At a time when the unemployment rate in South Africa has risen to its highest in decades, companies struggle to find the correct financiers to assist in their growth. And when the requirements for securing finance have become seemingly impossible to meet, how are SMEs expected to have a measured effect in their respective markets?
“Impact funding has the potential to decrease the unemployment rate and play an important role in securing SA’s future,” says Kumaran Padayachee, CEO of Spartan SME Finance. What financiers in this country need to focus on is financing for high impact SMEs, which will back these businesses to reach the next level of growth; and in turn enable more staff hires.
While established SMEs have the ability to create the jobs South Africa so desperately needs, the real issue is that much attention and financing has been given to the start-up phase. The reality is that funding for high impact SMEs will help them reach that vital next level of growth. “Age is one of the most important factors in the number of potential jobs SMEs create,” says Padayachee. He feels that financiers and the more established SMEs should be working together to bring about positive change through impact finance.
This is particularly important in 2019 where South Africa’s unemployment rate is sitting at 29.1% – the highest unemployment rate the country has seen in decades, and one of the highest in the world. There are estimated to be about 250 000 – 500 000 small businesses in SA. The question is, can positive social and economic change be brought about in such trying times? While the country continues to produce more and more start-up businesses, there is a concerning lack of job creation.
Start-ups don’t create jobs
“The reason the unemployment rate to start-up company ratio makes no sense, is due to a common misconception. Contrary to popular belief, start-up companies do not create jobs,” says Padayachee. “Yes, they may have the capacity to hire one or two people, however, they are rarely able to employ more as these businesses are still in survival mode.” He believes that where we can look to SMEs to create jobs, is to consider the more established companies – those that are 3-years and older. These companies are most likely to have transitioned into the growth phase.
Recent international research points to small businesses playing an important role in job creation, but only over time. It is only once the SME has reached the 20-employee mark, or the three to five-year milestone, that there is a positive employment effect. Job creation by these businesses is by no means immediate, but rather subject to their future growth. This is where financiers come in, and where impact finance makes a difference.
Three barriers to scaling a business
Spartan highlights three barriers to scaling any business: leadership; scalable infrastructure; and market:
Firstly, the business needs to have a jockey that a financier regards as a good fit – a leader they want to back. The financier then needs to carefully assess the financials provided by the jockey, as these do not always align with future projects. And the financier must future assess the person’s character and competence before backing the business.
Secondly, SMEs must show that they can scale their infrastructure and systems, and that they have potential to grow. The financier must then understand what infrastructure needs to be financed in order to scale.
Lastly, if an SME secures a contract that is larger than its previous projects, it will need finance to follow through on this project. Financing is a way to gain access to the market, and for the SME to follow through on delivery.
Both SMEs and financiers need to recognise these barriers, and work towards breaking them down, together.
With the number of small businesses in South Africa, the potential is huge – “granted SMEs find financiers to invest with impact, and in turn, financed SMEs make an impact of their own,” says Padayachee.