the country at large fights to enter a phase of economic stability, small businesses represent one of South Africa’s most promising opportunities for economic recovery,” says Jeremy Lang, chief investment officer at Business Partners Limited.

“The role small businesses play as engines of economic growth in South Africa is well documented. An estimate by the International Finance Corporation (IFC) puts the annual GDP contribution of the local SME sector at 34%, with these enterprises employing between 50 and 60% of the total workforce.”

However, Lang says, there is much work to be done in the way of supporting the growth of the sector.

According to the IFC, based on the current number of SMEs in South Africa and its GDP per capita, the country’s early-stage entrepreneurship rate should be three times greater.

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SMEs can boost GDP

“On a macro level, we know that SMEs have the potential to boost GDP. However, as our quarterly SME Index continues to show, there is an urgent need for greater access to finance for local businesses. Going forward, partnerships between the public and private sectors will be vital in providing small businesses with financial support, which will in turn stimulate the economy.

“Small businesses can, for example, be solar power innovators. The bounce-back loan scheme, implemented by the National Treasury in the wake of the pandemic, was aimed at providing local small businesses with much-needed impetus towards their goal of recovering COVID-related losses.”

Bounce-back loan scheme

Seen that this scheme had such a poor uptake last year and against the backdrop of rising interest rates and the increased frequency of rolling blackouts, government proposed a change in direction.

As Finance Minister Enoch Godongwana indicated in this year’s National Budget speech, the bounce-back loan guarantee scheme will now be used as a vehicle to fuel small business recovery and also to support the rollout of renewable energy.

“This is both an intuitive and necessary move by the public sector. Small businesses across sectors can become important contributors to building the renewable energy sector. SMEs are encouraged to use the bounce-back scheme to combat the impact of load shedding while positioning themselves as small-scale producers of embedded generation.

“While this sector must still take shape, SMEs can invest in technology now that will become immensely valuable in future.”

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Alternative power sources

SMEs looking for solutions just for their own business’s consumption can use the Business Partners Ltd Energy Fund for SMEs that provides finance up to R2 million.

The biggest benefits of the Energy Fund for SMEs are the cost of financing, which is generally charged at prime plus 1% and the tax benefit as businesses can reduce their taxable income by up to 125% of the cost of their investment in renewables.

SMEs: ‘Job creation multiplier effect’

We must not forget that the country’s SME sector is a solution to unemployment. According to the Small Enterprise Development Agency, 90% of all the jobs lost during the early pandemic years were in the SME sector.

Lang says this harsh reality placed the economy under undue strain, with increased pressures filtering down to ordinary South Africans on the ground.

“Small businesses can absorb a significant amount of the socio-economic pressure being placed on the country by record high unemployment, particularly among the youth. To this end, the IFC has committed to working with several private sector lenders to use an injection of funding to produce as many as 50 000 jobs.”

Lang says considering the job creation multiplier effect, this could lead to the creation of between 73 000 and 98 000 jobs and be a testament to the power of partnership and the potential of collaboration to uplift society at a grassroots level.

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Plans for developing small businesses

In proposing plans to develop South Africa’s small business sector, there is also an important gender dimension to be considered, Lang says.

“We know that a significant concentration of women entrepreneurs is based within the informal, micro-enterprise sector and therefore, government must hone its focus on formalisation to bring these smaller businesses into the economic fold.”

Lang says private and public sector financiers should foster greater financial inclusion for women entrepreneurs so they can play their rightful role as contributors to the GDP.

“Much progress is on the horizon for this, with government announcing its intention to inject R2.8 billion into its Township and Rural Entrepreneurship Fund, which will support the development of an estimated 120 000 township and rural-based businesses.”

While the president promised a few years ago already to reduce red tape, not much has been done so far.

Lang says there is an urgent need for ease of doing business to be improved and therefore he calls for an “uncompromisingly pragmatic” approach to building the SME sector.

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Government’s responsibilities

“Government must deliver on the commitments it made to reduce red tape and make doing business in South Africa less admin-intensive and therefore more accessible to a wider spectrum of society.

“As we have seen through the results of the Business Partners Limited SME Index, policy reform will play an increasingly important role in creating a more enabling environment for entrepreneurs and particularly those who are entering the industry as first-time business owners.”

The role of training and development for aspiring entrepreneurs must also not be underestimated.

Lang says the sector faces a substantial setback in terms of the lack of adequate training and the mentoring of prospective small business owners.

“Through initiatives such as our annual business plan competition, we identified the need for young entrepreneurs to receive quality education on business and specifically how to survive beyond the first three years within South Africa’s unique socioeconomic climate.”

Back to basics

Lang says we also need to get “back to basics” in terms of showing aspiring entrepreneurs how to formulate a business plan, comply with the relevant tax laws, train and hire their first recruits and most importantly, how to manage cashflow effectively.

“If we can focus on these key areas of personal and professional development, we can make faster progress towards building an entrepreneurial force that is well-equipped to take on the challenges that face South African small businesses.”