Obstacles in the access to SMME finance: an empirical

perspective on Tshwane.
by

Ashly Teedzwi Mutezo

submitted in fulfillment of the requirement for

the degree of

MASTER OF COMMERCE

in the subject

BUSINESS MANAGEMENT

at the

UNIVERSITY OF SOUTH AFRICA

SUPERVISOR: Dr AJ ANTONITES

November 2005

i
I declare that:
Obstacles in the access to SMME finance: an empirical perspective on Tshwane
is my own work and that all the sources that I have used or quoted have been
indicated and acknowledged by means of complete references.

……………………… …………………………….

Signature Date.

Mrs AT Mutezo

ii
 ABSTRACT

The positive role and fundamental contribution of entrepreneurship on a global and

national level is an unconditional phenomenon pertaining to economic growth. There
are though various perspectives and opinions on the format and context of
contribution. One of these perspectives embraces the obstacles involved in the
entrepreneurial process hindering contribution and economic catalisation. This study
follows a focused approach towards investigating a critical obstacle and specifically
the access to finance, within an indicated geographical area.

The research intervention has obtained a large and reliable data set to examine the
contention that there are obstacles faced by entrepreneurs in accessing small business
finance in the Tshwane area. The findings of the study support this contention and
also the fact that conventional financing mechanisms do not allow for cost-effective
provision of finance to large numbers of entrepreneurs seeking small quantities of
finance. Poverty and lack of assets mean that many people do not have the collateral
needed to access formal financing.

Keywords; Entrepreneurship, Entrepreneurs, Obstacles to access of finance, SMME

finance, Funding institutions, South Africa.

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 ACKNOWLEDGEMENTS

I wish to express my sincere gratitude to those who have assisted me in the

compilation of this dissertation.

In particular I would like to thank the following:

• Dr AJ Antonites for his enthusiasm and expert advice, assistance and

stimulating guidance.
• Prof. Tom Cronje for his encouragement and moral support all the way
• Mrs Monica Van der Merwe and Mr Hennie Gerber for their sound statistical
expertise.
• My colleagues in the Department of Business Management for their support.
• My husband and children who allowed me the time and space to do this study

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 Table of Contents

Declaration of originality…………………………………………………………… i
Abstract……………………………………………………………………………... ii
Acknowledgements…………………………………………………………………. iii

Chapter 1 Introduction

1.1 Background……………………………………………….................................... 1
1.2 Preliminary literature Review…………………………….....……………………6
1.3 Research Problem and Objectives………………………………………………. 7
1.3.1 Hypothesis statement………………………………………………………… 8
1.3.2 Primary Objectives……………………………………………………………8
1.3.3 Secondary Objectives…………………………………………………………9
1.4 Research Design and Methodology…………………………………………….. 9
1.4.1 Sample……………………………………………………………………….. 9
1.5 Purpose of Study……………………………………………………………..10
1.6 Definition of terms used in the study…………………………………………….10
1.6.1 Entrepreneurship……………………………………………………………..10
1.6.2 Small, Medium and Micro-Enterprises………………………………………11
1.7 Chapter Outline…………………………………………………………………..14
1.8 Shortcomings of the Study……………………………….. ……………………16

Chapter 2 Entrepreneurship: A South African Perspective

2.1 Introduction………………………………………………................................. 17
2.2 Entrepreneurship versus small business management…….. …………………. 18
2.3 Global perspective……………………………………………………………..21
2.4 Entrepreneurship in South Africa……………………………………………...25
2.5 Issues pertaining to SMME finance in South Africa…………………………..29
2.6 Conclusion……………………………………………………………………..30

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Chapter 3 The SMME financial sector

3.1 Introduction………………………………………………................................. 31
3.2 Role of SMME sector in the South African economy…………………………31
3.3 State of the SMME sector in South Africa……………………………………. 33
3.4 Obstacles faced by thee SMME sector…………………………………………37
3.4.1 Training for SMMEs…………………………………………………….......37
3.4.2 SMME support…………………………………………. …………………..38
3.4.3 Financial constraints………………………..………….. …………………...39
3.4.4 Other obstacles that small firms frequently experience................................ 40
3.5 The SMME financial sector …………………………………………………… 41
3.5.1 The enabling environment………..…………………………………………… 41
3.5.1.1 Public institutions…………………………………………………………….43
3.5.1.2 Private financing ……………………………………. ……………………..44
3.5.1.3 Formats of SMME finance…………………………………………………...48
3.5.1.4 Internal or external finance……………………………. ……………………49
3.5.1.5 Debt or equity………………………………………………………………..49
3.5.1.6 Venture capital……………………………………………………………….50
3.6 Conclusion……………………………………………….. ……………………54

