Despite the SME industry being a big driver of employment for South Africa, small businesses face a number of challenges during the start up phase. According to the World Bank and International Finance Corporation (IFC) South Africa is ranked 39th in the world for ease of doing business.
This doesn’t bode well for a country that needs to recover from a weak economy, partly due to the COVID-19 pandemic. In fact, it’s estimated that 50% of small businesses fail within a year of launching, and 70% to 80% are estimated to fail within the first five years.
So with these statistics in mind, what exactly are the challenges faced by SMEs in South Africa?
Access to funding
Getting access to startup capital is a long-standing issue for startups and entrepreneurs. Most banks in South Africa are less willing to risk lending the money to new businesses and ask for a number of requirements to be met in order to qualify for a business loan. This unfortunately means that many SMEs don’t meet the strict requirements.
Few SMEs or startups have their own capital to inject into a new business idea, resulting in a very important first road block for many entrepreneurs who just need the finance to get potentially very good ideas off the ground.
South Africa’s history of droughts, load shedding and poorly maintained roads and vehicles is a big challenge for startups. Weak or inconsistent infrastructure halts processes, decreases manufacturing times and reduces the ability for entrepreneurs to connect with relevant industry experts online.
For many entrepreneurs who already have a limited amount of resources they can give towards manufacturing, delivery and connecting online, it can significantly halt a business’s growth.
Lack of skills
With many skilled workers leaving the country for better opportunities in developed countries, South African entrepreneurs have a limited pool of people with the right expertise to draw from. Whether it’s finance, sales, law or marketing, startups will have to search for the right skills to build their business unless they have worked their way into the right network.
With a weak economy, many startups are begging out of necessity due to unemployment rather than to plug a hole in the market or disrupt an industry. With limited technological resources, funding and skills, SMEs go into survival mode and operate just to make an income and not to change things for the better.
As this is the case, less research and innovation goes into how a business might work optimally for the current market and economic climate, leading to ideas that are less likely to succeed.
Despite these challenges, a number of SMEs do survive and make it in South Africa. There are a number of alternative funding resources for small businesses. This, combined with a problem-solving attitude can lead to a successful business venture. Entrepreneurs must take this attitude to heart and reach out to established SMEs, online network groups and resources to find the best possible towards business success.