Small Business Faces Annihilation

A guest post from Ryan Anderson

Vehicles being torched in Cape Town protests this week.

South African Academic Report:

95% OF SMALL BUSINESS OWNERS CAN'T AFFORD TO PAY EMPLOYEES

93% DO NOT HAVE ANY OTHER INCOME SOURCES

50% DO NOT THINK THEIR BUSINESS WILL SURVIVE

And the economic assistance package will probably not help.

Former student of mine, and a real mensch, Ryan Anderson (famously the playmaker for the 2015 unbeaten Michaelhouse 1st XV) is a statistics honours student at UCT, having completed an undergraduate degree in maths, stats and computer science.

He is also a part of a group of researchers comprised of postgraduate students from UCT and entrepreneurs from Philippi, a nearby low-income community. The research group is associated with Phaphama - a social enterprise development initiative.

A report he co-authored on how small businesses are coping with the crisis in South Africa has been doing the rounds on social media. He has given me an exclusive report:

The mandate for our research was to better understand how COVID-19 is affecting micro-businesses and where the gaps are in existing funding opportunities. We managed to capture over 250 responses from entrepreneurs in numerous developing communities across South Africa.

The results reaffirmed what everyone had suspected – the funding opportunities available are at large not reaching these businesses and thus the prospect of these business surviving the pandemic is slim.

The owner of a spaza shop in Soweto had the following to say:

“I operate a restaurant/spaza shop in Soweto township. I've been forced to stop all operations. I employ 4 people full time and they have stopped coming to work as of when the lockdown began. I'm not generating income so I will not be able to pay these employees unfortunately. I will not even be able to sustain myself during this lockdown.”

This situation was echoed among many of the business owners who rely on their business for their only source of income. Having to close their businesses is not only devastating for them personally, but they all seemed burdened by the weight of no longer being able to support their employees’ families too. One of the entrepreneurs had this to say:

“My employees are like family to me, if I have a good month, they have a good month. I have told them that if I get the funding they will be the first to know.”

The extension of the lockdown has further cut these entrepreneurs off from their only source of income.

These businesses have turned to the funding opportunities provided by the government and the private sector to help support their employees and their businesses. However, as we found, these opportunities present their own problems.

1.    Eligibility requirements are too stringent.

Most funding platforms require businesses to be registered, tax compliant and UIF compliant at least. Additional requirements include six months of bank statements as well as financial projections. Many businesses do not meet these qualifying criteria and some of the application processes require the retrieval of multiple documents. This is particularly tricky without access to a printer.

2.    Asymmetric & misleading information

There is a major gap in the available funding information. Entrepreneurs do not know where to find assistance. There is no centralized governmental location for gathering information about opportunities, applying and tracking your application status. However, it is clear that in the last two weeks different private-sector bodies, such as Wesgro (https://www.supportbusiness.co.za/covid-19-support-finder/), have dedicated resources to fixing this problem.

Funding requirements are often ambiguous and business owners think that many funding options are grants, when they are actually loans. This can be extremely problematic for entrepreneurs when the future of their business is so uncertain. How can they commit to a repayment in the future when they do not know if their business will survive the pandemic? Grant funding should be preferred over loans in this regard.

There is no funding available for foreign owned small businesses. This is a contentious issue and has been up for debate. However, many of these foreign-owned small businesses employ South Africans. Thus, it seems in the country’s best interest to offer support to these businesses too.

3.    Time Lag

The waiting period between the funding application and the disbursement of the funds is too long for businesses in distress. This needs to be reduced, or alternatively, communication around when funding will be distributed should be improved.

There is one fund in particular, the Sukuma Relief Fund for sole proprietors, which has worked around these issues. It has only two requirements, which is in stark contrast to the ten documents needed for the SMME Debt Relief Finance. Furthermore, the assistance is in the form of a grant. Lastly, you can expect to receive the financial aid within seven working days, a prompt distribution. It should come as no surprise that the fund had to stop accepting applications after less than four days due to the overwhelming number of applications received.

However, despite all the perks of the Sukuma Relief Fund, the issue of compliance still remains and removes a large proportion of desperate entrepreneurs from its assistance.

But what happens after the lockdown is over?

This question holds so much uncertainty. The owner of a transport business in Philippi shared these concerns, “But when will we start up again? And what will business look like? Will people be travelling as they were?”. She has the concern that the effect of the lockdown on the wealth of individuals and businesses will lead to a lack of customers for her business when the lockdown is over.

If this is the case for these entrepreneurs, which seems quite likely, the need for external funding will surpass the lockdown period, and will remain a necessity until the township economy starts to recover – a time period which remains indefinite.

It is important to note that our findings and recommendations are based on a relatively small sample of entrepreneurs. We understand the limitations of our research. However, we do believe that, despite the limitations, our research has pointed out that there are problems that need to be addressed.

The report can be viewed and downloaded here.

My view? Currently the entire African continent has had fewer deaths than the UK or NY suffer a day. I doubt that somehow lockdowns are the reason why. We will soon face starvation. We need a radical policy shift - draconian measures (Draco was the ruthless Athenian lawgiver who kept citizens in debt) must be lifted.