Chapter 4 Research Methodology

4.1 Introduction………………………………………………... ………………..… 56

4.1.1 Problem Statement…………………………………………………………...57
4.1.2 Primary Objectives……….……………………………..............................57
4.1.3 Secondary Objectives……… …………………………… ………………...57
4.1.4 Hypothesis statement……………………………..………………………….58
4.2 Research Design…………………………………………….... ………………..58
4.3 Description of the population and sampling frame …………………………….59
4.3.1 Sampling technique………………………….…………………………………60
4.3.2 Sample size……………………..……….……………………………………...61
4.4 Research instrument……………………………………………………………..61
4.5 Data collection…………………………………………………………………...63

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4.5.1 Format of the questionnaire……………………………………. ……………..64
4.6 Data analysis and statistical techniques used …………………….……………..64
4.6.1 Descriptive statistics…………………………………………………………...65
4.6.2 Inferential statistics…………………………………………………………….65
4.6.3 Statistical significance…………………………………………………………66
4.7 Statistical analysis software………………………………………. …………….66

Chapter 5 Research findings

5.1 Introduction…………………………………………………. …………………67

5.2 Demographic profile of respondents……….………………...............................67
5.3 Profile of business activities………….……………………….. ……………….71
5.4 Small and medium business financing……………………………………….....74
5.4.1 Methods of obtaining business finance…………………..................................74
5.4.2 Perceptions and attitudes towards financial entities and the
application process…………………………………………………………….80
5.4.3 Need for training entrepreneurs……………………………………………….81
5.5 Comparison of demographic groups in terms of obstacles
experienced during the application for finance………………. ………………..82
5.5.1 Differences between gender groups…………………………..….....................82
5.5.2 Differences between ethnic groups…………………………………………...83
5.6 Conclusion…………………………………………………….. ……………….85

Chapter 6 Summary, conclusions and recommendations

6.1 Introduction……………………………………………………………………..86
6.2 Summary and overview of research…………………………………………….87
6.3 Primary objectives………………………………………………………………88
6.4 Secondary objectives…………………………………………………………....88
6.5 Hypothesis Testing……………………………………………………………...89
6.6 Shortcomings of the study………………………………………………………91
6.7 Recommendations………………………………………………………………91
6.8 Further Research………………………………………………………………...93
6.9 Concluding remarks……………………………………………………………..93

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Bibliography…………………………………………………………………………95
Annexure 1 Covering Letter………………………………………………………...103
Annexure 2 Questionnaire – Entrepreneur………………………………………….105

List of Figures and Tables

Figures
Figure 1.1 International comparison of necessity entrepreneurship for 2002
And GDP per capita income for 2001…………………………………6
Figure 3.1 Total funds under management at 31 December 2000…..…. ……….51
Figure 3.2 Relative size of international private equity markets…………………52
Figure 3.3 Sectoral analysis of investments.……………………………………...53
Figure 3.4 Investment in 2000 –by stage.…………………………………………54
Figure 4.1 The research process…………………………………………………..56
Figure 5.1 Gender composition…………………………………………………...67
Figure 5.2 Home language………………………………………………………..70
Figure 5.3 Ethnic group distribution……...………………………………………69
Figure 5.4 Education of the sample……………………………………………….69
Figure 5.5 Role of respondents in business……………………………………….72
Figure 5.6 Length of time in operation……………………………………………72
Figure 5.7 Economic sector……………………………………………………….73
Figure 5.8 Size of businesses……………………………………………………..74
Figure 5.9 Phases in life cycle…………………………………………………….75
Figure 5.10 Methods of raising start-up capital…………………………………...75
Figure 5.11 Financial support problems experienced……………………………..76
Figure 5.12 Methods of learning about financial entities…………………………78
Figure 5.13 Reasons for rejection during the application of finance……………..79
Figure 5.14 Alternative financing entities………………………………………...79
Figure 5.15 Percentage: Very good/excellent on service attributes………………80
Figure 5.16 Problems experienced during the finance application process………81
Figure 5.17 Skills training most needed…………………………………………..81

