Article provided by Edge Growth
In the midst of a tough economic landscape, many South African SMEs are showcasing their resilience despite numerous challenges, although market access and access to working capital continue to plague them.
“While we do see support available when it comes to SME skills training, mentorship and the sharing of knowledge, there is still an enormous need for SMEs in South Africa to have more opportunities for market access and access to finance, two pillars that are currently the most significant in order for this sector to grow,” says Susan Moloisane, Chief Executive for Edge Growth Solutions. “SMEs are still the biggest employer in the country, making up 60-70% of the jobs that are available, so the need to help this sector to not only survive, but thrive, is vital”.
Janice Johnston,CEO at Edge Growth Ventures agrees, and says that SMEs are crucial for economic diversification to new markets. “In South Africa, SMEs generate about 34% of the country’s GDP and are essential to any economy looking to drive economic growth and development,” she says.
After being hard hit by the COVID-19 pandemic, many of the SMEs that did survive are only now starting to recover but are facing further instability given the current macro-economic factors including low GDP growth, prolonged high interest and inflation rates as well as energy instability. Subsequently, SMEs have struggled with additional cash flow requirements, mainly from rising operating costs and interest rates.
“Given the important role of SMEs, the economy suffers when these businesses are negatively impacted with smaller margins for error, particularly on the financial front,” Johnston says.
The SMEs who have weathered these conditions best are those that have a wider range of financial options available to them, either through low levels of leverage, undrawn banking or other commitments and effective use of short-term working capital facilities.
“Strong collections and general financial management practices have often been a differentiator as well as open and transparent relationships with funders who have been informed of developments and mitigation strategies,” Johnston says.
There is also an urgent requirement on the development sector to make sure that these SMEs are well prepared to access the kind of funds that they require to unlock opportunities within the sectors in which they operate.
And once they are funding-ready, non-traditional and more innovative funding solutions are needed, outside of the banking and venture capital space.
“There is a missing middle within the SME sector from a funding perspective that needs to be solved for. More collaboration across SME development players is needed to be able to do more in terms of access to market and finance,” Moloisane says.
When it comes to market access, these same macro-economic challenges are also being faced by larger companies who are tightening their budgets and becoming less amenable to opening up their supply chains to SMEs.
“At this point in time, many larger businesses in South Africa are focussing on their core operations and are more likely to stick to their established supplier network instead of opting to do business with newer SMEs which they might deem risky. This trend is adversely affecting access to market opportunities for SMEs”, explains Moloisane.
Johnston says there remains sector differentials and market forces which enable some businesses to flourish, even in challenging times. Some examples here include SMEs within the greentech, fintech and digital space. Moloisane adds that those SMEs that are operating in more stagnant, saturated or declining sectors are having to fight that much harder.
“Despite these challenges, our SMEs are pretty resilient. There are so many small businesses and entrepreneurs that focus on making a way when there doesn’t seem to be a way, who fight harder when one door closes and who find a creative way to still deliver their services and create an impact on the economy. These are the SMEs that really need support,” Moloisane says.
She says that what is needed is more collaboration with big corporations willing to open their supply chains to SMEs, and by this she says not just for peripheral services but core activities. But once again, to achieve this, more SMEs need to be funding and supply chain ready.
Johnston says that a continued growth in financing options is needed so that SMEs can have access to options that match their size, stage and cash flow profile. “This may require additional blended finance vehicles to facilitate appropriate risk/return requirements and further supply of alternative sources which could include merchant cash advance, asset or equipment finance, purchase order finance, revolving credit and trade finance,” she says.
Johnston says that despite the current challenges, Edge Growth continues to partner with many SMEs who are showing immense growth. These include a few notable funds raised for investee companies that have proved market traction and attractive business models, including local insuretech start-up Pineapple. She adds that SMEs also continue to make strides in the green economy with other examples including multiple fund investments in lithium battery manufacturer IG3N and waste management service Waste Want.
“It really is worth investing in those SMEs that are demonstrating a hunger to do more, to be more and to grow their businesses going forward,” Moloisane says.
Edge Growth is a small business development specialist. For more information, go to www.edgegrowth.com.
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