The National Small Business (NSB) Act (102 of 1996) defines SMMEs as a separate and distinct business entity, including cooperative enterprises, sole proprietorships, partnerships, close corporations, and non-governmental organisations, managed by one owner or more which, including its branches or subsidiaries, if any, is predominantly carried on in any sector or sub-sector of the economy (Government Gazette of the Republic of South Africa, 1996;
Dlova, 2017).
Furthermore, the National Small Business Act (102 of 1996) (as amended), as indicated in Chapter 1, categorizes businesses in South Africa into distinct groups, namely; survivalist, micro, very small, small, and medium, hence the use of the term “SMME” for small, medium and micro-enterprises (Mago & Toro, 2013). The most common categorization of SMMEs uses the number of employees per enterprise size category, combined with the annual turnover categories, and the gross assets, excluding fixed property (Abor & Quartey, 2010;
Ramasobana, Fatoki & Oni, 2017).
A brief description of SMMEs is provided below:
Survivalist enterprise
This category is considered pre-entrepreneurial and normally includes business activities by individuals who are unable to secure a paid job or enter into the economic sector of their choice (Abor & Quartey, 2010). Poverty and the need to provide basic sustenance are the main drivers for establishing this category of business. The businesses trade in the informal economy, no capital is invested, and there is very little or no skills training. The income generated is less than the minimum income standard or the poverty line (Mago & Toro, 2013).
Examples of survivalist businesses include hawkers, vendors, backyard manufacturing and services, subsistence farmers and occasional home-based evening jobs (Berry, Von Blottnitz, Cassim, Kesper, Rajaratnam & Van Seventer, 2002). In practice, survivalist businesses are often categorized as part of the micro-enterprise sector, however, survivalist businesses have very limited opportunities to hire employees and grow into a viable registered business (DTI, 2008).
Micro enterprise
Micro-enterprises are mainly owned by one owner, some have family member involvement, and for those that do have paid employees, usually employ no more than 5 people (NCR, 2011:25). These businesses normally trade in the informal economy, as many do not have business licenses and/or operating permits where required, do not meet formal registration requirements, and usually have a turnover of below the Value-Added Tax (VAT) registration limit (Mago & Toro, 2013). The businesses are usually home-based, typically have a limited capital base, no proper accounting systems, and have very basic technical and business skills (Berry et al., 2002). Examples include spaza shops, minibus taxis and household industries (Fatoki, 2016). Micro-enterprises are, however, considered to have the ability to advance into small businesses (Dlova, 2017).
Very small enterprise
These are enterprises employing fewer than 10 paid employees, except for the mining, electricity, manufacturing and construction sectors, in which the figure is 20 employees. Their turnover is between R150, 000 and R500, 000 (NCR, 2011:25). These enterprises mainly operate in the formal economy and have access to technology (Abor & Quartey, 2010; Dlova, 2017).
Small enterprise
Small enterprises are generally more established than very small enterprises and exhibit more complex business practices. They are usually owner-managed or directly controlled by an owner, with employment levels ranging between 5 and 50 employees (NCR, 2011:25).
These businesses are likely to conduct operations from a business or industrial premises, are registered for value-added tax, and usually fulfill other formal registration requirements.
Examples of small businesses can be found in sectors such as construction, manufacturing, retailing, and professional services (Dlova, 2017).
Medium enterprise
Medium enterprises constitute a category of businesses between small and large business.
These businesses are often characterized by the decentralization of power to an additional management layer, and there may be more complexity to the shareholding (Abor & Quartey, 2010). The maximum number of employees is 100, or 200 for the mining, electricity, manufacturing and construction sectors (Dlova, 2017). The capital assets (excluding property) of about R5 million is perceived as the maximum thresholds (The Real Economy Bulletin, 2017).
The above definition of SMMEs encompasses a very broad range of businesses which include formally registered and informal businesses. To put the South African small business market into perspective, it must be noted that there is uncertainty about the size and composition due to businesses which may not be registered which makes record-keeping difficult (Ladzani &
Netswera, 2009). In South Africa, if a business is not registered for example for Value-Added Tax (VAT), with the Unemployment Insurance Fund (UIF), or with the South African Companies and Intellectual Property Registration Office (CIPRO), it would normally be considered as trading in the informal economy. A sole proprietor or partnership would not be required to register at CIPRO; however, it should register for tax depending on the earnings, and where employees are appointed, to register with the unemployment insurance fund. It is important to note, however, that if a business is operating in the informal economy, it does not necessarily mean that it is a survivalist or micro-enterprise.
