Gauteng sme study 2008

Quantitative and qualitativeresearchon SMEs in Gauteng USAID Financial Sector Program

CONTENTS
Acronyms
Background
The Financial Sector Program
Methodology
GIS findings and maps
Quantitative findings
Qualitative findings
Demographics
Need and use of financial BDS
Banking and financial services
Legal and regulatory matters
Knowledge and information management
Analysis and conclusions
Key Recommendations

ACRONYMS

BACKGROUND
The Small Business Act (1996) and subsequent legislation gives recognition to the important role played by SMEs in the South African economy
It is estimated that SMEs account for 41.7% of private sector employment in South Africa.
Increasingly, government has looked to this sector (as opposed to micro enterprises) as the source of job creation in the country.
In Gauteng alone there are about 1 053 818 small business owners
However, as (very often) members of the second economy, the challenges faced by SMEs (both historically and currently) have to do with, for example, access to markets, finance, business opportunities or business support services
Small businesses were ranked based on their level of business sophistication in Gauteng (BSM) in the 2006 FinScope study. SMEs mainly belong to BSM 6 and 7

BACKGROUND
Small and Micro-Businesses by Sophistication Segment
Source: FinScope, Small Business Survey Report Gauteng 2006 (Johannesburg: FinScope, 2006)

BACKGROUND

BACKGROUND
Small business and the formality of the business

FINANCIAL SECTOR PROGRAM (FSP)
The FSP is funded by USAID. The objective of the program is to:
expand access to financial services and lower financing costs for small and medium enterprises (SMEs) through
reforming the legal and regulatory framework affecting the financial sector and business environment and
improving the commercial viability of lending to historically-disadvantaged SMEs in South Africa.
The ultimate result is to mitigate market credit risk leading to increased SME access to a range of quality affordable financial services.

FSP Workstreams:
Financial business development services
Financial management, business planning, access to and use of support organisations
Financing from outside the business, use and constraints of loans.
Legislative and regulatory matters
Improve financial sector legal and institutional framework; enhance regulatory environment for SMEs
Access to and sharing of information, knowledge of changes in business environment, use of ICT

RESEARCH BRIEF AND PURPOSE
Quantitative analysis of SMEs in the BSM 6 & 7 FinScope small business survey of 2006
Qualitative research by way of focus groups among HDI business owners with a turnover of more than R200 000
The purpose of the above was to provide the most relevant information that will enable the FSP team to accurately design and implement their work plan and determine the targets of the Performance Management Plan

ASSUMPTIONS
The BSM model provides the most realistic segmentation of small businesses
Used adjusted Banking Association’s definition of SME
Turnover of R500 000 to R20 million per annum
Bottom threshold was decreased to R200 000
To include SMEs in transition to higher level
Includes the highest concentration of HDI SMEs
Expected that this group will need support the most
Excludes micro enterprises

METHODOLOGY
Analysis of the 2006 FinScope small business survey for BSM 6 and 7
Identify areas were BSM 6 & 7 are located
Discussion guide
Questions pertaining to each of the 4 workstreams
Criteria for selection
HDI business owner
Annual turnover of more than R200 000
Recruitment of participants
Recruiters in selected areas
Recruitment questionnaire
Conducted 11 focus groups across Gauteng

QUANTITATIVE SURVEY RESULTS

2006 SMALL BUSINESS SURVEY
About 1 053 818 small businesses in Gauteng
109 441 are HDI BSM 6 & 7 SMEs
Awareness of support organisations is high
57% never used support organisations
42% need for capital most important problem faced
2% had a loan at the time of the survey

BUSINESS TURNOVER OVER PAST 12 MONTHS

BSM Maps
Created from the 2006 FinScope SME survey using small area estimation techniques
Maps show percentage households falling into BSM 6 and 7 within an enumeration area
Most of the focus group areas were selected using BSM 6 map where highest concentration of HDI small businesses are found
More African and Coloured SMEs found in BSM 6 while Asian SMEs mainly found in BSM 7
BSM maps enabled focus group areas to be selected and provided epicentres for HDI small businesses to be found

Distribution of BSM 6 households
Inset: Location of Gauteng province in South Africa