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 List of tables
Tables
Table 1.1 TEA, start-up, new firm, opportunity and necessity rates……………….4
Table 1.2 Distinction between entrepreneur and small business owner…………..11
Table 1.3 Classification of SMMEs……………………….……………………...12
Table 1.4 Categorisation of SMMEs……………………………………………...14
Table 2.1 The characteristics of an entrepreneur versus the average small
business owner……………………………………………..................19
Table 2.2 Limiting factors most frequently identified by country experts in
each country…………………………………………………………….24
Table 3.1 The national experts’ assessment of financial support for
entrepreneurs in various countries……………………………………...34
Table 3.2 Challenges facing the informal and formal entrepreneurs in
South Africa……………………………………………………………36
Table 3.3 Obstacles experienced entrepreneurs…………………………………..40
Table 3.4 Partial list of financing sources for new ventures and private
business………………………………………………………………...48
Table 4.1 Distribution of questionnaires for entrepreneurs……………………….64
Table 5.1 Descriptive information for age……………………………………......68
Table 5.2 Cross-tabulation between gender and ethnic group..………………......70
Table 5.3 Cross-tabulation between gender and education……………………….70
Table 5.4 Cross-tabulation between ethnic group and education…………………71
Table 5.5 Economic sectors ………………………………………………………73
Table 5.6 Financial entities approached for assistance…………………………...76
Table 5.7 Financial entities granting finance……………………………………..77
Table 5.8 Differences in the perceptions of service quality of males and females.82
Table 5.9 Obstacles experienced by male and female entrepreneurs……………..83
Table 5.10 Differences in the perceptions of service quality of males and females:
t-test for independent measures……………………………………….84
Table 5.11 Obstacles experienced by entrepreneurs from different race groups….84

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CHAPTER 1: INTRODUCTION
1.1 BACKGROUND

The development of small, medium and micro-enterprises (SMMEs) contributes

significantly to job creation, social stability and economic welfare across the globe
(Ladzani and Van Vuuren, 2002:2). In the United States of America (USA), for
example, SMMEs have introduced innovative products and services, created new
jobs, opened foreign markets, and in the process ignited the USA’s economy into
regaining its competitive edge in the global economy (Scarborough and Zimmerer,
1996:10). Japan’s SMME sector accounts for the bulk of the country’s business
establishment, proving vital support for employment, for regional economies and, by
extension, for the day-to day life of the Japanese people (Ministry of International
Trade and Industry, 1997:11). In Taiwan, the SMMEs sector generates approximately
98 percent of the economy’s GDP. Although these businesses are relatively small in
scale, limited funds, and weak in structure, they make significant contributions to
national economic prosperity, create innumerable jobs and promote social stability
(Scarborough and Zimmerer, 1996:12).

In South Africa, small, medium and micro-enterprise development was identified by

government as a priority in creating jobs to solve the high unemployment condition.
There is evidence that the national unemployment level currently estimated at 28.4
percent (Statistics South Africa 2004:1), is increasing at an alarming rate. According
to the Ntsika Annual Review (2001:111), SMMEs constitutes 97.5 percent of all
businesses in South Africa. This sector generates 34.8 percent of the Gross Domestic
Product (GDP), contributes 42.7 percent of the total value of salaries and wages paid
in South Africa, and employs 54.5 percent of all formal private sector employees
(Diederichs, 2001:64). The gap between high and low income groups is increasing
fundamentally over time. Small businesses and entrepreneurship development serve
as a facilitator in filling these economic gaps.

The South-African small business sector has been neglected during much of the
century following the discovery of diamonds and gold, and the establishment of a
modern, capitalist economy with almost exclusive white control (Ministry of Trade

1
and Industry, 1994:9). Given South Africa’s legacy of big business and constrained
competition, the small business sector is seen as an important force to generate
employment and more equitable income distribution, to activate competition, exploit
niche markets, enhance productivity and technical change, and thereby stimulate
economic development. The Ministry of Trade and Industry (1994:11) emphasizes the
problem of accessing small business finance, mentioning that for many years only 8
% of total credit in South Africa went to previously disadvantaged individuals (PDI)
while 82% went to non-PDIs. The reason mentioned pertaining to the lack of access
to financing is that the requirements of lending institutions made it difficult for
Blacks, Indians and Coloureds to get credit.

