SMEs – Not Only Startups – Need Funding
If the country is to create new jobs the government needs to invest more heavily in the growth of SMES that already have a proven track record, not just startups, says Karl Westvig, CEO of Retail Capital, an SME funder.
Westvig was commenting on yesterday’s #BUDGET 2019 and the budget allocated to the SME sector.
“We welcome the money allocated to the Small Enterprise Development Agency of just under R500 million as this will help incubate new businesses,” he says.
However, according to Westvig, more established SMEs also needs significant support.
“With the economy only growing at 1%, there needs to be a significant investment in the SME sector – not just the start-up 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 says.
According to Westvig, access to funding can support increased stock levels, new locations and new channels to customers. “This leads to growing turnover and more staff to handle this growth.”
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,” he says. “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.”
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.”
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 with 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.”