2.6 Challenges faced by small businesses
2.6.2 General challenges faced by small businesses
Table 2-4: Challenges: Access to credit for small businesses
For the bank: For the small business owner:
Inability to determine the credit risk attributed to the lack of business information.
Perceived overall as high risk.
Risk of failure in the early stages poses an even higher risk.
High appraisal or due diligence costs.
Weak expected return.
Unable to obtain credit.
Time to travel to the nearest financial institution.
Complex bank application process.
High transaction costs.
High interest rates.
Lack of quality business development support.
Finance and technical assistance costs.
For the bank and the applicant:
Using the 5C’s of credit:
Entrepreneurs’ Character/Capabilities - lack of:
Financial planning skills.
Business management skills/experience.
Specific industry knowledge.
The capacity of the entrepreneur - lack of:
Accurate and reliable financial information.
Lack of timely payment from Government on contracts.
Capital by the entrepreneur - lack of:
Equity contribution.
Conditions of the business - lack of:
Demand for products or services.
Access to markets.
Bargaining power with suppliers and customers.
Diversity.
Collateral:
Insufficient or no tangible assets to cede as security.
Source: Authors own compilation
The above provided an overview of the challenges faced by small businesses to obtain credit.
Below any other prominent challenges faced by small businesses are explored.
departments and levels of government, poor communication and access to information, and administrative inefficiencies in government departments and municipalities (Musara &
Gwaindepi, 2015) For example, there are delays in obtaining permits and licenses for the businesses according to the World Economic Forum (WEF) 2015/2016 Global Competitiveness Report. The report listed government bureaucracy as one of the major obstacles to entrepreneurial and business activity in South Africa (Schwab & Sala-I-Martin, 2016). Dlova (2017) states that it can take up to 176 days to license a business in South Africa.
The business owner therefore spends a large amount of time dealing with regulatory compliance (which includes labour disputes) and this takes time away from managing the core business functions, which ultimately results in loss of income. Moreover, studies indicate that small businesses can spend up to eleven days per case at the Commission for Conciliation, Mediation, and Arbitration (CCMA). The CCMA is an independent authority in South Africa that resolves labour disputes. Its main aim is to promote fair practices in the work environment.
Reports reveal that the average small business is taken to the CCMA twice a year (SBP, 2015).
Furthermore, the SME Growth Index reports that small businesses spend an average of eight working days a month dealing with red tape (SBP, 2015). Not only is there an opportunity cost where time is taken away from managing the business, but there is the actual cost payable for compliance. The Davis Tax Committee Interim Report on Small Business indicates a median cost of R20 500 to comply with all tax requirements. According to the SBP report, the cost of regulatory compliance (75 hours a month) for a small business equates to approximately R18 000 a month, or R216, 000 a year. If a business has a turnover of R5 million, these costs represent 4% of turnover. This amount seems high for a small business, specifically in the start-up phase and clearly indicates the disincentive not to register the business and comply with business legislation (SBP, 2015).
A study conducted by Fatoki (2014a) argued that problems experienced with regulatory compliance and bureaucracy may be linked to small businesses engaging in corruption. The Transparency International Global Corruption Report (2008) defines corruption as “the abuse of entrusted power for private gain” (Dlova, 2017). Fatoki (2014a) observed that corruption further raises operational costs and ultimately limits the opportunities for growth of a small business.
The other prominent issue which is also adding to the cost for small business operations is the high crime experienced in South Africa. A study by the United Nations Office on Drugs and Crime (2013) revealed that South Africa was amongst the world’s five most dangerous nations (Dlova, 2017). According to the 2015 Economic Survey of South Africa, the high crime
situation was forcing small businesses to increase security spending (Burger et al., 2017). The problem for small businesses is further exacerbated as some businesses may not have insurance to cover losses due to criminal acts (Fatoki, 2014).
The challenges faced by small businesses are however not limited to regulatory and criminal activities. Table 2-5 provides a summary of the general challenges faced by small businesses based on the views of various authors and publications (Fatoki & Garwe, 2010; Oyelana &
Fiseha, 2014; Fatoki, 2014; GEM, 2014; Musara & Gwaindepi, 2014; Mthimkhulu & Aziakpono 2015; Love et al., 2015; BER, 2016; Burger et al., 2017; Dlova, 2017). The challenges have been split between firm-based factors and external economic factors:
Table 2-5: Challenges: Firm-based and external factors
Firm-based factors External factors
Insufficient capital.
High operating expenses.
Poor management of consumer credit.
Poor cash flow management.
Lack of management skills.
Adapting to a changing business environment.
Time management.
Delegation and cooperative management.
Planning and prioritizing.
Inability to understand market expectations.
Inability to identify the target market.
Poor market access.
Poor location.
Lack of knowledge of competitors.
Ineffective marketing.
Unable to develop relationships with customers.
Inability to attract suitable employees.
Low employee productivity.
Poorly trained employees.
High employee turnover rate.
Lack of support networks.
Lack of access to appropriate technology.
Lack of access to appropriate physical infrastructure.
Regulatory compliance.
Business registration.
License requirements.
Labour legislation.
Taxation.
Compliance with BEE.
Inefficient Government bureaucracy.
Municipal issues.
Crime and corruption.
Inflation.
Exchange rates.
Interest rate fluctuations.
Increased competition.
No support from large companies.
Access to electricity.
Lack of recognition of the importance of small businesses in economic
development.
Source: Authors own compilation
A recent study by Ayandibu and Houghton (2017:136), went one step ahead and ranked the internal and external challenges faced by small business in South Africa (Table 2-6), where (1) is considered the most prominent challenge, and (30) the least prominent challenge:
Table 2-6: Internal and External challenges in ranking order
Internal and External challenges in ranking order 1. Lack of access to finance.
2. Lack of collateral.
3. Insufficient owners’ equity contribution.
4. Crime.
5. Insufficient government support.
6. High interest rate.
7. Inadequate demand.
8. Inadequate market research.
9. Location of the business.
10. High competition.
11. Bad credit record.
12. High production costs.
13. Lack of information technology.
14. High transport costs.
15. High taxes and other tariffs.
16. Recession in the economy.
17. Lack of experience relevant to the venture.
18. Founder not familiar with market/industry.
19. Lack of networking.
20. Lack of business skills.
21. Shortage of skilled labour.
22. Costs of registration and licenses.
23. High inflation rate.
24. High foreign exchange rate.
25. Poor electricity supply.
26. Lack of training.
27. Corruption.
28. Poor roads.
29. Poor water supply 30. Poor telecommunication.
Source: Ayandibu & Houghton (2017:136)
The above provided a view of the challenges faced by small businesses, a significant one being the lack of access to credit (Ayandibu & Houghton, 2017). Access to credit seems to be a problem for small businesses worldwide. However, according to Mbedzi (2011a), in comparison to other developing countries, the contribution to job creation and economic growth by small businesses in South Africa is small and it is among those with the highest failure rate for start-ups (SBP, 2015).
The Statistics South Africa Labour Force Survey (2015) shows that small businesses that employ fewer than 50 people are becoming less important as job creators, to the extent that the GEM Report (2008) states that more small businesses in South Africa are shutting down than opening (Dlova, 2017). Mbedzi (2011a) identified one of the main contributing factors for small businesses not achieving success is due to poor or inadequate training in entrepreneurship. This was also highlighted in the GEM National Expert Survey which emphasized that only 9.3% of small business owners in South Africa received any form of training on starting a business (GEM Executive Report, 2010). The main reasons for the failure of small businesses in South Africa are further explored below.