Despite the growth in venture capital funding, access to funding remains a problem
for small enterprises, in particular for empowerment groups in South Africa. In most
surveys among small enterprises, the provision of concessionary finance comes out as
one of the most urgently felt needs. Yet, extensive research reveals that access to
financing is one of the several important factors that are critical for business survival
and growth, the other factors are market access and lack of management and skills
(Ministry of Trade and Industry, 1994:24). South Africa’s financial sector has always
been reluctant to provide comprehensive services for the fragmented, risk-prone and
geographically dispersed small enterprise sector (Ministry of Trade and Industry,
1994:25). This applies in particular to black emergent enterprises, where apartheid
restrictions, forced removals, influx control, migrant labour and job reservations all
militated against the gradual development of a solid bank-client in both rural and
urban areas. It is only logical therefore that commercial banks have for long been
reluctant to risk their client’s funds through loans to and investments in black owned
or controlled enterprises.

The Global Entrepreneurship Monitor (GEM) is an executive report that is produced

annually in order to assess the current state of entrepreneurship in a specific country
from a global perspective. Foxcroft, Wood, Kew and Herrington and Segal (2002) in
their report, compare 37 participating countries and South Africa ranked as follows:
- 19th in overall entrepreneurial activity with 6.54% of the adult population
involved in entrepreneurial venture established since January 1999. This rate

2
 is the lowest of all the developing countries participating in GEM (Thailand,
India, Chile, Argentina, Brazil, Mexico and South Africa).
- 15th in start-up activity (a start-up is a business that has not paid salaries and
wages for longer than three months), with just under 5% of the adult
population involved in starting a business.
- 29th in new firm activity (a new firm is a business that has paid salaries and
wages for longer than three months but less than 42 months), with only 2%
of the adult population involved in new firms.
- 9th in necessity entrepreneurship (a necessity entrepreneur is involved in a
new business because s/he has no other choice for work), 2.38% of the adult
population are necessity entrepreneurs.
- 29th in opportunity entrepreneurship (an opportunity entrepreneur is
involved in a new business to pursue an opportunity), 3.3% of the adult
population are involved in pursuing exploitable opportunities.
- in all measures of entrepreneurship South Africa ranks lowest of all
developing countries in the GEM.
- Finally, of all GEM countries in two key measures namely opportunity
entrepreneurship and new firm activity, South Africa is in the lowest quartile

Although South Africa has such low rankings when compared with other countries,
entrepreneurship still plays a very important role in economic development.

South Africa has slipped further behind in international rankings of entrepreneurial

activity released by GEM. In a survey done by Orford, Wood, Fischer, Herrington and
Segal (2003) it was shown that South Africa ranked 22nd out of 31 countries in terms
of new business formation. GEM’s primary measure of entrepreneurial activity is the
Total Entrepreneurial Activity (TEA) index. In 2003 South Africa had a TEA of
4.3%, meaning that 4.3 out of every 100 adults in South Africa were starting or
operating businesses less than 3.5 years old in 2003. The TEA provides a basis for
international comparisons of the level and nature of entrepreneurial activity. South
Africa’s TEA rates have fallen from 9.5% in 2001 to 4.3% as shown in table 1 below.
The table compares South Africa’s TEA rates with the rest of the world. Figure 1
shows the TEA rates of 2003

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Table 1.1 TEA, start-up, new firm, opportunity and necessity rates for GEM
2003
2003 2002 2001 Start-up New firm Opportunity Necessity
TEA TEA TEA rate 2003 rate rate 2003 rate 2003
2003

Uganda 29.3 na na 14.8 16.9 17.1 13.2

Venezuela 27.3 na na 19.2 9.7 16.1 11.6
Argentina 19.7 14.2 11.1 12.4 8.5 11.9 7.5
Chile 16.9 15.7 na 10.9 7.1 10.5 5.9
New Zealand 13.6 14.0 18.1 9.3 5.2 11.5 1.7
Brazil 12.9 13.5 12.7 6.5 6.9 6.9 5.5
United States 11.9 10.5 11.6 8.1 4.9 9.1 1.7
Australia 11.6 8.7 15.5 6.6 5.4 9.9 1.6
China 11.6 12.3 na 4.3 7.4 5.5 6.1
Iceland 11.2 11.3 na 7.3 4.4 9.4 0.8
Ireland 8.1 9.1 12.2 5.1 3.8 6.7 1.3
Canada 8.0 8.8 11.0 5.1 3.8 6.7 1.1
Norway 7.5 8.7 8.8 4.0 3.9 6.7 0.7
Switzerland 7.4 7.1 na 4.3 3.7 6.3 1.0
Finland 6.9 4.6 7.7 4.1 3.1 5.8 0.6
Greece 6.8 na na 2.9 3.9 4.2 2.6
Spain United 6.8 4.6 8.2 4.4 2.5 6.1 0.5
United Kingdom 6.4 5.4 7.8 3.4 3.2 5.3 1.0
Denmark 5.9 6.5 8.0 3.1 3.3 5.3 0.4
Germany 5.2 5.2 8.0 3.5 2.1 3.7 1.2
Singapore 5.0 5.9 6.6 3.0 2.3 3.9 1.0
South Africa 4.3 6.5 9.5 2.7 2.0 2.9 1.5
Sweeden 4.1 4.0 6.7 2.0 2.4 3.8 0.4
Slovenia 4.1 4.6 4.5 3.0 1.1 3.1 0.8
Belgium 3.9 3.0 6.4 2.8 1.2 3.3 0.3