There are various reasons for business owners not wanting to register the business. Schneider and Klinglmair (2004) confirm that the main reasons for becoming informal in the formal economy are due to direct and indirect taxation and government regulations. In the labour market, the costs which businesses (and individuals) have to pay when officially hiring an employee are increasing due to indirect tax, social contributions on wages, and due to the legal regulations attached to employment. Examples of indirect taxes on wages are the
training, levy, and contributions to the unemployment insurance fund. This is especially true in Europe, where both are calculated on the wage bill of a company (Schneider & Klingmair, 2004). In South Africa, these challenges are also prominent. Ferreira (2007) notes that many small businesses in South Africa are unable to reach their objectives due to impediments such as red tape, cumbersome regulations, and tax. Several studies (SEDA, 2016; Musara and Gwaindepi, 2014; Oyelana and Fiseha, 2014; Dlova, 2017) highlight that the business environment in South Africa inhibits the establishment and growth of small businesses.
Furthermore, Worku (2015b) states that the cost of doing business in South Africa is arguably the highest in the world. Abor and Quartey (2010) add that the licensing and regulatory requirements impose an excessive burden on small businesses in South Africa.
From the above, it was ascertained that small businesses include businesses which trade in the formal and informal economy of South Africa. A further breakdown is provided below to provide an indication of the number of small businesses, and the geographic and demographic information. Where possible, the information was further separated to distinguish between the businesses operating in the formal and informal economy in South Africa. One of the main variables used to distinguish whether a business operates in the formal or informal economy, based on the information included in Tables 2-1 and 2-2, is whether the business is registered for VAT. In 2015, VAT registration was legally required for businesses with a turnover of >R1 million (SARS, 2015). The Tables were compiled using the information from various sources (SARS, 2015; SEDA, 2016; Statistics South Africa, 2016; BER 2016; Statistics South Africa’s Quarterly Labour Force Survey (QLFS), 2015; Statistics South Africa Labour market dynamics (LMD), 2015; The Real Economy Bulletin, 2017):
Table 2-1: Statistical profile of small businesses in South Africa SMALL BUSINESSES (2015)
Total 2.2 million businesses.
650 000 businesses registered for tax with taxable income between R250, 000 and R20 million.
Employment provided by formal small businesses: 5.8 million people.
Main sectors: Retail, construction and business services.
Main provinces: Gauteng, Western Cape, KZN (mainly in metros).
Source: Authors own compilation
Table 2-2: Formal and Informal small businesses in South Africa
2015 Formal Informal
Numbers 670 000 1.5 million
Employment status 69% of owners are employers, 31% employ only themselves
20% of owners are employers, 80% employ only themselves Average monthly income R8000 – R12000pm R2000 – R4000pm
Majority ownership by race 49% owned by black people 94% owned by black people
Ownership by gender Women 24%, Men 76% Women 40%, Men 60%
Main geographic distribution Gauteng, Western Cape &
KwaZulu Natal
Limpopo and Mpumalanga
Primary industries Retail, financial, construction and business services
Trade and accommodation sector
Education levels Degree or diploma 15%
Matric 38%
Do not have matric 47%
Degree or diploma 5%
Matric 25%
Do not have matric 70%
Source: Authors own compilation
The above provided a general profile of small businesses in South Africa, with a further distinction between formal and informal small businesses. Furthermore Burger, Marais and Van Rooyen (2017) state that in comparison to informal small businesses, formal small businesses typically have more capital, more advanced technology, more employees and higher incomes, where the owners are mostly professionals or artisans with significant skills.
Provinces with larger economies tend to have the largest share of formal small businesses (The Real Economy Bulletin, 2017). In contrast, the businesses operating in the informal economy show high failure rates, the income generated is very low, and have low capital amounts available, especially in the more rural provinces (SEDA, 2016).
The reason for the high failure rates of small businesses will be addressed later in the chapter.
Below the capital requirements during the lifecycle stages, and the possible capital sources for small businesses will be further explored.