Distribution of BSM 7 households
Inset: Location of Gauteng province in South Africa

SELECTED FOCUS GROUP AREAS
Pretoria
Pretoria CBD – African
Eersterust – Coloured
Mamelodi – African
Soshanguve – African
Laudium - Asian
Johannesburg
Eldoradopark - Coloured
Florida - Coloured
Lenasia - Asian
Soweto – African
Alexandra – African
Tembisa - African

Focus Group Area Maps
Focus group area maps show selected enumeration areas from BSM 6 and 7 maps in Google Earth
Examination of focus group area maps show that selected enumeration areas are generally located near the commercial and industrial centres
Asian and Coloured focus group areas tend to be larger in extent than African areas
African focus group areas differ from one another depending on levels of urbanization and formal settlement
African focus group areas tend to have several separate areas where SMEs are concentrated

MAMELODI FOCUS GROUP AREA

EERSTERUST FOCUS GROUP AREA

SOSHANGUVE FOCUS GROUP AREA

PRETORIA CBD FOCUS GROUP AREA

LAUDIUM FOCUS GROUP AREA

TEMBISA FOCUS GROUP AREA

ALEXANDRA FOCUS GROUP AREA

SOWETO FOCUS GROUP AREA 1

SOWETO FOCUS GROUP AREA 2

ELDORADO PARK FOCUS GROUP AREA

QUALITATIVE SURVEY RESULTS

DEMOGRAPHICS

COMPANY TURNOVER

TURNOVER BY POPULATION GROUP

BUSINESS SECTOR

YEARS IN BUSINESS

FINANCIAL BUSINESS DEVELOPMENT SERVICES

Financial Business Development Services
By Financial Business Development Services (BDS) we mean a range of services that are intended to develop/improve business performance. These services are provided by government agencies, private sector and NGOs. Financial BDS focuses on:
Financial management, which includes budgeting, costing / pricing, cash flow management, records keeping, book keeping, preparing and analysing financial statements, auditing and tax submissions
Provision of consulting and advisory services, training and mentoring
Key issues relating to financial BDS that need to be assessed include access to information and financial ‘intelligence’; and proximity/accessibility, affordability and relevance of services

Aware of Financial BDS
Aware of following support/advice services (in order of prominence):
Khula Enterprises
SETAs
DTI
Umsobomvo Youth Fund
NAFCOC
GEP
DBSA
FNB, ABSA, Nedbank
NEF
Aware through advertising, offices nearby, forums and consultants
Mostly approached for loan but not successful
SETA approached for training and professional advice
Others approached for business and marketing plans, support in running businesses, training and education

Aware of Financial BDS
BDS support not up to standard and not making a difference or fulfilling their mandate
Resulting in SMEs doing their own financial management, development of business and marketing plans
SMEs have closed down because of a lack of support
Support from BDS institutions must be systematic and over a period of time
BDS providers not keeping pace with needs and expectations of SMEs
Unrealistic expectation of BDS for SMEs to develop ‘big’ and ‘beautiful’ business plans

Need for Financial BDS
Financial support the most important need
Advice and training on the step-by-step procedures needed to start and run an SME including:
Determining if a business is viable
Securing start up and longer term funding
Determining the legal vehicle to use
Setting up and structuring the business
Developing business plans and profiles
Locating the business
Securing and maintaining clients
Need for bookkeeping services to assist with VAT, PAYE, SDL, UIF, etc
Affordability of bookkeeping services identified as a concern

Need for Business Plans
SMEs understand the value of business plans
Need for business plans is increasing because they are needed to access finances, support services and to tender for work
One SME indicated that the business plan was needed to grow the business and keep it sustainable into the future
Advice on developing business plans from business associates, financial advisors, advocates, family and friends
Some SMEs use professionals to develop business plans but some question the ability of SMEs to operationalize these
Many SMEs don’t develop business plans because they are ‘too busy’.

