This document summarizes research on small and medium enterprises (SMEs) in Gauteng, South Africa. It includes: - Quantitative findings from a 2006 survey of 1,053,818 small businesses in Gauteng, identifying challenges around access to capital and use of support organizations. - Qualitative findings from 11 focus groups with SME owners, revealing needs for financial management training, developing business and marketing plans, and challenges accessing financing due to lack of collateral and financial records. - Recommendations to improve SMEs' awareness and use of financial business development services, including dedicated capacity building, improved communication from support organizations, and integrated multi-sector advising.

1. Quantitative and qualitativeresearchon SMEs in Gauteng USAID Financial Sector Program

2. CONTENTS Acronyms Background The Financial Sector Program Methodology GIS findings and maps Quantitative findings Qualitative findings Demographics Need and use of financial BDS Banking and financial services Legal and regulatory matters Knowledge and information management Analysis and conclusions Key Recommendations

3. ACRONYMS

4. BACKGROUND The Small Business Act (1996) and subsequent legislation gives recognition to the important role played by SMEs in the South African economy It is estimated that SMEs account for 41.7% of private sector employment in South Africa. Increasingly, government has looked to this sector (as opposed to micro enterprises) as the source of job creation in the country. In Gauteng alone there are about 1 053 818 small business owners However, as (very often) members of the second economy, the challenges faced by SMEs (both historically and currently) have to do with, for example, access to markets, finance, business opportunities or business support services Small businesses were ranked based on their level of business sophistication in Gauteng (BSM) in the 2006 FinScope study. SMEs mainly belong to BSM 6 and 7

5. BACKGROUND Small and Micro-Businesses by Sophistication Segment Source: FinScope, Small Business Survey Report Gauteng 2006 (Johannesburg: FinScope, 2006)

6. BACKGROUND

7. BACKGROUND Small business and the formality of the business

8. FINANCIAL SECTOR PROGRAM (FSP) The FSP is funded by USAID. The objective of the program is to: expand access to financial services and lower financing costs for small and medium enterprises (SMEs) through reforming the legal and regulatory framework affecting the financial sector and business environment and improving the commercial viability of lending to historically-disadvantaged SMEs in South Africa. The ultimate result is to mitigate market credit risk leading to increased SME access to a range of quality affordable financial services.

9. FSP Workstreams: Financial business development services Financial management, business planning, access to and use of support organisations Banking and financial services Financing from outside the business, use and constraints of loans. Legislative and regulatory matters Improve financial sector legal and institutional framework; enhance regulatory environment for SMEs Knowledge and information management Access to and sharing of information, knowledge of changes in business environment, use of ICT

10. RESEARCH BRIEF AND PURPOSE Quantitative analysis of SMEs in the BSM 6 & 7 FinScope small business survey of 2006 Qualitative research by way of focus groups among HDI business owners with a turnover of more than R200 000 The purpose of the above was to provide the most relevant information that will enable the FSP team to accurately design and implement their work plan and determine the targets of the Performance Management Plan

11. ASSUMPTIONS The BSM model provides the most realistic segmentation of small businesses Used adjusted Banking Association’s definition of SME Turnover of R500 000 to R20 million per annum Bottom threshold was decreased to R200 000 To include SMEs in transition to higher level Includes the highest concentration of HDI SMEs Expected that this group will need support the most Excludes micro enterprises

12. METHODOLOGY Analysis of the 2006 FinScope small business survey for BSM 6 and 7 Identify areas were BSM 6 & 7 are located Discussion guide Questions pertaining to each of the 4 workstreams Criteria for selection HDI business owner Annual turnover of more than R200 000 Recruitment of participants Recruiters in selected areas Recruitment questionnaire Conducted 11 focus groups across Gauteng

13. QUANTITATIVE SURVEY RESULTS

14. 2006 SMALL BUSINESS SURVEY About 1 053 818 small businesses in Gauteng 109 441 are HDI BSM 6 & 7 SMEs Awareness of support organisations is high 57% never used support organisations 42% need for capital most important problem faced 2% had a loan at the time of the survey

