BUSA Presentation to the Portfolio Committee on Economic Development SME Access to Finance Presenter: Prof Thami Mazwai 23 November 2010

SME ACCESS TO LOAN FINANCE In the start-up phase of SMEs, entrepreneurs are usually unable to adequately demonstrate the potential of their businesses to deliver the required rates of return to financiers For the recently-announced Growth Path Plan to succeed, a strong SME base is required Although our purpose today is to highlight the essential role of small business, in the long run we see the interests of small and big business as interdependent, not separate The provision of finance is one of several variables for small business support, albeit it a very important one. Access to markets and management know how play an equal role. Local government business retention and expansion programmes can be harnessed to assist in the improvement of SME sustainability  

CHALLENGES FACED BY SMEs IN ACCESSING FINANCE The REGULATORY BURDEN, which makes it difficult to set up a business, is also costly and administratively complex to maintain a business and challenging to move from informal to formal status- see more detailed analysis SMEs prefer to SELF-FINANCE when start-up funding and business insurance would have been helpful 3. Financial Institutions’ requirements often call for COLLATERAL which new SME’s do not necessarily have 4. Relatively HIGH INTEREST RATES &RISK PROFILES of the SME sector is not conducive to loan financing for these small enterprises on a sustainable basis 5. APPROACHING DFI’S is perceived as daunting and the processes of eliciting assistance considered too challenging.

WORLD ECONOMIC FORUM GLOBAL COMPETITIVENESS REPORT SELECTED GLOBAL COMPETITIVENESS FACTORS AFFECTING SMALL BUSINESS [SA’s ranking against 139 countries] FACTOR 2009/10 2010/11 Venture capital availability 33 39 Number of procedures to start a business 26 34 Time required to start a business 64 75 Quality of overall infrastructure 43 56 Business costs of crime 133 137 Pay and Productivity 105 112 Burden of Government Regulation 65 94 Burden of Custom procedures 51 55 Ease of access to loans 31 41

ORGANISED BUSINESS’ DESIRE TO WORK WITH GOVERNMENT ON PROGRAMMES TO ASSIST SMEs As a general rule, financial institutions do not provide finance in the region of R500 000 to R2,5 million. Small business owners are forced to take personal loans, exposing themselves to personal risk, which in turn affects risk taking. Unblocking SME barriers and constraints Undertake Regulatory Impact Assessments and review strategy (this affects not only SMEs, but business in general) Stem collusive and anti-competitive behaviour in our markets Maximize state and business procurement links with SMME’s - through sub contracting outsourcing and joint venture arrangements in the value chains Stimulate a culture of entrepreneurship Benchmark practices that have been tried and tested Make venture capital more easily available

ORGANISED BUSINESS’S DESIRE TO WORK WITH GOVERNMENT ON PROGRAMMES TO ASSIST SME’S CONT.D VALUE CHAIN ANALYSIS We believe that one of the key components in the debate centres on the analysis of the value chain (debtors/creditors/suppliers) and the effect on cash flow of SMEs, to illustrate this: customers place orders and pay, for example, 60-90 days after receipt of goods or services SME suppliers are often reluctant to provide goods and services on account/or on consignment basis Debtors too, will have a propensity to stretch out payment further affecting the cash flow of an SMME

ORGANISED BUSINESS’S DESIRE TO WORK WITH GOVERNMENT ON PROGRAMMES TO ASSIST SME’S CONT...D... GOVERNMENT MUST CREATE CONDITIONS CONDUSIVE TO VENTURE CAPITAL DEVELOPMENT Primary igniters for this might be tax incentives and breaks to encourage risk taking The creation of a state venture capital fund aimed at funding SMEs can focus on a wide range of financing needs from start up capital, to working capital and cash flow funding Small business is a partnership between the private sector, government, organised business and the educational sector The Regulatory Impact Assessment Mechanism needs to conduct an impact assess on the role of all existing and new legislation so as to prevent situations like the demise of small pharmacies as a result of a law passed by Parliament

CONCLUDING REMARKS The capacity of business to employ is currently limited by the capacity of businesses to sustain themselves. It is generally recognised that small and emerging businesses have the greatest potential for job creation. Nonetheless business does not favour policy interventions and support programmes to the extent that a “dependency culture” is fostered. THANK YOU