As noted previously, SMEs in South African have encountered numerous challenges due to the COVID-19 pandemic. The outbreak and consequent lockdown measures have caused SMEs that were already facing several challenges to be further hindered in their development and growth (Gerald, Obianuju & Chukwunonso, 2020). Not only has the pandemic exacerbated extant challenges, but it has added new challenges (Bartik et al., 2020). While there are various challenges faced by SMEs due to the COVID-19 pandemic, this current study highlights only the most predominant, as presented within the South African SME context. These challenges are detailed further in the following subsections.
2.16.1 Lack of access to funding
One pattern that persists both pre- and during COVID-19 is that SMEs struggle to access funding (Cunha et al., 2020). Of the aforementioned R200 billion (also known as the loan guarantee scheme) that was set aside to assist SMEs during and post-COVID-19 with financial support, less than 10% had actually been disbursed to SMEs throughout 2020 (Cunha et al., 2020). A report by the Banking Association South Africa (2020) shows the results of the COVID-19 loan guarantee scheme applications, whereby only 25% of applicant SMEs were approve, 38% are currently pending assessment, and 36% were rejected, with more than R183 billion yet to be deployed. These results highlight that the credit scoring models used by South Africa banks tend to inhibit rather than aid SMEs access to finance (Cunha et al., 2020).
Traditional risk criteria include requirements such as tax status and financial statements, place a heavy burden on SMEs, and inhibit their access to grants and funding, as 50% of all SMEs, both pre- and during the COVID-19 pandemic, were generally unable to maintain full financial
records (Cunha et al., 2020). The SMEs unable to maintain full financial records because of lack of proper administration and understaffed, while others are negligent, uninformed and do not have capacity to generate proper paperwork to begin with. (Cunha et al., 2020). Thus, the credit scoring models as well as the traditional risk criteria limit SMEs’ ability to access credit from banks and other institutions (Brock, 2021). Rajagopaul et al. (2020) further indicate that approximately 90% of funding during this period was granted to SMEs that have existed for 5 years or more. Larger SMEs with a turnover more than R10 million were also granted funding, while micro- and small enterprises were mostly rejected (Cunha et al., 2020). These differences in funding allocation clearly show that the COVID-19 pandemic exacerbated many SMEs struggle to access funding, as it was much more difficult to gain funding during the COVID- 19 pandemic.
2.16.2 Disruption of the supply chain system
The COVID-19 pandemic and its associated lockdown measures posed significant challenges to the South African supply chain system (Anakpo and Mishi, 2020). Specifically, lockdown restrictions slowed and at times even temporarily stopped the flow of raw materials and finished goods to and from the country, which directly affected the manufacturing sector (Mahmud et al., 2021; Harapko, 2021). A study by Harapko (2021) further indicates that the COVID-19 pandemic has not necessarily created new challenges for the supply chain system, but has rather exposed pre-existing unseen vulnerabilities therein. Anakpo and Mishi (2021) found that approximately 90% of all SMEs in South Africa faced significant supply chain challenges during the pandemic and as a result of the established lockdown measures. Supply chain resilience is important for South Africa’s economic development and growth (Moromane
& Ncube, 2021). As Erhie, Osinubi, and Nevin (2021; p17) state:
…an effective supply chain systems ensures higher efficiency rates, quality over control, better customer relationship and service, faster production cycle, reduced production costs and an overall improvement in the financial performance of a small and medium enterprise.
Yet, due to the lockdown restrictions on imports, exports, in-country logistics, and productions sites, both national and international supply chain systems were unable to remain resilient, which adversely impacted SMEs dependent on said supply chains (Anakpo & Mishi, 2021).
The decline in demand of South African raw materials and commodities as well as South Africa’s limited access to industrial components and manufactured goods and commodities from abroad further harmed South African SMEs that are import-export dependent (Arndt et
al., 2020). Supply chain-reliant SMEs have, thus, been severely hindered by the COVID-19 pandemic and lockdown restrictions (Arndt et al., 2020). These enterprises’ survival now depends on their ability to adapt to the new realities brought about by the COVID-19 pandemic (Misky, Alzahrani & Oreijah, 2021).