15. 2006 SMALL BUSINESS SURVEY

16. 2006 SMALL BUSINESS SURVEY BUSINESS TURNOVER OVER PAST 12 MONTHS

17. BSM Maps Created from the 2006 FinScope SME survey using small area estimation techniques Maps show percentage households falling into BSM 6 and 7 within an enumeration area Most of the focus group areas were selected using BSM 6 map where highest concentration of HDI small businesses are found More African and Coloured SMEs found in BSM 6 while Asian SMEs mainly found in BSM 7 BSM maps enabled focus group areas to be selected and provided epicentres for HDI small businesses to be found

18. Distribution of BSM 6 households Inset: Location of Gauteng province in South Africa

19. Distribution of BSM 7 households Inset: Location of Gauteng province in South Africa

20. SELECTED FOCUS GROUP AREAS Pretoria Pretoria CBD – African Eersterust – Coloured Mamelodi – African Soshanguve – African Laudium - Asian Johannesburg Eldoradopark - Coloured Florida - Coloured Lenasia - Asian Soweto – African Alexandra – African Tembisa - African

21. Focus Group Area Maps Focus group area maps show selected enumeration areas from BSM 6 and 7 maps in Google Earth Examination of focus group area maps show that selected enumeration areas are generally located near the commercial and industrial centres Asian and Coloured focus group areas tend to be larger in extent than African areas African focus group areas differ from one another depending on levels of urbanization and formal settlement African focus group areas tend to have several separate areas where SMEs are concentrated

22. MAMELODI FOCUS GROUP AREA

23. EERSTERUST FOCUS GROUP AREA

24. SOSHANGUVE FOCUS GROUP AREA

25. PRETORIA CBD FOCUS GROUP AREA

26. LAUDIUM FOCUS GROUP AREA

27. TEMBISA FOCUS GROUP AREA

28. ALEXANDRA FOCUS GROUP AREA

29. SOWETO FOCUS GROUP AREA 1

30. SOWETO FOCUS GROUP AREA 2

31. ELDORADO PARK FOCUS GROUP AREA

32. QUALITATIVE SURVEY RESULTS

34. DEMOGRAPHICS

35. COMPANY TURNOVER

36. TURNOVER BY POPULATION GROUP

37. BUSINESS SECTOR

38. YEARS IN BUSINESS

39. FINANCIAL BUSINESS DEVELOPMENT SERVICES

40. Financial Business Development Services By Financial Business Development Services (BDS) we mean a range of services that are intended to develop/improve business performance. These services are provided by government agencies, private sector and NGOs. Financial BDS focuses on: Financial management, which includes budgeting, costing / pricing, cash flow management, records keeping, book keeping, preparing and analysing financial statements, auditing and tax submissions Provision of consulting and advisory services, training and mentoring Key issues relating to financial BDS that need to be assessed include access to information and financial ‘intelligence’; and proximity/accessibility, affordability and relevance of services

42. SETAs

43. DTI

44. Umsobomvo Youth Fund

45. NAFCOC

46. GEP

47. DBSA

48. FNB, ABSA, Nedbank

49. NEFAware through advertising, offices nearby, forums and consultants Mostly approached for loan but not successful SETA approached for training and professional advice Others approached for business and marketing plans, support in running businesses, training and education

51. SMEs have closed down because of a lack of supportSupport from BDS institutions must be systematic and over a period of time BDS providers not keeping pace with needs and expectations of SMEs Unrealistic expectation of BDS for SMEs to develop ‘big’ and ‘beautiful’ business plans

53. Securing start up and longer term funding

54. Determining the legal vehicle to use

55. Setting up and structuring the business

56. Developing business plans and profiles

57. Locating the business

58. Securing and maintaining clientsNeed for bookkeeping services to assist with VAT, PAYE, SDL, UIF, etc Affordability of bookkeeping services identified as a concern

59. Need for Business Plans SMEs understand the value of business plans Need for business plans is increasing because they are needed to access finances, support services and to tender for work One SME indicated that the business plan was needed to grow the business and keep it sustainable into the future Advice on developing business plans from business associates, financial advisors, advocates, family and friends Some SMEs use professionals to develop business plans but some question the ability of SMEs to operationalize these Many SMEs don’t develop business plans because they are ‘too busy’.

