/ 20 August 2010

Lean, mean season for small fry

Lean

Big business and corporations have largely recovered from the recession, but small and medium enterprises (SMEs) are still struggling to pay the bills. Most SMEs are in “survival mode”, says Gerrie van Biljon, an executive director of business at Business Partners Limited, a company that specialises in SME risk financing.

“The market is under severe pressure.” And Kevin Lings, chief economist at Stanlib, says things will start improving only next year. “SMEs were hurt during the recession. Even though business activity has picked up recently, big business benefits first. It’s not an instant turnaround.”

About half of South Africa’s consumers are in debt and small and medium enterprises are also continuing to feel the effects of the 2009 global financial crisis. The National Credit Regulator’s (NCR) credit bureau monitor report in March indicated that debt stress levels were quite high. The report found that 54% of the 18.21- million credit-active consumers were in “good standing”, meaning that their accounts were paid up and the client had not missed more than one or two instalments, but that number had decreased by 3.6% since March 2009.

At the same time the number of consumers with impaired records rose from 42.4% in March 2009 to 46% at the end of the first quarter. In general SMEs depend on a few specific sources to stay in business, — larger companies and direct clients — both of which were put under pressure by the recession. The more consumers were in debt, the more SMEs were negatively aff ected. It becomes a vicious circle, says Van Biljon.

“SMEs are having extreme difficulty in meeting their fi nancial obligations. It’s a chain reaction. If your clients aren’t paying you, you can’t pay your suppliers,” Van Biljon says. “During the recession SMEs first will deplete their financial reserves, namely cash and assets. Then they will try to extend their credit, renegotiate their terms and draw on their financial facilities with the bank. At some point they can’t survive any longer and go under,” Lings says.

The NCR does not collect statistics on bad debt according to industry, but in terms of individual consumers and active accounts. But data from Statistics South Africa shows that company and close-corporation liquidations in May 2010 were up by a “shock” 35.7%. Monthly data is extremely volatile, however, so it is more useful to look at trends.

In the first five months of 2010 liquidations rose 2.8%. This is “well below the 36.8% recorded in January to May 2009, [but] the overall level of liquidation activity remains extremely high by historical standards”, says the report. Arthur Goldstuck, managing director of World Wide Worx and coowner of SME Survey, which does research on local SMEs, has found that bad debt in the industry is fairly high but “remains at a particular level, about 21%”.

Ironically, many small businesses collapse just as the economy starts to recover. “[The recovery] is not quick or significant enough to help them. They need bridging finance, so they turn to the bank, the bank looks at the depleted reserves, the negotiated credit, the overdraft, and isn’t keen to supply finance. So the small business fails,” says Lings. Though he says he can’t put a number on it, Van Biljon has witnessed many SMEs go under since 2008.

“The rate at which businesses are in severe distress or have closed their doors is substantially higher than anything in the past 50 years. Just go to a typical shopping centre and notice the empty space. Small business has gone through a very difficult time in South Africa.” But Goldstuck says that though lots of SMEs went out of business, the situation was not as bad as it could have been. “Before the recession SMEs had a really bad year.

In 2008 the petrol price was more than R10 a litre, interest rates went through the roof and there was load-shedding, which really hit SME owners hard. “Through this triple whammy, they were forced to become lean and mean and that’s what sustained them through the recession. They’d already absorbed so many shocks.”

Why are SMEs struggling?
Kevin Lings, chief economist at Stanlib offers the following reasons and suggestions:

  • The industry is quite regulated, for example in terms of licensing requirements and labour legislation. This makes it difficult to start up a small business and then to abide by all the regulations once the business is up and running.
  • Access to finance is another issue. Banks’ credit policies remain fairly restrictive and SMEs are higher risk — more of them fail than larger businesses and banks are risk averse. They’re not purposely trying to undermine small business; they do have willing policies, but ultimately they’ve got to assess the risk.
  • SMEs also find it difficult to attract and retain skills, because of their financial situation.

What can be done about it?

  • First, address the regulation issues: make it less onerous for business to occur, and to start, operate and conduct activity in certain sectors.
  • Then you have to look at the labour situation. SMEs can’t aff ord to deal with the current cumbersome labour legislation (minimum
    wage, other restrictions).
  • Finally, a complete rethink on finance is needed.
  • Overall, there needs to be more promotion of the SME sector, recognition that they have a specific case.

Although government has provided some assistance, for example with taxes, I would argue that there is not enough emphasis on assistance for SMEs.