Need for Marketing Plans
SMEs see marketing plans as important in reaching potential customers
Marketing plans must be ‘workable’ considering limited turnover of SMEs (ie use appropriate marketing tools – pamphlets, wall signage, etc)
Location of SMEs in relation to their customers was seen as critical
All focus groups indicated need for training in developing business and marketing plans

Use of Financial BDS
Limited knowledge and infrequent use of BDS institutions and service offerings now and in the past
Needs of SMEs not being met when approaching BDS institutions because:
No feedback given on application
Given the run around and staff not helpful
Bureaucratic processes and lack of capacity
Deposit and documents required too restrictive
Assisting too few SMEs because of restrictions
To get assistance must have developed business plan (catch 22 situation)
Location of BDS must be closer to SME business premises
Need for support/advice in own language

Business Records
Some SMEs have bookkeepers and keep records
Family members
Self
Many others not keeping records because they are too busy or have not been trained to do so
Most SMEs are using manual systems – few have progressed to using computerized systems

Communication with BDS institutions
Communication problems include:
Inability to get hold of BDS providers, especially in government:
the “phone will ring until hallelujah”
Inability to be put through to the right person
Time to get feedback is lengthy and sometimes the issue is not addressed at all
Only way is to know someone in the BDS institution
BDS staff are often unfriendly

RECOMMENDATIONS
Strategy to improve awareness of BDS support/services offered by organisations
More communication, advertising and coordination of BDS offerings required
Training of BDS staff in addressing needs and being responsive to SMEs
Development of simple information products on the availability of BDS – institutions to contact and individuals to speak to
Booklet on how to set up and manage small businesses and how BDS providers should communicate with SMEs
Integrated approach in the provision of BDS support/advice in different sectors – government to facilitate

RECOMMENDATIONS
SMEs identified need for dedicated capacity building on:
business planning
financial management
day-today business management
Sector specific mentoring required
Location & quality of support to be improved through training of BDS staff
Research into BDS provided in public and private sectors to determine what they offer, effectiveness of services and medium used to communicate with SME

BANKING AND FINANCIAL SERVICES

Banking and Financial Services
Banking and financial services covers the areas of:
Existing use of finances from formal and informal institutions and under what conditions
Suitability of financing from an amount and repayment perspective
Need for financing
Past experience in applying for financing and reasons for being declined
Reasons for not applying for financing

Access to Finance
Majority of SMEs have personal bank account, business bank account or both
Type of account is mainly a savings or ATM
Black SMEs and females have less access to bank accounts and have greater challenges in getting access to financing
Need for finance to enable:
Businesses to grow
Improve workplace conditions
Buy stock and equipment
Find bigger and better premises
“Yes, we are always short of cash flow. The more money you have the more stock you can buy. In a business you can never have enough money” (Laudium businessman)

Obstacles to accessing finance
Many indicated that they could not get funding and found financing/ BDS support a challenge
There are numerous reasons why SMEs have difficulty getting access to financing including:
No accounts with institutions – must have an account for at least 6 months
No credit history
Poor credit history
Lack of security/collateral
Not enough cash flow
Not enough equity in their business
Inadequate financial records and no accountant – needed 3 years of bank statements for business
Poor financial literacy
Not in business long enough
Blacklisting
Business owners don't have always have title deeds to their residential properties
Feel intimidated by financial institutions
“They [financial institutions] have a fear when you dressed like that [in a suit and tie with a briefcase]” (Tembisa businessman)

Further obstacles to accessing finance
Banks only allow savings accounts to start up businesses that don't provide statements
High interest rates
Institutions only fund large projects and in specific sectors
“With Umsombovu you have to understand that they are interested in big projects, like manufacturing. They will send you to Gauteng Shared Services, the DTI, or Gauteng Growth something. They’ll tell you that those people will be able to help you with those small funds, but they are not interested in those projects.” (Alexandra businessman)

Obstacles to accessing government finance
“ .. I am aware of all of those, I am in business for a long time now, I went to KHULA and they told me that they will provide a loan, but they want security. It is a long process. When you go to them they will assist you and then they send you there and then they decide if your business is worth it, it is a waste of time. Maybe it is where we come from and we are used to struggling to make ends meet and then maybe in the end we will grow.”
“What happens here is that they all have different names, they but they all want the same. If you have a bad experience with one of them, you look at them as just another one.”
“Umsombovu, yes, but it’s not more of a financial assistance if you are in services. They are also not interested in something less than R60 000. If you come up with a need for a small amount like R45 000 they say go to a financial institution. You must remember they are a bank themselves and need to make a profit. Even Khula is also not funding on a small scale”.

