The relationship between South African SMMEs, the government and banks is a bloody mess right now. A new survey conducted by entrepreneur platform Heavy Chef and its nonprofit arm, the Heavy Chef Foundation, highlights a real danger that the fracture will deepen unless urgent changes are made in government’s approach to small business. Immediate action is required – and, no, we cannot wait for any more levels to be unlocked.

After reviewing the results of the #CombatCovid SMME Survey released by a consortium of SMME-focused organisations, the seriousness of this challenge quickly becomes evident:

• One out three SMMEs reduced salaries between 75% and 100%.
• Prolonged lockdown will force 71% of SMMEs to retrench staff.
• Three out of four SMMEs will not survive beyond July 2020 under lockdown.

The extreme nature of these results is not surprising. After all, these are extraordinary circumstances. However, it also underscores the incapacity of the current relief channels to respond effectively to SMMEs’ plight.

Part of the problem is inherited. Over the past three decades, our government has promised to ease barriers within the small business sector. As it stands, South Africa is ranked 139th out of 190 countries in this regard. Even before Covid-19, we have had little to show for our efforts.

Before anyone points to our position as a developing nation, it’s clear that we’re woefully behind many of our African neighbours.

Consider that it takes, on average, 40 days to register a business in South Africa. Rwanda does it in four.

Consider that 87% of SMMEs are self-funded, while less than 1% applied for formal lending at a bank.

Consider that registered small businesses contribute 28% of the jobs in South Africa. If we take into account all our informal traders and micro-businesses combined, it is estimated that the small business sector in total contributes 47% of jobs. With that in mind, we must remember that President Cyril Ramaphosa said in his 2018 State of the Nation Address: “By 2030, small and expanding businesses will contribute 90% of our jobs.”

Consider that the global average for SMME job creation is between 60% and 70%.

These challenges are not small, even if the businesses are.

Perhaps, the most telling revelation from the #CombatCovid survey is that 68% of relief applications submitted by small businesses to date have been unsuccessful.

It is then no surprise that many of us in the small business sector hold a measured amount of scepticism for our president’s announcement of “an unprecedented release of funds, R100bn” to support the SMME community during the Covid-19 pandemic.

Look, don’t get us wrong. Kudos must be given to President Ramaphosa. Very few would want to be in his shoes right now. The World Health Organisation has been generous in its praise of South Africa’s handling of this novel threat.

However, during this time our team has been documenting stories like that of Lethu, who had to forestall his dream of building a local beerhouse. Instead of serving cheerful customers this year, Lethu has been spending time in lockdown trying to figure out the paperwork to apply for UIF relief for his staff that he cannot pay.

Or the story of Shannon, a food service entrepreneur who bypassed the relief fund route to crowdfund R150,000 in two weeks in order to feed thousands of hungry community members.

SMMEs should be the lifeblood of our economy. Instead, it feels like we’re being bled.

Of the 47% of SMMEs that applied for financial relief from either a bank or a fund, why were only 32% successful?

In other words, just about 15% of all SMMEs have received Covid-19 financial relief (again, this refers to TBL: time before lockdown). To put that into context, three out of four SMMEs have indicated they will close shop if the lockdown in its current state continues beyond 1 July 2020.

The findings from #CombatCovid SMME Survey were collated from the communities of organisations servicing the SMME community and curated by entrepreneur education platform Heavy Chef. It outlined the impact of Covid-19 on their livelihoods and how they are attempting to survive.

The results make for grim reading. Most of the respondents have already suffered significant losses and have retrenched staff.

The brutal truth is that many SMMEs have been unsuccessful in receiving relief or funding support during the Covid-19 pandemic. Although the government (and some wealthy South African families) have made relief funding available to struggling business owners, it does not seem to be reaching the business owners who need it the most. As a result, SMMEs now have little faith in the possibility of successfully submitting a funding application.

We must naturally account for circumstances such as outdated financial reporting information, the lack of tax compliance, incomplete statutory registration documentation, and non-access to qualified, registered accountants.