60. Need for Marketing Plans SMEs see marketing plans as important in reaching potential customers Marketing plans must be ‘workable’ considering limited turnover of SMEs (ie use appropriate marketing tools – pamphlets, wall signage, etc) Location of SMEs in relation to their customers was seen as critical All focus groups indicated need for training in developing business and marketing plans

62. Given the run around and staff not helpful

63. Bureaucratic processes and lack of capacity

64. Deposit and documents required too restrictive

65. Assisting too few SMEs because of restrictions

66. To get assistance must have developed business plan (catch 22 situation)

67. Location of BDS must be closer to SME business premises

70. Time to get feedback is lengthy and sometimes the issue is not addressed at all

71. Only way is to know someone in the BDS institution

74. financial management

75. day-today business managementSector specific mentoring required Location & quality of support to be improved through training of BDS staff Research into BDS provided in public and private sectors to determine what they offer, effectiveness of services and medium used to communicate with SME

76. BANKING AND FINANCIAL SERVICES

77. Banking and Financial Services Banking and financial services covers the areas of: Existing use of finances from formal and informal institutions and under what conditions Suitability of financing from an amount and repayment perspective Need for financing Past experience in applying for financing and reasons for being declined Reasons for not applying for financing

79. Improve workplace conditions

80. Buy stock and equipment

81. Find bigger and better premises“Yes, we are always short of cash flow. The more money you have the more stock you can buy. In a business you can never have enough money” (Laudium businessman)

83. No credit history

84. Poor credit history

85. Lack of security/collateral

86. Not enough cash flow

87. Not enough equity in their business

88. Inadequate financial records and no accountant – needed 3 years of bank statements for business

89. Poor financial literacy

90. Not in business long enough

91. Blacklisting

92. Business owners don't have always have title deeds to their residential properties

93. Feel intimidated by financial institutions “They [financial institutions] have a fear when you dressed like that [in a suit and tie with a briefcase]” (Tembisa businessman)

94. Further obstacles to accessing finance Banks only allow savings accounts to start up businesses that don't provide statements High interest rates Institutions only fund large projects and in specific sectors “With Umsombovu you have to understand that they are interested in big projects, like manufacturing. They will send you to Gauteng Shared Services, the DTI, or Gauteng Growth something. They’ll tell you that those people will be able to help you with those small funds, but they are not interested in those projects.” (Alexandra businessman)

95. Obstacles to accessing government finance “ .. I am aware of all of those, I am in business for a long time now, I went to KHULA and they told me that they will provide a loan, but they want security. It is a long process. When you go to them they will assist you and then they send you there and then they decide if your business is worth it, it is a waste of time. Maybe it is where we come from and we are used to struggling to make ends meet and then maybe in the end we will grow.” “What happens here is that they all have different names, they but they all want the same. If you have a bad experience with one of them, you look at them as just another one.” “Umsombovu, yes, but it’s not more of a financial assistance if you are in services. They are also not interested in something less than R60 000. If you come up with a need for a small amount like R45 000 they say go to a financial institution. You must remember they are a bank themselves and need to make a profit. Even Khula is also not funding on a small scale”.

97. Retrenchment packages

98. Pensions and other savings

99. Other sources of finance

100. Bond on their home

101. Use property as surety

102. Loan taken in personal capacity

103. From industry

105. Opinions on financial institutions Banking is only for the good times “....for a long time my account was okay and then I ran out of money, so I went to the bank to ask them for money and they said no”. Banks are perceived to be a good place to get finance “We normally approach the bank because it is the trustworthy party.” (Soshanguve business women) Banks don't consider SMEs important “I suppose I am a small thing” (Lenasia business man)

106. Opinions on financial institutions Banks don't provide the full loan amount required by SMEs “Yes I had an account, I still remember I borrowed only five thousand Rand; they didn’t give me more and couldn’t cover everything.” (Soshanguve business women) Banks don't reject loan applications because of race/cultural considerations but because of ineffective communication on their side “I don’t think it is based on colour, it is based on risk but they don’t go to the level where they explain to you what makes you a high risk.” (Eersterust businessman)

