While there are numerous reasons why small businesses fail shortly after starting, the main causes relate to legal issues. This was revealed by a discussion between panelists from the government and legal sector, who agreed that meeting the legal requirements for a small business increased its success. The Small Enterprise Development Agency partnered with the Institute of Business Advisors Southern Africa to discuss how practitioners in the small business development sector can support SMMEs to grow by formalising and meeting legal requirements.
Panelist Nicholene Schoeman-Louw, a law practitioner at Pocket Advisors, said that the major barrier was time and money. Schoeman-Louw has been working with small businesses for almost 15 years. “Many of the things we see or hear from the SMME community which link to their businesses success or failure has a legal cause to it, and we noticed that there is a major barrier between small businesses and lawyers which relate to costs, accessibility and time,” she said.
“Consulting with an attorney for at least five to 10 hours costs between R10,000 and R20,000, and drafting a suite of contracts costs between R100,000 and R150,000 for example.” Schoeman-Louw also revealed that according to Stats SA, there was a 68% failure rate for SMMEs not succeeding in the first year prior to the pandemic, and since the Covid-19 outbreak, this had increased to 75%.
The top reasons for small businesses failing included no access to funding opportunities, issues entering big business supply chains, legal disputes, and reputational damage from unhappy customers. “We have seen (from statistics provided by Stats SA) a 1000% increase in debt collection cases which involve SMMEs claiming from other people,” she said.
Schoeman-Louw encouraged practitioners to help small businesses understand the legal elements. “Bad habits do not have immediate repercussions,” she said. “For example, you have a business partner and the partner disappears, and you found a new partner, only for your old partner to come back (and institute legal action).” She also believes there is a need to ease regulations for businesses in order to make the country attractive to investors.
Andile Yengeni, SEDA’s district manager at Nelson Mandela Bay, said that SMMEs stood to gain a lot of benefits if they fully adhered to the legal requirements of compliance. He said small enterprises needed to pay more attention to legal issues. “If you formalise your business, you get exposed to incentives from the government, and benefits for employees like the Unemployment Insurance Fund, and your business becomes a more attractive employer as a result of formalisation,” he also said.