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Netherlands 3.6 4.6 6.4 1.7 1.9 3.0 0.4
Hong Kong 3.2 3.4 na 1.7 1.6 2.2 1.1
Italy 3.2 5.9 10.2 2.0 1.3 2.9 0.2
Japan 2.8 1.8 5.2 1.4 1.5 2.0 0.5
Croatia 2.6 3.6 na 1.8 0.9 1.7 0.6
France 1.6 3.2 7.4 0.9 0.7 1.1 0.4
G7 5.6 5.8 8.7 3.5 2.5 4.4 0.9
All GEM 8.8 7.4 9.4 5.2 4.1 6.3 2.4
Developing ex 21.2 14.5 11.9 12.8 9.8 12.5 8.7
SA
Source: Foxcroft; et al. (2002:16)

International comparison of necessity entrepreneurship for 2002 and GDP per

capita income for 2001.

Figure 1.1 Source: Foxcroft et al. (2002:16)

However, according to the Ntsika Annual Review (2002:111), there is a need to view
and understand the access-to-finance dilemma in a broader context. The reluctance of
financial institutions to advance loans or overdrafts to small business is not just based
on alleged conservatism of commercial bankers or racially biased financiers. “It is the

5
result of their experience with poorly motivated loan applications, the frequent lack of
systematic business plans and realistic market assessments, the statistically verified
high rate of small-business failure and irrecoverable collateral, and other
complications which make small-business finance unprofitable for banks” (Ntsika
Annual Review, 2002:111).

Given this background, it is important to look at the obstacles that small business
owners face in terms of access to start-up finance. Conversely it has been noted by
Orford, Wood, Fischer, Herrington and Segal (2003:47) that one way to address the
problem of access to finance is to focus on improving the financial management
practices of entrepreneurs. Thus according to Kirby and Watson (2003:100), in
seeking to make finance more easily available, especially businesses with inadequate
administrative and management practices, is unlikely to result in optimal use of the
relatively scarce resources. Rather, it is likely to have an added undesirable result of
increased numbers of highly indebted and bankrupt entrepreneurs. It is therefore
important to assess the current situation of the South African financial sector and
come up with possible solutions that will help increase the financial success of small
businesses and hence improve income and wealth distribution.

1.2 PRELIMINARY LITERATURE REVIEW

A number of research interventions have been conducted on the importance of access

of finance to small business owners on a global level. On a survey done on SMMEs
in Great Britain, access to finance was the main reason for the failure of these
businesses. Woodcock in Buckland and Davis (1995:41) argues that there is a
continuity of lack of knowledge on the part of small businesses pertaining to possible
funding options. Mason et al in Buckland and Davis (1995:78) in conjunction with
the latter, observe that entrepreneurs often have difficulty in convincingly conveying
their specialized knowledge to a bank manager. In Great Britain banks are a
recognized source of start-up and working capital. According to Hughes and Storey
(1994:10) they are however, not a particularly easy source, putting a priority on
security/collateral and for intervention of the state. Thus, SMMEs require support if
they are to survive and grow. According to Miroslav and Drnovsek in Kirby and
Watson (2003:131), one of the obstacles that hindered the creation of new ventures in

6
Slovania includes lack of capital financing for small business initiatives on the part of
banks and other financial institutions. Banks were reluctant to lend to small
businesses and practically no venture funds existed. New entrepreneurs primarily
obtained the requisite resources from family members and friends (Kirby and
Watson, 2003: 133).

