South Africa’s biggest employer in serious trouble

South Africa’s Small and Medium Enterprises (SMEs), which employ most of the country’s labour force, are in serious trouble. They have slow growth, regulatory obstacles, and debt that nearly half of small businesses cannot pay back.

According to the Banking Association of South Africa (BASA), SMEs make up an estimated 91% of formalised businesses in the country.

They provide employment to about 60% of the labour force and have a total economic output that accounts for roughly 34% of GDP.

FinMark Trust explained that South Africa’s Micro, Small, and Medium Enterprise (MSME) sector has an estimated turnover of over R5 trillion and accounts for a large part of the workforce.

Despite being such a large part of the country’s economy, many of South Africa’s small and medium-sized businesses struggle financially.

Luncedo Mtwentwe, Managing Director of Vantage Advisory, explained that the upcoming budget speech will mark a pivotal moment for South African businesses.

“Amid growing uncertainties, including potential funding cuts and looming tariffs from President Trump, to escalating living costs and the threat of load shedding rearing its unwelcoming head, SMEs are walking a tightrope between cautious optimism and the harsh reality of persistent debt,” Mtwentwe said.

“Many SMEs are still reeling from the financial fallout of the COVID-19 pandemic and grappling with the fallout from load-shedding, which has stifled productivity and strained resources,” Mtwentwe said.

In addition, South Africa’s economic growth—which has been significantly downgraded from a 3% forecast to a mere 1.5%—has made it difficult for these businesses to flourish.

“And unfortunately, a lot of small businesses turn to credit to stay afloat,” Mtwentwe added.

According to Xero’s 2024 State of Small Business Report, more than 24% of South Africa’s SMEs reported struggling with cash flow issues in the last year, and nearly 72% are turning to personal savings to stay afloat.

Furthermore, the South African Reserve Bank (SARB) explained that 49% of local SMEs are facing debt that far surpasses their payback capacity, with many unable to pay employees or suppliers on time.

According to Mtwentwe, one of the most common mistakes SMEs make is using debt to fund day-to-day operations without a clear plan for how it will generate future revenue.

“This just means they’re just digging themselves into a deeper hole.”

While the government has taken steps to address the financial struggles of SMEs, with plans to increase access to funding and relief programmes, Mtwentwe said that these businesses need to change their approach to debt management to stay afloat.

“The debt crisis facing small businesses in South Africa is real. SMEs cannot rely on government assistance.”

CDE explained that saving small businesses in South Africa is not through government intervention but through the private sector.

CDE’s latest report, ACTION EIGHT: Let the private sector drive small business development, explained that South Africa’s small business sector has grown very slowly in recent years.

According to some calculations, the sector expanded at an unimpressive rate of 1.6% per annum from 2010 to 2019, before being devastated by Covid.

During the height of the Covid pandemic, many more South African small businesses shut their doors.

CDE research revealed that between the financial years 2017/18 and 2020/21, the state transferred an average of R5.8 billion every year to small enterprises in direct financial support, through grants, loans and a combination of the two.

However, there is little publicly available information on who receives financial support, on what basis the funds are allocated, how recipients use the funds or how many firms thrive or fail.

What is known, CDE said, is that government efforts have often favoured a well-connected few, imposed additional costs on essential services, and been hampered by regulatory obstacles such as onerous labour laws and rigid empowerment requirements.

These interventions have largely made it more difficult for enterprises to survive and expand, rather than fostering a dynamic small business sector.

“South Africa needs a radical rethink in its approach to small business development,” said Ann Bernstein, executive director of CDE.

“We need to move away from the flawed assumption that government can create businesses, that bureaucrats are best placed to identify and support firms with the potential to grow and that small firms exist in isolation from the broader economy.”

To address the problems small businesses are being faced with, CDE recommended that the private sector should drive small business development.

They also suggested removing regulatory barriers that stifle small business growth, stopping the use of procurement to artificially “create” township economies, and shutting down the Department of Small Business Development.

“South Africa does not need more government intervention; it needs less,” Bernstein said.

“For the country to escape its economic malaise, it must abandon the illusion that government can engineer entrepreneurship. The private sector – not the state – is best equipped to drive small business growth.”