By: Anna Majavu
High interest and inflation rates, a lack of funding, and a heavy tax burden are among the biggest problems facing South African SMMEs, new research has found. Ayanda Sibiya, Johan van der Westhuizen, and Bongani Sibiya of the Vaal University of Technology wrote this month in the African Journal of Inter/Multidisciplinary Studies that SMMEs needed more funding options. This was because the wide variety of finance that was said to be available to small businesses existed only “theoretically”.
Some small companies may not even be able to access finance at all, “hindering the growth and expansion of SMMEs”, they wrote. Before the coronavirus hit, there were 2.61 million SMMEs in the country, but 280,000 collapsed during the pandemic. The high rate of inflation, which increased from 3.2% in 2020 to 5.4% in September this year, has “harmed SMMEs”, wrote the authors, with the costs of raw materials shooting up just as cash-strapped consumers hit by high inflation were reluctant to pay SMMEs more for their goods and services.
Together with the currently high prime interest rates, which increased from 7.75% before the pandemic to 11.75% today, SMMEs had less chance of borrowing the money they needed to grow their businesses. “An increased interest rate has an impact on loan repayments, credit card repayments, and the ability and opportunity to get more financing. This has a direct impact on SMMEs,” the authors wrote. “High-interest rates may also diminish the cost of assets, making it more difficult to sell them for money. When interest rates are high, banks also provide fewer loans; this has a negative impact, not just on consumers but also on SMMEs, as this reduces the expenditure on new equipment.”
Banks continued to believe that lending money to SMMEs would cost them more than lending to big corporates, and this impeded their development. “SMMEs may find it challenging to consistently pay the increased interest rates demanded by banking institutions. As a result, SMMEs must have a significant amount of money available for investment instead of relying on banking institutions for finance. This is not always achievable,” the research found.
They said that SMMEs also faced a “relatively high tax compliance burden” in comparison with multinational organisations and urged the government to consider the negative impact of taxing SMMEs on the future of the small business sector. “Increased taxes result in decreasing earnings for SMMEs. The expenses of corporate tax and value-added tax in South Africa are among the highest in the world, [and] a huge percentage of SMMEs struggle with managing tax returns or utilising the tax return system,” the research found.
SMMEs were also affected by the high rate of unemployment, with more and more people resorting to starting small businesses to survive at the very same time that the market was made up largely of unemployed people with no money to spend. “This results in reduced growth or business failure because of the high rate of unemployment and consequently limited earnings,” the authors concluded.