The absence of, or at least poor access to finance, was an important negative factor
affecting SMMEs in Romania and Bulgaria. According to Kirby and Watson
(2003:191), in 1998, just 8-10 percent of the firms in Bulgaria had access to bank
loans. The rigid requirements of the commercial banks for serving the loans (e.g.
collateral and terms) extend to firms as well as the high cost of debt (Kirby and
Watson, 2003:191). In South Africa the White Paper on National Strategy for the
Development and Promotion of Small Business (1995) reinvented the wheel for the
SMME sector. The Small Business Development Act of (1996) indicates that up to
78 percent of the small businesses started in South Africa eventually failed. It is
therefore necessary for the South African government to adopt specific economic and
social policies to stimulate SMME development as an essential part of the economic
and social development of the entire country. It is though important for entrepreneurs
to help themselves and find ways to improve the organisation of their businesses, and
the skills of their employees. They also have to find the adequate means to adapt to
the market requirements if they are to survive (Orford et al 2003: 180).

1.3 RESEARCH PROBLEMS AND OBJECTIVES

Most SMMEs in South Africa fail due to a number of reasons namely lack of
education, lack of experience and entrepreneurial culture and most important of all,
lack of and access to financial resources. Evidence adduced earlier on in this study
demonstrates that there is a serious problem, which pertains to small business getting
access to finance. Thus, improving access to finance as a fundamental approach to
improve/enhance South Africa’s entrepreneurial performance. Given this state of
entrepreneurship in South Africa, it is necessary to identify what issues hinder the
access of SMME finance from the perceptual view of the entrepreneur and/or small
business owner. It is furthermore critical to identify potential demographical

7
variables affecting the access to SMME finance in order to address the relevant
issues/obstacles effectively.

1.3.1 Hypothesis Statement

H1 Small, medium and micro-enterprises (SMMEs) do not perceive

obstacles in accessing finance from financial institutions in Tshwane

H1a Small, medium and micro-enterprises (SMMEs) perceive obstacles in

accessing finance from financial institutions in Tshwane

H2 Gender differences do not exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H2a Gender differences exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H3 Ethnic differences do not exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H3a Ethnic differences exist in terms of the perceived obstacles in obtaining

finance by small, medium and micro-enterprises (SMMEs) in the
Tshwane area

1.3.2 Primary objectives

(1) To identify the obstacles faced by entrepreneurs in accessing small business

finance from financial institutions.
(2) To determine the basic demographic of entrepreneurs in the Tshwane
Metropolitan area with reference to gender, age, language group and level of
education.

8
 (3) To determine the entrepreneur’s work experience and the phase of
entrepreneurial process in which the entrepreneur is in.

1.3.3 Secondary objectives

(1) To identify the industries in which the entrepreneurs operate.

(2) To determine the nature of training and support that entrepreneurs need
(3) To determine possible solutions to make accessibility of small business
finance easier and thus improve on the success rate of this sector.
(4) To determine how government can intervene to improve the accessibility of
small business finance to entrepreneurs

1.4 RESEARCH DESIGN AND METHODOLOGY

This study will be an empirical study using primary and secondary data. The primary
data comprises evidence obtained through structured questionnaires, which are
qualitative and quantitative in nature so as to gain an insight and understanding into
the operations of the funding institutions and the entrepreneurs. The questionnaire is
designed based on open and closed-ended questions. Interviews will be carried out so
as to take care of those instances where the entrepreneur selected may not understand
the questionnaire as a result of linguistic barriers. Various sources of secondary data,
including scientific journals within the entrepreneurship and SMME context, reports
from the Department of Trade and Industry (DTI) of South Africa, newspaper articles
on SMMEs and annual reports of funding/financing institutions will also be assessed
and deductively applied. Responses to the questionnaire will be analysed and
evaluated using techniques such as tabulation, correlation and statistical graphs.

1.4.1 Sample

A total of 600 questionnaires were sent out to entrepreneurs in the small, micro and
medium enterprises sector of the Tshwane Metropolitan Area. Two hundred
completed questionnaires were returned giving a response rate of about 33%.
Therefore the sample consisted of the 200 entrepreneurs who have had experience in
accessing funds from various funding institutions. A random sample was drawn from

9
Braby’s database and the Business Referral and Information Networking (BRAIN) for
Small Business in South Africa, within the geographical framework of the Tshwane
Metropolitan area.

