The high cost of living as well as alarming unemployment has meant that many South Africans have been thrust into what some call “earning their bread” through entrepreneurship, reluctantly, according to Momentum and Unisa (University of Africa) Science of Success report.
“So many of them are unqualified or unprepared to enter the world of self-employment. If they had the chance, they would rather work for an employer than become an entrepreneur,” it reads.
However, even for those who imagined themselves to be self-sufficient by starting their own business and having something of their own and extended self-expression, the reality is this: it is always difficult to succeed and thrive as a business owner in the South. Africa, notes the report.
“It is a daily struggle for SMEs (small, medium and micro enterprises) to stay in business in South Africa.”
The report indicates that the effect of the Covid-19 pandemic continues to be felt more heavily on SMEs, which are often the main sources of income for business owners and their employees. He notes that the sector has yet to recover to pre-Covid levels.
It indicates that while there were a total of just over 2.6 million SMEs in the third quarter of 2019 (Q3 2019), this number decreased slightly to around 2.3 million in Q3 2020 and is set at 2.4 million in Q3 2021. This, he notes, translates to 150,000 fewer SMEs compared to 2019, before the onset of the pandemic and subsequent lockdowns.
The report further states that while only 56% of SMEs employ more than one person, in 2021 they provided employment to over nine million people, representing 68.3% of all jobs in the country during of the period.
Similarly, another form of entrepreneurship that has become popular thanks to the indulgences of remote working, especially during times of lockdown, is the rise of the side hustle. The study notes that parallel entrepreneurs already have a main source of income and they start their own business – formal and/or informal – to add an additional source of income.
The Momentum/Unisa Household Finance Survey (2022) found that the number of households earning additional income from a side business also fell to about 11.4% (2,138,282 households) in 2021, compared to 14% in 2020.
According to financial economist and senior lecturer at the University of Cape Town, Dr Thanti Mthanti, the decline of SMEs and side hustle is largely attributable to the lack of financial support, particularly at the start of the pandemic.
“Some SMEs, as well as large companies, took out loans before the onset of the Covid-19 pandemic became a reality. When the Covid hit, it shook the finances of many companies, especially SMEs. What we have seen is that finances and cash flow have started to dry up quickly.
“Big companies had reserves and could get more loans. But many SMEs lost their jobs and had to close due to lack of funding.
According to Mthanti, despite their potential impact on jobs and the economy, SMEs are not seen as spaces for investment. “These SMEs are in a space where they are not really funded by the government and where the private sector thinks it is too risky to invest in them.”
“If you look at the amount of finance available to SMEs, one of the things you notice is that the sector is important in terms of the economy and contribution to GDP. But if you assess the scale and find out what kind of support the sector needs, it’s just not enough.
According to Mthanti, with the South African economy estimated at R6 trillion, of which around R1.2 trillion is attributed to the SMME sector, funding institutions or SMME investors need to match this amount in order to support and subsequently stimulate the sector, which in turn would benefit the sector. the economy significantly. “R300 million of funding is not enough in this respect.”
Monique Schehle, strategic analytics consultant at Momentum, further notes that July’s power cuts, increased crime and civil unrest affected many small businesses.
Commenting on the pressure added by changing consumer behaviors, Schehle says another problem exacerbating the situation for SMEs is local prices versus cheap international prices.
“Many South Africans prefer to buy from Shein or external suppliers, rather than shopping at local designer boutiques. And that’s understandable because it’s cheaper to buy clothes, for example, from international online stores, but the cost of production is not cheap in South Africa.
If she admits that the high standard of living pushes consumers to opt for less expensive goods than “purchasing power should go to local SMEs”.
Moreover, the report says that the government and society as a whole are putting “extreme pressure” on SMEs to play a role in rebuilding the South African economy.
Wayne McCurrie, economist and portfolio manager at Ashburton Investments, says that although they are not the biggest contributor to the economy, SMEs are key to job creation, especially when they are successful.
However, he warns that big business, government and trade unions need to work together to raise the capital needed to boost the South African SME landscape and economy in general.
“The big thing missing is a coordinated plan between the main players. There is a lot of uncertainty around the future of start-ups and the economy, this includes issues around electricity, transnet, water and dysfunctional municipalities.
“What the country really needs is for everything to work efficiently. Only then will we see South Africa get more investment that will boost facets of the country’s economy, especially financing for small and medium enterprises,” he notes.
Nondumiso Lehutso is an intern at Moneyweb.