107. Deficiencies in SMEs Lack of financial education and literacy Lack of business training Highly competitive and undiversified markets Lack of record keeping and proper documents (eg company documents, tax clearance, UIF, etc) Inability to present formal business plans Poor credit ratings Lack of collateral/security for loans Limited capital bases and ability to grow capital Misconceptions about the risk analysis process

108. Deficiencies in financial institutions Rigid credit scoring policies Rigid collateral requirements Reluctance to provide small loans Rigid repayment schedules Support organisations acting like banks Lack of understanding of cultural differences Poor report-back to applicants on loan refusals Poor communication of services offered Lack of differentiation of product and approach offered to clients Restrictions placed on lending via the National Credit Act - additional documentation, calculations and checks

109. Recommendations Investigate possibility of informal lenders being part of credit scoring system in future Develop clear step-by-step guidelines on what is needed to secure funding from institutions Provide guidelines to staff in financial institutions and government organizations on communication standards To address deficiencies on the supply and demand side as regards access to finance

110. Recommendations Develop equity accumulation programs – subsidized share schemes – include in Financial Sector Charter requirements Government funded equity/asset base creation program – fund fixed assets development for SME's (start-up capital) Re-design collateral scoring techniques – consider "non-western" collateral Provide tax incentives on mentoring programs from bigger business Relaxation on re-payment "holidays", interest rate capping, extended re-payment periods Extensive financial literacy training programs Easy/cost free access to firm's credit rating information Develop the third tier banking system granting smaller loans with short repayment periods – create Micro Banking/Divisions Encourage formal banks to finance third tier banking More flexible interpretation of National Credit Act for categories of small business Change mindsets of the formal banking institutions vis-a-vie small business

111. Recommendations Fund technology drive in small business Develop creative funding approaches learned from informal/NGO schemes: Repayment in public Notional collateral Targeting women's groups Develop market access programs Encourage segmentation of Donor/Support Agencies against specifically targeted SME segments – using the BSM Simplify the "business plan" requirements process Expand geo-graphic coverage of Micro Bank/Division coverage from formal banks Subsidised/lower interest for start-up capital/technology purchases for small business Better training of bank staff to understand small business needs Government capital injection incentive program for small business - -for every compliance registered get 10 points – 100 points equals computer

112. LEGAL AND REGULATORY MATTERS

113. Legal and regulatory matters Legal requirements and compliance knowledge of benefits and liabilities associated with different types of companies; knowledge of regulatory requirements; need of legal/regulatory training. Relationships with public institutions At the national, provincial and municipal levels Knowledge of BEE legislation Awareness of business opportunities and benefits associated to BEE legislation. Need for training Association membership and Advocacy Capacity of associations to help and defend members

115. Get access to VAT number and Tax Clearance certificate

116. Better positioned to get access to government work

117. Some were not aware of the benefits

118. Few knew that it reduces risks and liabilities of SMESMEs started business because wanted to own their own business Advice received from business associates, family and accountants in selecting legal vehicle

120. Limited knowledge of registration process – registration process is not complicated or expensive

121. Saw themselves as too small a business

122. Did not see the benefits of registeringMost participants did not understand the benefits associated with the different types of companies

123. Legal requirements and compliance Most SMEs try to respect their obligations towards SARS, but were not aware of the new VAT threshold in 2009 SMEs knew to register their employees for UIF SMEs more likely to comply in paying income tax and PAYE Reasons for non-compliance was indicated to be a lack of knowledge

125. Did not understand SMEs so they were not able to help them properly

126. Needed to communicate with them better and within local languages

127. Did not know where to find public institutions

128. Bureaucratic and length procedures, not transparent and practiced nepotism

129. Staff needed to be trained in understanding policies/regulations and how to deal with customers

131. Providing training and education in the setting up of SMEs

132. Providing access to business premises

133. Providing access to relevant information in local languages“Most important thing is that they must make information more easily accessible in all the languages; some off us has difficulty in finding the right information”

134. Knowledge of BEE legislation SMEs generally don’t know the BEE legislation - they think it is biased and reserved for big companies SMEs were not aware that they had to register to be BEE “Yes, I haven’t register for it, I thought being black you are automatically registered as BEE” Almost all SME were not registered as a BEE company and most of them did not know how to do it. SMEs don’t see how they can benefit from the BEE legislation.