1.5 PURPOSE OF STUDY

Internationally it has been proven that small businesses foster economic growth and
job creation as in industrialised countries like Japan and The United States of
America, as already stated in this study. In South Africa large or corporate businesses
contribute more than 50 percent to Gross Domestic Product (GDP) and approximately
35 percent by small businesses. The small business sector’s role in job creation and
economic growth can not be underestimated. This study focuses on a critical issue
pertaining to the access to business finance, as an obstacle to survival and growth.
Once the obstacles in assessing small business finance have been identified,
recommendations will be made, which if considered, could help entrepreneurs,
government and the funding institutions. Once finance is accessible, the success rate
of small businesses could potentially increase and contribute to the improvement of
socio-economic issues.

1.6. DEFINITION OF TERMS

For the reader to appreciate the context in which various terminologies have been
applied herein, below follow definitions of some terms used in this study.

1.6.1 Entrepreneurship
Rwigema and Venter (2004:6) define entrepreneurship as “the process of
conceptualizing, organizing, launching and through innovation – nurturing a business
opportunity into a potentially high growth venture in a complex, unstable
environment.” Entrepreneurship is thus characterized by the following:
• Creativity and innovation
• Resource gathering and the founding of an economic organization
• The chance for gain (or increase) under risk and uncertainty

10
Thus, entrepreneurs spot an opportunity, marshal resources and organize these into a
venture that offers something new or improved to the market. However, an important
distinction has to be made between entrepreneurship and small business management.
Wickham (1998:24) believes that, although entrepreneurial ventures and small
business pursue the same objectives, there are some fundamental differences between
the two as shown in the table below:

Table 1.2 Distinction between entrepreneur and small business owner

Entrepreneurs Small business owners

Are innovative and are creators of new Operate with established products
products, processes and technology
Ventures have high growth potential Normally operate in an established
market
Ventures are concerned with growth Are concerned with sales and profits
targets, market development and
positioning
Source: Wickham (1998:24)

For the purposes of this study, both entrepreneurs and small business owner-managers
will be considered, as finance is required in both ventures. An understanding of the
definition of entrepreneurship highlights the importance of the processes that
entrepreneurs will follow to achieve their goals.

1.6.2 Small, Medium and Micro Enterprises (SMMEs)

According to the National Small Business Act 102 of 1996, the SMMEs are defined
as separate and distinct business entities in any sector of the economy managed by
one owner or more. These include cooperative enterprises and non-governmental
organizations, as well as branches or subsidiaries if any (Rwigema and Venter,
2004:314). The South African government has defined the SMME sector according to
various factors namely, ownership, employment size and formality (Government
Gazette 1995:8) resulting in a classification of businesses as shown in Table 1.2
below:

11
Table 1.3 Classification of SMMES

SECTOR OR SUB- SIZE TOTAL FULL TOTAL TOTAL

SECTORS IN OR TIME ANNUAL GROSS
ACCORDANCE CLASS EQUIVALENT TURNOVER ASSETS
WITH OF PAID VALUE
INDUSTRIAL EMPLOYEES LESS THAN (FIXED
CLASSIFICATION ESS THAN R (million) PROPERTY
EXCLUDED)

LESS THAN
R (million)
Agriculture Medium 100 R4 R4
Small 50 R0.40 R2
Very 10 R0.15 R0.40
Small 5 R0.15
Micro
Mining and Medium 200 R30 R18
Quarrying Small 50 R7.5 R4.5
Very 20 R3 R18
Small 5 R0.15 R0.10
Micro
Manufacturing Medium 200 R40 R15
Small 50 R10 R3.75
Very 20 R4 R1.5
Small 5 R0.15 R0.10
Micro
Electricity, gas and Medium 200 R40 R15
water Small 50 R10 R3.75
Very 20 R4 R0.15
Small 5 R0.15 R0.10
Micro
Construction Medium 200 R20 R4
Small 50 R5 R1
Very 20 R2 R0.40
Small 5 R0.15 R0.10
Micro
Retail and motor Medium 100 R30 R5
trade and repair Small R15 R2.5
50
services Very R3 R0.50
Small 10 R0.15 R0.10
Micro
Wholesale trade, Medium 100 R50 R8
commercial agents Small 50 R25 R4
and allied services Very 10 R3 R0.50
Small 5 R0.15 R0.10
Micro

