Small and medium-sized enterprises (SMEs) are considered one of the strongest drivers of economic growth, innovation, and employment, especially in developing markets. The formal SME sector alone is responsible for more than 50% of employment opportunities worldwide, 60% of those in South Africa, and 80% across Africa. Yet, SMEs in Africa are faced with more uncertainty than ever as the long list of challenges they face keeps increasing month-on-month. Unfortunately, 80% of small to medium enterprises fail within their first five years of business.
Now, more than ever, SMEs need support to help them succeed and propel the recovery of the South African economy and other countries on the continent. Doing so will create a solid foundation for inclusive growth. Technology can play a key role in achieving this aim, providing SMEs with tailored solutions that help reduce or remove the numerous barriers to success.
Unpacking the current challenges
SMEs have been among the hardest hit by the recent economic recession with the drop in demand having a marked impact on cash flow and turnover. In South Africa, this has been compounded by the ongoing power crisis with loadshedding, forcing some SMEs to cease operations for hours at a time. The result is an overreliance on infrequent large orders of products or big projects which some still struggle to fulfil due to power restrictions.
Just when most small businesses were trying to recover steadily from the effects of the Covid-19 pandemic, working around loadshedding and loss of revenue, the Financial Action Task Force announced that South Africa has been “Grey listed” for not being fully compliant with business standards. What this means is that small business owners without a financial track record will be subjected to more stringent requirements when applying for business finance.
SMEs have unique financial and growth needs
Take a small catering company, for example, where the customer base consists mainly of corporate customers. In a tough economic climate, many of these businesses cut back on expenses, leaving the catering company short of clients. Then when there are orders, the catering company has the added challenge of delivery during loadshedding, especially if they cannot afford backup power.
Desperate for backup power to keep their kitchen appliances running during power cuts but without the capital to invest in any solutions, the catering company owner turns to several banks for a loan.
After weeks of struggling to complete complex documentation and waiting for approval, the loan applications are rejected due to low turnover and a lack of collateral. The catering company, which offers employment to five other members of its community, can no longer keep its doors open.
This is just one of the many examples of the challenges faced by SMEs in South Africa, with the most prominent barrier to growth being a lack of access to funding. Named the finance gap by the International Finance Corporation (IFC), it is estimated that 40% of formal SMEs in developing markets have an unmet financing need of R94 trillion each year, relying on friends and family for funding rather than traditional financial institutions - an option which in developing markets and the informal sector often does not exist.
According to the IFC, closing this finance gap is perhaps the most critical step to helping SMEs in developing markets achieve higher growth and remain a sustainable solution to employment needs in the future.
Finding a FinTech solution best matched for SMEs
While the finance gap poses a challenge to SMEs, it also poses an opportunity for the private sector, especially those enterprises in the fintech space. The onus is on us to create an enabling environment that will grant small business owners an opportunity to get business finance that will grow their businesses for scale. Using technology to develop financing solutions tailored to the everyday needs of SMEs will provide much-needed funding options, which in turn will enable business growth and boost the economy.
A business loan platform, such as Vodacom’s VodaLend, can make a significant impact on the viability of SME operations. Offering a simple interface, minimal paperwork and quick turnaround times for approval, this type of FinTech solution ensures that a temporary dip in financial resources has little impact on the running of their businesses. Additionally, entrepreneurs can access payment terms, which are tailored to their unique situations, allowing them to continue to grow their businesses with financial tools in their arsenal. A small corner shop can become a supermarket when the right funding and financial products are introduced to that small business.
There is no questioning the important role SMEs play in developing markets like South Africa. With 22% of all working-age adults in Africa starting businesses at some point in their careers it is imperative that we find a way to reduce the 80% failure rate. Providing the right financial products, tools, finance, advice and technology to SMEs will ensure that they grow their businesses and stand the test of time.