This has resulted in an increase in numbers of failing small businesses.
“We’re seeing the effect of the difficult market beginning to show in these small enterprises. Previously from global credit ratings perspective we had seen a lot of growth and a lot of demand for credit ratings, which implies strong opportunities from the smaller medium-sized sector,” Global Credit Ratings head of the corporate sector Eyal Shevel told CNBC Africa on Thursday.
“Lately we’re beginning to see that growth in demand for new debt facilities is slowing down quite significantly and most concerning is that some of these companies that we had rated are really falling on hard times, and some have gone even into business rescue and liquidation.”
Small to Medium Enterprises (SMEs) in a global credit ratings context are businesses that employ roughly around 100 to 1000 people or more. These are big businesses that may not be Johannesburg Stock Exchange-listed but can be found in the manufacturing, agriculture and fast moving consumer goods (FMCG) sectors.
“A lot of the businesses we’ve dealt with are really businesses that have been growing quite strongly over the last 10 years and looking to take that next step in their business development from a medium to large-sized business to a large-sized business. It is generally these types of stages where they come and they’re looking for a credit facility, where they’ll come to Global Ratings to get a credit rating,” Shevel explained.
According to a 2011 report on SME access to credit in South Africa done by the National Credit Regulator, of the 6 million SMEs in South Africa at the time, only 20 per cent were registered with the Companies and Intellectual Property Commission (CIPC).
One of the CIPC’s main functions includes registering companies, cooperatives and intellectual property rights. Companies that were not registered were financially excluded from obtaining funds in the formal financial market.
While South Africa has a variety of funding programmes and financial schemes established by the private and public sector for SMEs, the uptake has been significantly low and bank-sponsored schemes have seen high rejection rates for the SMEs that applied for this type of funding.
One of the main reasons for rejection is due to the SMEs failure to have the minimum requirements for a business loan from a bank, such as suitable collateral. Some banks are also not set up to cope with SME-specific loans.
“Because of the economic environment in South Africa at the moment, these cooperations have been struggling and therefore their business can’t generate the necessary cash to sustain either loss making or new operations,” said Shevel.