Fine line between opening the economy and curbing infections
Small and medium-sized enterprises require funding and need to be at level 3 or lower to survive
President Cyril Ramaphosa has mentioned two criteria to ease lockdown regulations: the rate of infection and the readiness to deal with the disease. The larger metros are likely to be able to move to the next level by the end of May, even though their infection rates are high. I am given to understand that Cape Town and Johannesburg are almost ready to deal with the crisis and qualify for level 3, the level we need to get to for small and medium-sized enterprises (SMEs) to survive.
Increasing trade for small businesses throughout the country will be vital for the economy. Level 5 saw only 10%-20% of SMEs trade. This increased to 30%-40% on level 4, and we expect 75% to trade under level 3. This will have a significant impact on the SME sector.
As such, in the coming weeks Ramaphosa should strongly consider moving the whole country to alert level 3 to stimulate economic activity. It is important to note that level 3 still means lockdown, so this would not be a free-for-all.
It has been reported that the government plans to set risk levels, not only provincially or for metros, but even at a subdistrict level. This may be challenging to deal with people moving between areas in terms of public transport and locking down smaller areas. You certainly don’t want to shut down a whole economic hub because of a breakout in a suburb. It is therefore vital that the government is pragmatic about these matters in the next two weeks of its consultations with stakeholders.
It is clear that the government is walking a fine line between trying to get the economy going and curbing the rate of infection. Therefore, we welcome the introduction of e-commerce and further retail expansion during level 4.
Moving to level 3 will require continued co-operation between all role players in the SME sector. There is already significant discipline among business owners and customers. For example, shops require masks and social distancing. They are also limiting the number of customers allowed inside. There must be an environment where customers will withhold their custom if they don’t feel comfortable and staff will have a voice if they are unhappy with working conditions. This will keep everyone in the process honest and allow trade to continue.
The key to restarting and continuing operations on a national scale is to balance increasing trade with strict precautions. We don’t want flare-ups in productive areas. Infections in a business means that a workplace is shut down for a day or even a week. Consequently, if there is contact tracing, anybody that has been in contact will be quarantined which will further disrupt productivity.
If the country rushes into lower levels with the uncontrolled movement of people, we run a serious risk of disrupting our supply chains which will result in empty shops. Therefore the two need to be balanced. People’s livelihoods must be restored, but not at the risk of higher lockdown levels.
Considering this, I welcome SMEs being allowed to trade under strict conditions, rather than regulation on whether they are allowed to trade or not. Hopefully, we will soon see the end of petty restrictions and draconian lockdown rules so that small businesses can begin to trade again.
The president has also touched on support for small businesses and the disbursement of the R200bn allocated as loan guarantees. According to a recent survey conducted by the SA SME Finance Association and assimilated by Heavy Chef, only 47% of SMEs have applied for any form of relief, while the rest believe they are not eligible. Of those that did apply, only 32% received funding. This means a mere 15% of the SME community has had any relief.
It is clear that the SME sector has suffered greatly under the lockdown and, along with the subsequent restrictions, is not getting the support from banks or the funds it needs.
The survey also revealed that 75% of business owners say they will not have the resources to reopen if the lockdown as it stands goes beyond the end of June. This means that in six weeks more than 1-million business owners and staff will lose their jobs, leaving their 5-million dependents destitute. This is worsened by the fact that many of them cannot claim from the Unemployment Insurance Fund (UIF), as employees are often casual or not registered with the fund even though they pay UIF levies in PAYE.
The survey did find that 71% of these businesses would need funding to allow them to restart. These are mainly smaller businesses and their needs are modest, with 53% needing less than R100,000 and 34% between R100,000 and R500,000.
While the R200bn loan guarantee scheme for banks is welcomed, the reality is that banks mainly serve larger and medium-sized businesses that meet traditional credit-vetting criteria, including surety and security. They don’t have the resources or mechanisms to fund a business doing R10,000-R20,000 turnover per month that do not have any security to put up as collateral.
Traditionally these smaller SMEs have depended on nonbank lenders for capital. These lenders serve an estimated 100,000 small businesses and have lent more than R10bn in the past five years. These loans were based on cash flow-based lending models and use risk scorecards and data-driven approaches, as opposed to collateral-based models.
This nonbank sector is well developed and includes members of the SA SME Finance Association, among others, such as Retail Capital, Merchant Capital, Spartan SME Finance, Cashflow Capital, LulaLend, Business Fuel, Pollen Finance, Bridgement and many more.
We call on the government to divert part of the R200bn allocated to SMEs to specifically provide these institutions with loan guarantees of R10bn. These lenders have the networks and systems in place to disburse these loans quickly and effectively. This money is needed now by the 85% of SMEs that did not get relief funding.
The SME sector makes up 28% of jobs in SA, and this could rise to 90%, according to the National Development Plan. For this to happen these SMEs have to survive the immediate catastrophe. Unless we fund them and allow them to trade, 75% of them will no longer exist after the end of June. We ask the government to act now. We have less than six weeks.
Westvig is CEO of Retail Capital.