2.16.3 Decline of market demand
Market demand is a significant guide for SMEs’ survival, growth, and development (Caballero- Morales, 2020). The outbreak of COVID-19 brought about a market demand shock in industries such as entertainment, travel and tourism, construction, transportation, wholesale and retail, manufacturing, and oil and mining (van der Merwe, 2020). Regulations pertaining to mitigating the spread of COVID-19, such as social distancing and the restriction of physical movement, caused a disruption in consumer consumption and spending, which led to the noted decline in market demand (Nicola et al., 2020).
A study by Arndt et al. (2020) indicates that lockdown regulations had a major adverse impact on market demand, as people were only allowed to buy essential products. Consequently, many SMEs were greatly affected by the decline in market demand for their ‘non-essential’ products and services, as SMEs, in general, are heavily dependent on regular customer traffic for their survival (van der Merwe, 2020).
2.16.4 Cashflow management
For many South African SMEs, the COVID-19 pandemic caught them off guard financially, as most lacked sufficient cash reserves (Caballero-Morales, 2020). This issue was compounded by how the lockdown measures to contain the pandemic required 90% of all SMEs to shut down (StatsSA, 2020b). This sharp reduction in operation meant that 90% of all South African SMEs had little to no available cash or cashflow (which would usually be gained via customer purchases) to pay their recurrent expenses such as salaries, rent, or interest on loans (Weber, 2020). Furthermore, many South African SMEs were unable to access the government’s stimulation funding, which further exacerbated their cashflow issues (Weber, 2020), as banks do not give out loans to SMEs. The inability to maintain good cashflow over this period threatened the survival of SMEs during the country’s extended lockdown (Weber, 2020).
A study by Botha, Smulders, Combrink, and Meiring (2020) further indicated that the large failure of South African SMEs during the peak of the COVID-19 pandemic and lockdown was due to SMEs’ inability to manage cashflow or them not having cashflow at all. The outbreak
of the pandemic, thus, exposed SMEs’ general lack of prioritisation and financial planning pre- pandemic, as these played a great role in why the pandemic had such a negative impact SMEs’
cashflow (Weber, 2020). Rajagopaul et al. (2020) further note that the COVID-19 pandemic has added even more pressure to SMEs’ liquidity and cashflow issues – both during and into post-COVID-19.
Another issue is that despite the pandemic exerting pressure on South African SMEs’ cashflow, they were still expected to pay both their fixed and statutory costs, which led to the vast majority of SMEs not being able to survive the initial lockdown (Caballero-Morales, 2020).
The deterioration in SMEs’ cashflow was also exacerbated by SMEs not being able to access funding (Rajagopaul et al., 2020). As such, the cashflow issues faced by SMEs, particularly at the beginning of the pandemic, have proved to be one of the major challenges faced by these enterprises during this time period.
2.16.5 Inconsistencies in policies and regulations
The policies and regulations that were formulated to limit the spread of the COVID-19 virus indicated that the economy and SMEs were not a primary concern during the onset of the COVID-19 pandemic (Bartik et al., 2020). Despite many of the quickly-implemented policies and regulations that were imposed on SMEs having good intentions, they tended to be insufficient and had adverse impacts on SMEs (Ozili & Arun, 2020). For example, both the
‘social distancing policy’ and the ‘stay-at-home policy’ immensely damaged SMEs, especially those dependent on human interaction in sectors such as hospitality and travel and tourism (Rogerson & Rogerson, 2021). The imposed policies and regulations related to halting the COVID-19 pandemic also resulted in many SMEs closing down during the lockdown period, with as much as 90% of all SMEs being prohibited to operate during the pandemic (Ozili &
Arun, 2020). In some cases, therefore, the imposed policies and regulations led to outright SME failure, with the South African government failing to take responsibility for this failure (Fairlie, 2020). In other words, while South African SMEs were expecting the relevant COVID-19 policies and regulations to protect and mitigate their challenges and barriers brought about by the pandemic, the contrary was true, due to contradictory and conflicting policies and regulations, which ultimately became yet another challenge to SMEs development and growth.
2.17 Strategies to Mitigate Small and Medium-sized Enterprise-specific COVID-19