Small and medium-sized enterprises (SMEs) are undeniably a driving force behind economic growth, innovation, and job creation, particularly in developing markets. Across the globe, the formal SME sector alone accounts for over 50% of employment opportunities, and these figures soar even higher in Africa, with 60% in South Africa and a remarkable 80% across the continent.
However, despite their vital role, SMEs in Africa are grappling with mounting uncertainties as they face a growing list of challenges. Regrettably, statistics reveal that a staggering 80% of small to medium enterprises fail within their initial five years of operation.
Unpacking Current Challenges
Now, more than ever, it is essential to extend support to SMEs, enabling them to flourish and contribute to the recovery of the South African economy and other nations on the continent. By doing so, we can lay a solid foundation for inclusive growth.
The key to achieving this goal lies in leveraging technology to offer tailored solutions that reduce or eliminate the various barriers to success that SMEs encounter.
As we delve into the current challenges faced by SMEs, it becomes evident that they have borne the brunt of the recent economic recession. A drop in demand has significantly impacted their cash flow and turnovers.
In South Africa, this predicament has been further compounded by the ongoing power crisis, characterized by load-shedding, which forces many SMEs to halt their operations for extended periods.
Consequently, these businesses are forced to rely heavily on sporadic large orders or significant projects, which some struggle to fulfill due to power restrictions.
Just as most small businesses were beginning to recover from the devastating effects of the Covid-19 pandemic, they now must contend with additional hurdles, such as the recent “Greylisting” of South Africa by the Financial Action Task Force.
This listing means that small business owners without a solid financial track record will face more stringent requirements when applying for business finance, making it even more challenging to access much-needed funds.
SMEs Have Unique Financial Growth Needs
To illustrate the unique financial and growth needs of SMEs, let’s consider the case of a small catering company that primarily serves corporate customers.
In an economic downturn, these businesses often reduce expenses, leaving the catering company with fewer clients. Furthermore, the company faces the added challenge of delivering orders during load-shedding, especially if they lack the capital to invest in backup power solutions.
Faced with these challenges and desperate for backup power, the catering company owner approaches several banks for a loan.
However, the arduous process of completing complex documentation and awaiting approval ends in rejection due to low turnover and a lack of collateral. Tragically, this means that the catering company, which employed five members of its community, can no longer keep its doors open.
This example highlights one of the many obstacles SMEs encounter in South Africa, with the most significant barrier being a lack of access to funding.
Referred to as the “finance gap” by the International Finance Corporation (IFC), an estimated 40% of formal SMEs in developing markets face an unmet financing need of a staggering R94 trillion yearly.
Instead of relying on traditional financial institutions, these SMEs often resort to seeking funding from friends and family, which may not always be a viable option in developing markets and the informal sector.
Finding a FinTech Solution Best Matched For SMEs
Addressing this finance gap is crucial to fostering higher growth and ensuring the sustainability of SMEs as a vital source of employment in the future, according to the IFC.
In light of this challenge, the private sector, especially enterprises in the fintech space, has an opportunity to make a significant impact.
By creating an enabling environment that grants small business owners access to tailored financing solutions, the fintech industry can provide the much-needed funding options that will stimulate business growth and boost the economy.
One example of such a solution is Vodacom’s VodaLend, a business loan platform that could revolutionize SME operations.
By offering a user-friendly interface, minimal paperwork, and swift approval processes, VodaLend ensures that temporary financial setbacks have minimal impact on SMEs’ day-to-day operations.
Moreover, entrepreneurs can access customized payment terms that cater to their unique circumstances, empowering them to expand their businesses armed with the right financial tools.
With the right funding and financial products, a small corner shop could potentially transform into a thriving supermarket.
SMEs are a vital force in the development of markets like South Africa, with approximately 22% of all working-age adults on the continent starting their businesses at some point in their careers.
To reduce SMEs’ alarming 80% failure rate, we must prioritize providing them with the appropriate financial products, tools, advice, and technology, ensuring their long-term success and contribution to our collective prosperity.
By Mariam Cassim, CEO of Financial and Digital Lifestyle Services