136. BEE is a mechanism whites use to get government businessSMEs indicated they needed more information and training on the benefits of BEE Some SMEs felt that BEE only benefitted Africans “BEE is a waste of time for us, for me, myself because first of all it hasn’t been marketed properly. We - I’m talking as a young Indian businessman – we haven’t been educated as to what resources we can get w.r.t. BEE. I think to be quite frank it is only beneficial to the Black man in the country. In the old government I wasn’t white enough, now I am not Black enough. That’s my view.” SMEs felt that they were overlooked because they were located in townships and were too small

137. Association membership or professional association Limited membership of professional associations with no advocacy role Women, colored and Asian seem more likely to participate in business forums and associations “I think communication is a problem, especially in the taxi industry. The only time we communicate with them is when we strike.” “On the issue of communication between the community and the government, the communication does reach us, and it goes back to them. The problem is that there is a messenger in-between, so there is a break-down, so it’s not sufficient.”

139. Training on BEE legislation and business opportunities created by BEE legislation

140. More support of public institutions in their neighbourhood.

142. Knowledge and information management Knowledge and information management focuses on: Mechanisms of sharing knowledge and experiences between organizations Support being provided by government and other organizations Needs, capacities and challenges in sharing knowledge and learning Best practices being used amongst SMEs in sharing knowledge and learning BEE businesses and influences from a cultural, identity and learning perspective ICT support for SMEs

144. Simple step-by-step procedures in handbook

145. Use of Internet (E-mail and web)

146. Business EXPOs

148. Too busy to attend

149. Too far away from their business premises

152. Who to contact and where to go

153. Pamphlets

154. Provide hands on training

155. Develop database of small businesses

156. Follow-up and monitoring of SMEs

157. Financing and subsidies of access to ICTs

159. E-mail clients and suppliersPublic institutions where SMEs can access ICT facilities free of charge

160. Culture, identity and religious influences Soshanguve women said: “We never come across it at all” Women in central Pretoria said: “but with identity you are more likely to get a bank loan if you are white than you are black” Knowing someone in a financial institution is seen as a way to get assistance “....through knowing the people at the bank we were able to open a bank account.” An Asian man said: “We need advice on how to grow as a business and how to become a BEE? We don’t know the procedures. How do we qualify, first we are not white enough now we are not black enough”

162. Not many use it for financial management purposes

163. More advanced uses are for bookkeeping, income and expenditure, tracking profits, monitoring sales and stock takingE-mail is used to communicate with clients and suppliers Web is used to access information and place orders with clients Internet and phones can be used to hold teleconferences

165. Have invited guests with people phoning in to ask questionsSimilar programmes can be presented on TV

166. RECOMMENDATIONS

168. Banking and financial services

169. Knowledge and information management

171. Analysis and conclusion SMES generally have personal or business bank account Many obstacles to SMEs getting finance but there is a distinct need SMEs are not well positioned to access financing from institutions – deficiencies in supply and demand Consequently, SMEs are getting finance from other informal sources Many recommended opportunities for intervention – most of all FSP workstreams

172. Analysis and conclusion Sharing of knowledge and learning not happening amongst SMEs Mechanisms for improving knowledge and learning clearly articulated Government has a distinct role to play in providing information, training, databases, monitoring, facilitating access to finances and communication Needs of SMEs in the knowledge and learning arena clearly articulated ICTs being used but there is a need for more use and training Key recommendations made with the development of a knowledge portal being at the forefront

173. Analysis and conclusion Although SMEs are formally registered – great need for training and education in benefits and mechanisms of establishing legal vehicles Generally there is good compliance amongst SMEs in registering with the various regulatory bodies, especially SARS Public institutions are not assisting SMES as much as they should - facilitate access to loans, training and education and to relevant information SMEs simply don’t know enough about BEE, its legislation and its potential benefits More developed SMEs part of professional associations but not bodies that act in an advocacy role Many opportunities for input by FSP but especially in conduct research into making SME associations and forums more effective

174. Discussion.