We also acknowledge that most entrepreneurs are allergic to onerous application procedures.

Such is the life of an entrepreneur.

However, the Loan Guarantee Scheme from the National Treasury alone is R200-billion and is there to support the formal banks to provide lending to SMMEs in South Africa, up to a turnover level of R300-million per annum.

So, where are we going so wrong?

Applications have to follow the banks’ traditional credit-vetting criteria, and in many cases require surety and security. It is expensive and difficult to underwrite funding for SMMEs under R10-million per annum. We expect the bulk of the support from National Treasury to go to medium-sized businesses that can provide security and have longer, established track records.

In this case, approximately 85% of SMMEs will continue to be ignored for support.

The best-placed funders to support these businesses are the non-bank lenders who have cashflow-based lending models and use risk scorecards and data-driven approaches, rather than collateral-based models. These non-bank lenders are currently not being supported by the government and hence there is a gap in the system.

Collectively, the members of South African SME Finance Association (SASFA) and other non-bank lenders, such as Retail Capital, Merchant Capital, Spartan SME Finance, Cashflow Capital, LulaLend, Business Fuel, Pollen Finance, Bridgement and many more, have lent more than R10-billion to over 100,000 SMME owners in the last five years.

Right now, we face an unprecedented threat. We also face an unprecedented opportunity to fast-track decisions that otherwise would take years to push through countless layers of bureaucracy.

These may seem like small numbers compared to the R200-billion guarantee scheme from the National Treasury, but these non-bank lenders have a large impact on the livelihoods of more than one million owners and employees, indirectly having an impact on five million people in South Africa. Many of these SMMEs have also been precluded from claiming UIF as they are sometimes casual or are not registered with UIF, even though they pay UIF levies and PAYE.

In South Africa, we also have fintech organisations such as Zapper, Snapscan, iKhoka and Yoco. These are finance options that have been globally recognised for their innovation. Others, such as Payfast, have a continent-wide footprint and serve thousands of small to medium-sized businesses.

On the back of the #CombatCovid Survey, the first of a series Heavy Chef is conducting, it is plainly obvious that a more urgent and innovative approach is needed.

In order to prevent further bloodletting, channels must be opened. The consequences are dire if we do not initiate bold steps: Job losses. Debt-spiral. Economic depression. These are the sort of consequences that condemn a promising nation like South Africa to decades of back-peddling, rather than realising its potential.

Right now, we face an unprecedented threat. We also face an unprecedented opportunity to fast-track decisions that otherwise would take years to push through countless layers of bureaucracy.

On the back of the transparency provided by the first #CombatCovid SMME Survey, there are clear steps that can be taken:

1. Allocate R10-billion to non-bank lendersWe recommend the allocation of R10-billion of the aforementioned R200-billion towards a non-bank funding guarantee scheme. This will enable cash to flow straight to SMME owners who urgently need access to funds in order to weather this storm.For example, we have world-class innovations such as Yoco and Retail Capital’s Merchant Cash Advance product. A disclaimer here: both these organisations are Heavy Chef partners, however, there are a multitude of providers that make up the consortium and who are ready to participate in a more efficient distribution of funds.

The members of the South African SMME Finance Association (SASFA) and other non-bank lenders have the platforms, the people and the processes already in place to distribute these funds.

2. Allocate R100-million towards SMME-focused FintechThe role of technology in line with our Fourth Industrial Revolution ambitions cannot and should not be ignored.The opportunity to make the process of applying for funding can be made significantly more efficient and accessible. By using existing technology we have an opportunity to not only solve many of the current SMME funding needs, but also ensure that we build a more widely accessible, and sustainable SMME funding model.APIs (application programme interface) are able to connect multiple software solutions. By having these connections, data can be pushed and pulled between each piece of software, as and when needed, and of course when authorised.We see examples of this in practice today with Alternative Lending where SMMEs are able to share their existing financial, and non-financial information, with an Alternative Lending company which is then able to evaluate the data received, and approve or decline the funding requested – usually in just a few hours. And the time spent to make the application is even shorter than that, with none of the traditional paperwork being required.

