An investigation into the financial support available to South African small and medium enterprises.

Abstract

Since the democratization of South Africa, there has been a fundamental need for the creation of employment and economic growth. South African companies have, however followed international business trends through merges, acquisitions and the introduction of sophisticated technology. The result of the above policies, have significantly contributed to the counties high unemployment rate, with the current official unemployment rate of 30,5 (according to the 1996 census). Furthermore, the legacies of apartheid have left a large portion of the population to be unskilled and therefore unemployable. As a result of the above, the government has been burdened with the creation of employment, single-handedly finding innovative financing schemes for the small and medium enterprise sector, while simultaneously ensuring economic growth, despite prevailing economic conditions. In order to achieve economic growth and create employment opportunities, it is my opinion that primary focus needs to be given to the development of small and medium enterprises. In this regard emphasis should be given to the enhancement of potential and existing small and medium entrepreneurs, to enable them to become competitive forces. It has however, become common for good entrepreneurial ideas to "die as ideas" largely due to the inability of these entrepreneurs to secure adequate venture capital, to fund their ideas into successful businesses/innovations. This chronic shortfall of financial resources for SMEs is largely attributable to a financial strategy focused on larger firms with a perceived lower risk based on the belief that such firms were "to big to fail". The challenge is therefore, for government to create innovative ways to finance initiatives by existing and potential entrepreneurs, thereby stimulating economic growth and employment. It is also prudent to highlight the fact that in addition to the contribution SMEs make to a countries wealth and employment, they also serve as the primary vehicles by which new entrepreneurs provide the economy with a continuous supply of ideas, skills and innovations. Start-ups are estimated to have created 140 000 jobs in South Africa, between January 1999 and July 2002, while new firms are estimated to have created nearly one million. Furthermore, the 2002 Global Entrepreneurship Monitor (GEM) places South Africa below the average rate of entrepreneurial activity when compared with 36 countries. S.A also ranks lowest of all developing countries including Chile, Brazil, India, Argentina and Thailand. These results show that SA is in the bottom quartile of all countries on measures of opportunity entrepreneurship and new firm activity - both critical gauges for economic growth potential. GEM 2002, which is an annual international research project coordinated by London Business School, found that the greatest obstacles facing entrepreneurship is a lack of/ ineffective financial support, education and training, government policies and programmes. The aim of this study is to identify innovative ways of funding small and medium enterprises (SMEs) and the strategic implications of these initiatives on the South African economy. Furthermore, it is recommended that government big business and the select few wealthy individuals form strategic alliances, in order to promote the growth of this business sector, considering that the number of companies registered by the DTI has risen to 110 000 last year, of which 80 percent were small, black owned businesses. According to the National Small Business Act (1996), the small business sector absorbs nearly 44 % of the people formally employed in the private sector, and contributes to about 32.7 % to the country's gross domestic product. Given the significant increase in the number of registered enterprises since the 1994 General Elections, the sector holds further promises in order to generate economic growth and hence the need to develop and invest in this sector. Despite the existence of schemes, access to finance has been identified at the recent Job Summit as one of the problems and barriers to job creation and growth of small enterprises in South Africa. A recent media reports have highlighted the frustration of members of parliament, about the failure of the Department of Trade and Industry (DTI) to help SMEs, with the Director General, admitting that his department had not been doing enough, or visibly enough. While the DTI claims to have various loan assistance schemes in place, emerging Black entrepreneurs do not seem to have access to these facilities. A major concern is that the DTI continues to rollover massive amounts of unspent funds (from its annual budget of R2.2 million), that indicates that their target market is not being reached. Accordingly the focus in the future should be to increase the outreach of various programmes, targeting them more specifically at the SME sector. This research project therefore reviews the implementation of policies and programmes aimed at SMEs access to financial assistance in order to highlight barriers that hinder this process and recommendations to rectify the existing status quo.