Challenges Facing SMEs in South Africa

Challenges Facing SMEs in South Africa

The challenges of running a small business at the Base of the Pyramid are numerous and under estimated. I decided to write a blog post to raise awareness on these challenges and prepare those of us that work in support of micro entrepreneurs to do so more effectively.

At the Micro Franchise Accelerator (MFA) in South Africa that I developed and run, we spend a lot of time analyzing these challenges to come up with effective solutions and not solutions assimilated from the top down. I have seen these challenges across various countries, but here I focus especially on South Africa.

Here are the main challenges that I see and hear from:

Education: Not only is access to education is scarce, but on top of this, the public education level is generally poor. Our microfranchisees have often not even reached a Matric level (end of high school exam) and therefore lack basic tools when they start a business, such as numeracy to name one.

Lack of specific skills: trainings and certifications are hard to access too! They are expensive, hard to find, and people struggle on having an idea of the quality of what they get.

Lack of equipment: The two main challenges here are that machines are expensive and sourcing them is a challenge. I got to learn that people in townships here actually and have no means of knowing where to simply source this equipment. Yes, they all know each other and are resourceful, but that does not give them much choice since communities are small or option, even for second-hand machines. People often end up with very expensive and poor quality equipment. Think about us sourcing from the internet and how much choice it gives us!

Access to financial mechanism(s): and it is true globally, although in South Africa, compared to other places like India for example, micro finance is not widespread. Micro entrepreneurs battle to get start-up capital on the one hand, or working capital to grow on the other hand.

Premises: this is one of the challenge I hear the most! People in the townships are as aspirational as you and me and want to be able to buy or rent nice premises. The additional challenge I perceive here is as well that buying/renting premises right from the start adds a strong financial burden on their shoulder that they are totally oblivious to!

Lack of financial knowledge: I am always shocked during record keeping sessions with a new microfranchisee to realize how much they have no understanding of their financial situation. They have often no idea of the costs of their products of services: how much is this scone that I am selling is actually worth? How much is my time worth? And overall there is no clear picture between money in and money out, reducing the possibility of making a profit or saving. Similarly, managing a cashflow is a struggle. In low income communities, people pay very often on credit and one would need very strong cashflow understanding and planning to cope, which people have never been trained on.

Security: this sadly prevails in South Africa and is one of the main challenges for micro business owners. In townships, your chances of getting your money, assets, stock, or all of the above robbed are incredibly high. In actual fact, I have not had one of my microfranchisee who has never been robbed in his “business life”. Moreover, the same people that are the most at risk do not have access to insurance and therefore they literally loose everything and might not be able to start over.

Trust: staffing a micro business is actually really hard even for microbusiness owners that operate and know well their community. They find it hard to recruit people they can trust and there is no mechanism or services that helps them doing so.

The last challenge is micro business owners’ environment. First, there is no difference between private and professional financials. But on top of this, emergencies are common in low-income communities and there is nothing like stability. As a result, I see strong microfranchisees going in the red because someone died in their family and they have to go to another part of the country, therefore not work for a while, and pay for funerals. Every life event impacts a micro entrepreneurs’s financials and has the potential of drowning the business: children getting sick, a sibling needing support or any supply discourse. Overall, savings are tough in these conditions, and people remain stuck in a poverty circle.

Starting a business is hard in any case, but at the micro level, access to anything is harder. Being able to locate which service to get and which quality is this service going to be is hard, whether it is a financial service, training service, or buying any equipment. Imagine a world where you cannot use the internet or information centers to research what you need and try to picture how hard it would be!

On a positive note, once you have identified the challenges of micro business owners, it is easier to think of solutions! At the MFA for example, I spend monthly meeting sessions brainstorming with my microfranchisees on how to solve these as part of my support role. They tell me what is the situation on the ground and I tell them what are potential solutions.

I have co-started a microfranchise association in South Africa where actors in Microfranchising come and workshop concrete solutions on these challenges and supporting their microfranchisees more effectively.

This blog post was first published on Cecile’s blog:

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