Sources of finance used by SMEs
Because it is so hard for SMEs to access financing from formal and informal institutions they secure funding from:
Family and friends
Retrenchment packages
Pensions and other savings
Other sources of finance
Bond on their home
Use property as surety
Loan taken in personal capacity
From industry
Black listed SMEs forced to use informal money lenders

Support from financial institutions
SMEs reported working through consultants and filling in applications but still not getting support
SMEs informed to come back after 3-6 months once had enough bank statements
SMEs requested institutions to visit their premises to see potential of businesses
Indication of cultural/racial issues in securing funding
“There was a white relationship manager at the bank … I needed a cheque that had been deposited into my bank account cleared urgently … there was a big problem … if I had a Black relationship manager there would not have been a problem”

Opinions on financial institutions
Banking is only for the good times
“....for a long time my account was okay and then I ran out of money, so I went to the bank to ask them for money and they said no”.
Banks are perceived to be a good place to get finance
“We normally approach the bank because it is the trustworthy party.” (Soshanguve business women)
Banks don't consider SMEs important
“I suppose I am a small thing” (Lenasia business man)

Opinions on financial institutions
Banks don't provide the full loan amount required by SMEs
“Yes I had an account, I still remember I borrowed only five thousand Rand; they didn’t give me more and couldn’t cover everything.” (Soshanguve business women)
Banks don't reject loan applications because of race/cultural considerations but because of ineffective communication on their side
“I don’t think it is based on colour, it is based on risk but they don’t go to the level where they explain to you what makes you a high risk.” (Eersterust businessman)

Deficiencies in SMEs
Lack of financial education and literacy
Lack of business training
Highly competitive and undiversified markets
Lack of record keeping and proper documents (eg company documents, tax clearance, UIF, etc)
Inability to present formal business plans
Poor credit ratings
Lack of collateral/security for loans
Limited capital bases and ability to grow capital
Misconceptions about the risk analysis process

Deficiencies in financial institutions
Rigid credit scoring policies
Rigid collateral requirements
Reluctance to provide small loans
Rigid repayment schedules
Support organisations acting like banks
Lack of understanding of cultural differences
Poor report-back to applicants on loan refusals
Poor communication of services offered
Lack of differentiation of product and approach offered to clients
Restrictions placed on lending via the National Credit Act - additional documentation, calculations and checks

Recommendations
Investigate possibility of informal lenders being part of credit scoring system in future
Develop clear step-by-step guidelines on what is needed to secure funding from institutions
Provide guidelines to staff in financial institutions and government organizations on communication standards
To address deficiencies on the supply and demand side as regards access to finance

Recommendations
Develop equity accumulation programs – subsidized share schemes – include in Financial Sector Charter requirements
Government funded equity/asset base creation program – fund fixed assets development for SME's (start-up capital)
Re-design collateral scoring techniques – consider "non-western" collateral
Provide tax incentives on mentoring programs from bigger business
Relaxation on re-payment "holidays", interest rate capping, extended re-payment periods
Extensive financial literacy training programs
Easy/cost free access to firm's credit rating information
Develop the third tier banking system granting smaller loans with short repayment periods – create Micro Banking/Divisions
Encourage formal banks to finance third tier banking
More flexible interpretation of National Credit Act for categories of small business
Change mindsets of the formal banking institutions vis-a-vie small business

Recommendations
Fund technology drive in small business
Develop creative funding approaches learned from informal/NGO schemes:
Repayment in public
Notional collateral
Targeting women's groups
Develop market access programs
Encourage segmentation of Donor/Support Agencies against specifically targeted SME segments – using the BSM
Simplify the "business plan" requirements process
Expand geo-graphic coverage of Micro Bank/Division coverage from formal banks
Subsidised/lower interest for start-up capital/technology purchases for small business
Better training of bank staff to understand small business needs
Government capital injection incentive program for small business - -for every compliance registered get 10 points – 100 points equals computer