   Additionally, the Alternative Lender is able to monitor how this funding is being utilised by the SMME, and adjust the interest rate charged based on risk or even automatically approve the SMME for further funding – before another application has even been submitted.

3. Allocate R10-million to ongoing research Within seven days, Heavy Chef and partners managed to reach out to a collective community of 500,000 SMMEs to attain more than 2,280 completed samples. While this was a strong effort by the partners involved, further research is needed to identify the opportunities and challenges faced by SMMEs, raise awareness and catalyse needed dialogue and action.

There are currently several information-gathering initiatives being undertaken by different organisations, such as SIMODISA, Business Partners, BLSA, HSRC and the Small Business Institute, each focusing on various crucial aspects of the SMME ecosystem. However, the development of innovative and groundbreaking strategies in support of SMMEs requires a collaborative research effort between policymakers and practitioners. This multi-stakeholder effort should be driven by a dedicated team to ensure oversight and accountability, and supported by significant financial and non-financial resources.

Covid-19 presents an opportunity for us to drastically reinvent the way in which we support, fund, and advise SMMEs using readily available, affordable and accessible technology.

There is no simple salve for the Covid-sized laceration in our economy. It is also impossible to articulate the detail required to deploy these suggestions in a 1,949 word OpEd. However, SMMEs cannot be reliant on government departments and banks to manage the enormous challenge of distributing money to this sector, the beating heart of our country.

These three steps will not only significantly improve the success of current Covid-19 funding, but also ensure the accelerated growth of a more connected and suitably enabled SMME community for years to come.

The results are in. The crisis is real. There is carnage on the SMME streets.

There is work to be done, but we have the people and the tech to do it.

We now need bold decisions to prevent any further loss of blood. DM

Co-authors:

• Louis Janse van Rensburg, chairman, Heavy Chef Foundation 
• Lukhanyo Neer, project director, Heavy Chef Foundation
• Fred Roed, CEO, Heavy Chef
• Colin Timmis, SA country manager, Xero
• Karl Westvig, CEO, Retail Capital
• Graeme Wilson, CEO, Whipping The Cat
• Jonathan Smit, CEO, PayFast
• Katlego Maphai, CEO, Yoco
• Paul Keursten, CEO, Workshop17

Data sources used:

1. http://www.treasury.gov.za/comm_media/press/2020/20200428_COVID_Economic_Response_final.pdf
2. https://www.doingbusiness.org/en/rankings
3. https://accesstofinancereport.co.za/
4. https://www.smallbusinessinstitute.co.za/wp-content/uploads/2019/01/SBIbaselineStudyAlertfinal.pdf
5. https://www.nationalplanningcommission.org.za/assets/Documents/NDP_Chapters/devplan_ch3_0.pdf
6. http://sasfa.net/
7. http://www.treasury.gov.za/comm_media/press/2020/COVID-19%20Loan%20Guarantee%20Scheme%20Q&A.pdf

Notes on survey methodology:

1. The #CombatCovid survey received 2,280 responses using a convenience sampling methodology. This translates into certain limitations in terms of demographics particularly in terms of race and regionality in this study.
2. Another limitation was our ability to ascertain whether each individual was, in fact, a legitimate business owner.
3. We have made the assumption of legitimacy due to the nature of the questions and the time taken to fill in the survey.
4. The Heavy Chef survey team has not undertaken comparative analysis. For example, looking at impact on established businesses vs new businesses, or impact on female business owners.
5. The #CombatCovid survey was conducted before Level 4 was announced. It is necessary to view results with the lens that some of the companies surveyed are currently operational.
6. Please note: The #CombatCovid survey is the first of a repeating series of surveys. The Heavy Chef team aims to improve the range of information gathered and the demographic spread of the individuals reached over time.

Website references:

• www.heavychef.com
• www.heavychef.com/foundation
• www.heavychef.com/surveys

Images can be taken from any of the above sites, or if required, please contact [email protected] for special requirements.