By: Zandile Majavu
High-interest rates, lack of collateral, and terms of credit are some of the obstacles that impede small businesses from Komani in the Eastern Cape from accessing funding to set up their enterprises. Daniel Korku Doku from Nelson Mandela University conducted a study on funding challenges experienced by SMEs in Komani, where he discovered that most of them made use of retained earnings and informal funding to finance their operations.
In addition, many are not clued up on supporting government agencies such as the State Enterprise Funding Agency. Businesses in Komani are mostly involved in manufacturing, retail, or services. According to the study: 31% of the 82 respondents said they did not apply for credit due to the high interest rate charged, 20% said they had other reasons for not applying, and 5% said they had not applied for credit because they lacked collateral.
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Doku also found that red tape discouraged the drive to invest, and generated corruption because people asked for money to provide speedy services, which understaffed small businesses did not have time for, as opposed to their larger counterparts that employed someone to manage bureaucratic matters. Almost 70% of the SMEs in the study indicated that they failed to apply for credit because they believed that it would not be granted, while 30% applied.
Doku said the reason for this was a lack of information on the part of a small enterprise on a business plan, which was crucial in convincing a financial institution to lend money. Besides that, a lack of funding from the financial sector can also lead to job losses as employment costs continue to rise and are made worse by the minimum wage labour legislation. “The minimum wage constrains very small businesses that will not be able to pay employees at that rate. This frequently leads to job losses as businesses cannot afford to pay the minimum wage. This situation normally deters informal businesses from being formal,” the study reads.
The lack of funding results in many SMEs having to reduce the number of employees, which makes it more difficult for the country to reach its National Development Plan goal of SMEs creating 90% of the jobs by 2030. “It is recommended that more awareness campaigns be conducted regularly to ensure that SMEs are aware of the financial support system for their sector. So, it is vital for the government to create awareness of its agencies so that deserving SMEs can benefit from funding to create jobs for the population,” the study suggests.