LEGAL AND REGULATORY MATTERS

Legal requirements and compliance
knowledge of benefits and liabilities associated with different types of companies; knowledge of regulatory requirements; need of legal/regulatory training.
Relationships with public institutions
At the national, provincial and municipal levels
Knowledge of BEE legislation
Awareness of business opportunities and benefits associated to BEE legislation. Need for training
Association membership and Advocacy
Capacity of associations to help and defend members

SMEs were registered mainly as close corporations (CC) and sole proprietors
Larger SMEs tended to register as CCs
Benefits of registering as a CC were listed as:
Made business sense
Get access to VAT number and Tax Clearance certificate
Better positioned to get access to government work
Some were not aware of the benefits
Few knew that it reduces risks and liabilities of SME
SMEs started business because wanted to own their own business
Advice received from business associates, family and accountants in selecting legal vehicle

Reasons why SMEs were not registered included:
Limited time available to SMEs
Limited knowledge of registration process – registration process is not complicated or expensive
Saw themselves as too small a business
Did not see the benefits of registering
Most participants did not understand the benefits associated with the different types of companies

Most SMEs try to respect their obligations towards SARS, but were not aware of the new VAT threshold in 2009
SMEs knew to register their employees for UIF
SMEs more likely to comply in paying income tax and PAYE
Reasons for non-compliance was indicated to be a lack of knowledge

Relationship with public institution
SMEs indicated that public institutions were not very useful
SMEs raised several concerns about public institutions:
Were not accessible as they were located in major urban centres
Did not understand SMEs so they were not able to help them properly
Needed to communicate with them better and within local languages
Did not know where to find public institutions
Bureaucratic and length procedures, not transparent and practiced nepotism
Staff needed to be trained in understanding policies/regulations and how to deal with customers
Did not follow-up with SMEs after initial engagement

Relationship with public institution
Government should assist SMEs by:
Facilitating access to loans from financial institutions
Providing training and education in the setting up of SMEs
Providing access to business premises
Providing access to relevant information in local languages
“Most important thing is that they must make information more easily accessible in all the languages; some off us has difficulty in finding the right information”

SMEs generally don’t know the BEE legislation - they think it is biased and reserved for big companies
SMEs were not aware that they had to register to be BEE
“Yes, I haven’t register for it, I thought being black you are automatically registered as BEE”
Almost all SME were not registered as a BEE company and most of them did not know how to do it.
SMEs don’t see how they can benefit from the BEE legislation.

SMEs were not registering to be BEE because:
They were too busy running their business
BEE is a mechanism whites use to get government business
SMEs indicated they needed more information and training on the benefits of BEE
Some SMEs felt that BEE only benefitted Africans
“BEE is a waste of time for us, for me, myself because first of all it hasn’t been marketed properly. We - I’m talking as a young Indian businessman – we haven’t been educated as to what resources we can get w.r.t. BEE. I think to be quite frank it is only beneficial to the Black man in the country. In the old government I wasn’t white enough, now I am not Black enough. That’s my view.”
SMEs felt that they were overlooked because they were located in townships and were too small

Association membership or professional association
Limited membership of professional associations with no advocacy role
Women, colored and Asian seem more likely to participate in business forums and associations
“I think communication is a problem, especially in the taxi industry. The only time we communicate with them is when we strike.”
“On the issue of communication between the community and the government, the communication does reach us, and it goes back to them. The problem is that there is a messenger in-between, so there is a break-down, so it’s not sufficient.”

Conclusions
SMEs need:
More information and training on all aspects relating to registering of businesses, Labour Relations Act
Training on BEE legislation and business opportunities created by BEE legislation
More support of public institutions in their neighbourhood.
More support to strengthen their business/community associations and forums.

