Why South Africa’s SMEs Matter for Economic Recovery

In his 2022 Budget Speech, Finance Minister Enoch Godongwana outlined several measures the National Treasury would undertake to support small-to-medium enterprises (SMEs) in the wake of the COVID-19 pandemic. These measures include a bounce-back scheme where small business loan guarantees of R15 billion would be facilitated through banks and other financial institutions, a partnership between government and loan providers to underwrite the first 20% of losses, and a business equity-linked loan guarantee support mechanism, bringing the total support package through the scheme to R20 billion.

Godongwana’s scheme speaks not only to the vital role that SMEs play in South Africa’s economy, but also to the importance of accessible and reliable finance as a means to activating change and promoting growth. SMEs do not exist exclusively from the rest of South Africa’s business sector. They are South Africa’s business sector and understanding their importance and how much they need institutional and financial support are paramount in the face of growing insecurity and uncertainty.

Small business, big money

According to McKinsey, SMEs in South Africa represent more than 98% of businesses across the country. These businesses employ between 50% and 60% of the workforce across all sectors, and are responsible for not only a quarter of all job growth in the private sector, but also for 39% of South Africa’s GDP. SMEs have the potential to promote inclusive growth as 38% of them are owned by women.

These are not insignificant numbers, and South Africa is well aware of it. In addition to having a dedicated state-level agency in the form of the Department of Small Business Development, multiple agencies spread across the country work hard to promote SMEs located and operating in their respective regions. Take, for instance, the Grabouw Development Agency. It services the areas surrounding the Western Cape, uplifting the local economy (85% of which is centered on agriculture), encouraging growth, and supporting export yields that help South Africa in the greater globalised economy.

The role and benefits of an SME

South Africa’s small businesses have the capacity to solve employment problems. We’re facing record levels of unemployment – most notably among our youth – which has disastrous implications for the national economic outlook and puts further strain on public money and institutions. Job growth begins and ends on the ground level, where SMEs operate.

They also support our economy in other ways. A small business is one that innovates and competes. Competition from others keeps up pressure to uphold consistent quality of service, and forces enterprises to think beyond their current state and explore new ideas. That aforementioned quality of service also contributes to long-lasting customer and community relationships. In a small town like Grabouw, the community supports the businesses that they have grown to know and appreciate, and therein lies a cyclical movement of income and expenditure that can sustain those businesses in the long term. Think of family businesses that have endured for decades. SMEs respond to local trends and are malleable enough to adapt in a short period of time – something larger entities struggle to do.

Securing finance across sectors

SMEs face economic and logistical setbacks like any other corporate entities or individuals in South Africa. The impact of load shedding has long been documented since the outages first began more than a decade ago. Rising fuel prices, even prior to the Ukraine crisis, have not only dramatically increased running costs and company expenditures, but also emphasised the issues surrounding our rail and transport networks, and their importance to business.

Another factor to consider is the split between formal and informal businesses. In its quarterly update for Q1 2021, The Small Enterprise Development Agency (SEDA) reported that two thirds of South Africa’s small, medium, and micro enterprises (SMMEs) operate in the informal sector and only a third in the formal sector, with the ratio having changed little since 2010. These businesses are subject to varying degrees of access to finance, creating an uneven playing field as well as gatekeeping growth opportunities. And with SEDA also reporting that the number of SMMEs in SA has declined by 11% year-on-year, support and change have never been more necessary.

Working capital is one of the key pillars of this support and change. Obtaining a business loan or securing a line of credit is the first step to giving budding enterprises the resources they need to take off, or to give established businesses the capital they need to scale. With tech-enabled lenders streamlining the lending process, there’s no reason why we can’t increase growth in the sector. If the private and public sectors work towards the unified goal of creating a nurturing environment for SMEs, revitalising South Africa’s small businesses is possible.