KNOWLEDGE AND INFORMATION MANAGEMENT

Knowledge and information management focuses on:
Mechanisms of sharing knowledge and experiences between organizations
Support being provided by government and other organizations
Needs, capacities and challenges in sharing knowledge and learning
Best practices being used amongst SMEs in sharing knowledge and learning
BEE businesses and influences from a cultural, identity and learning perspective
ICT support for SMEs

Sharing of knowledge and learning
Learning of SMEs obtained mainly from previous employer
SMEs generally not sharing knowledge and learning with one another
Type of sharing mechanisms suggested
Regular production of bulletins and pamphlets
Simple step-by-step procedures in handbook
Use of Internet (E-mail and web)
Business EXPOs
Organize forums and workshops

Mechanisms of sharing knowledge and learning
SMEs not participating fully in Chambers of Commerce and other associations because
Not aware of them
Too busy to attend
Too far away from their business premises
See them as a waste of time
SMEs acknowledge need for forums and workshops
SMEs are willing to share ideas
Must be close to their business premises

Government support
“Cascading information” down to SMEs on running businesses
VAT and BEE benefits
Who to contact and where to go
Pamphlets
Provide hands on training
Develop database of small businesses
Follow-up and monitoring of SMEs
Financing and subsidies of access to ICTs
Advertising on TV, radio and in newspapers

Needs, capacities and challenges
Skills development in all aspects of SME management
Basic literacy training on computers
Use of the Internet
E-mail clients and suppliers
Public institutions where SMEs can access ICT facilities free of charge

Culture, identity and religious influences
Soshanguve women said:
“We never come across it at all”
Women in central Pretoria said:
“but with identity you are more likely to get a bank loan if you are white than you are black”
Knowing someone in a financial institution is seen as a way to get assistance
“....through knowing the people at the bank we were able to open a bank account.”
An Asian man said:
“We need advice on how to grow as a business and how to become a BEE? We don’t know the procedures. How do we qualify, first we are not white enough now we are not black enough”

ICTs in sharing knowledge and learning
SMEs use of computers:
Internet banking
Not many use it for financial management purposes
More advanced uses are for bookkeeping, income and expenditure, tracking profits, monitoring sales and stock taking
E-mail is used to communicate with clients and suppliers
Web is used to access information and place orders with clients
Internet and phones can be used to hold teleconferences

ICTs in sharing knowledge and learning
Mobile phones used to do banking and SMSs used to send and receive relevant information, monitor bank transaction and check bank account balances
Radio can be used to:
present short programmes in appropriate time slots (e.g. after 8pm) on running businesses
Have invited guests with people phoning in to ask questions
Similar programmes can be presented on TV

RECOMMENDATIONS

Analysis and conclusion
Quantitative analysis has allowed us to get a ‘handle’ on what is a small business in Gauteng
Developed an understanding of the characteristics of these SMEs and the size of the sector
Enables areas to be identified for selection of qualitative focus groups
Qualitative research enabled researchers to develop more nuanced understanding of SMEs in relation to:
Financial business development services

Financial BDS services are there but not being used as effectively as should or in addressing needs of SMEs
This is because they are:
Unfocused
Many factors inhibiting the use of financial BDS
Most important need is for financial support but also training, advice and services (eg bookkeeping)
Need for business plans is increasing to enable SMEs to access finance and work
Communication is a major stumbling block between financial BDS and SMEs
Key recommendations made in relation to issues identified in focus groups

SMES generally have personal or business bank account
Many obstacles to SMEs getting finance but there is a distinct need
SMEs are not well positioned to access financing from institutions – deficiencies in supply and demand
Consequently, SMEs are getting finance from other informal sources
Many recommended opportunities for intervention – most of all FSP workstreams

Sharing of knowledge and learning not happening amongst SMEs
Mechanisms for improving knowledge and learning clearly articulated
Government has a distinct role to play in providing information, training, databases, monitoring, facilitating access to finances and communication
Needs of SMEs in the knowledge and learning arena clearly articulated
ICTs being used but there is a need for more use and training
Key recommendations made with the development of a knowledge portal being at the forefront

Although SMEs are formally registered – great need for training and education in benefits and mechanisms of establishing legal vehicles
Generally there is good compliance amongst SMEs in registering with the various regulatory bodies, especially SARS
Public institutions are not assisting SMES as much as they should - facilitate access to loans, training and education and to relevant information
SMEs simply don’t know enough about BEE, its legislation and its potential benefits
More developed SMEs part of professional associations but not bodies that act in an advocacy role
Many opportunities for input by FSP but especially in conduct research into making SME associations and forums more effective

Discussion.

Gauteng sme study 2008

by odewa

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Gauteng sme study 2008 Presentation Transcript