12
Catering, Medium 100 R10 R2
accommodation and Small 50 R5 R1
other trade Very 20 R1 R0.20
Small 10 R0.15 R0.10
Micro
Transport, storage Medium 100 R20 R5
and communication Small 50 R10 R2
Very 10 R2 R0.50
Small 5 R0.15 R0.10
Micro
Finance and business Medium 100 R20 R4
service Small 50 R10 R2
Very 20 R2 R0.40
Small 5 R0.15 R0.10
Micro
Community Social Medium 100 R10 R5
and Personal services Small 50 R5 R2.5
Very 10 R1 R0.50
Small 5 R0.15 R0.10
Micro
Source: Adapted from National Small Business Act 1966, No. 102 of 1966:17

Definitions of SMMEs are difficult to discern since the labour and capital intensity of
enterprises vary so widely. Some credit lines also differentiate SMMEs by net asset
size or turnover, each of which has its unique limitations.

Another enlightening definition (South African Parliament’s White Paper on National

Strategy for the Development and Promotion of Small Businesses in South Africa,
1995) is that:
“Micro-enterprises are very small businesses, often involving the owner, some
family member/(s) and at the most one or two paid employees. They usually
lack formality in terms of business licenses, value-added tax (VAT)
registration, formal business premises, operating permits and accounting
procedures. Most of them have a limited capital base and rudimentary
technical or business skills amongst their operators. However, many micro-
enterprises advance into viable small businesses. Earning levels of micro-
enterprises differ widely, depending on the particular sector, the growth phase
of the business and access to relevant support.

13
 Small enterprises constitute the bulk of the established businesses, with
employment ranging between five and about fifty. The enterprises will usually
be owner-managed or directly controlled by the owner-community. They are
likely to operate from business or industrial premises, be tax-registered and
meet other formal registration requirements. Classification in terms of assets
and turnover is difficult, given the wide differences in various business sectors
like retailing, manufacturing, professional services and construction.

Medium enterprises constitute a category difficult to demarcate vis-à-vis the

“small” and “big” business categories. It is still viewed as basically
owner/manager-controlled, though the shareholding or community control
base could be more complex. The employment of 200 and capital assets
(excluding property) of about R5 million are often seen as the upper limit”.

For the purposes of this survey and resulting from information gathered, the following
categorization can be taken to be representative of the majority of the respondents’
definition of SMMEs:
Table 1.4 Categorisation of SMMEs
Type of business No of people employed
Micro-enterprises A staff complement of less than 5

Very Small-scale enterprise Staffing between 6 and 10

Small Staffing between 11 and 50
Medium-enterprise Staffing between 51 and 200

The above stated figures are inclusive of the proprietor(s).

1.7. CHAPTER OUTLINE

Chapter One : Background

A background to the focus of the study within a South African context is offered in
chapter one. The following issues are addressed: The role of entrepreneurship in
economic growth globally and the South African economy. The state of
entrepreneurship in South Africa and a preliminary literature review on access to

14
small business finance. The research problem and objectives are followed by the
hypotheses, research design and methodology, importance of study and the definition
of terms used in the study.

Chapter Two: Entrepreneurship in South Africa

Chapter two provides a comprehensive literature study on the definition of
entrepreneurship and small business, the characteristics of an entrepreneur, special
contributions of small businesses, global perspective of SMMEs and the issues
pertaining to the small business finance in South Africa.

Chapter Three: The SMME financial sector

Chapter three also provides a comprehensive literature study on the SMME financial
sector in South Africa. It views the historical perspective of the local SMME sector;
its economic importance within the country – focusing on employment creation,
poverty alleviation and contribution to the country’s economic growth; obstacles
faced by the sector in accessing small business finance and government initiatives to
promote it within the country.

Chapter Four : Data analysis/Process Data

Chapter four deals with the research methodology applied in this study as well as the
design of the questions for the empirical research that will be formulated and
distributed to a selected group of entrepreneurs and funding institutions. It also
describes the identified sample and the data analysis of the information.

Chapter Five: Research results and tabulation

Chapter five focuses on the interpretation of the empirical research results by means
of quantitative and qualitative analysis. The results are integrated with hypotheses and
concepts identified during the literature review to develop a structured approach to the
accessing of SMME finance. Tables and graphs will be used to illustrate the findings.

Chapter Six: Conclusion and recommendations

Chapter six is a concluding overview attempting to make the reader view the South
African scenario in relation to the bigger picture. The findings portrayed in chapter
five will be discussed in relation to the research objectives, the shortcomings of the

15
study and the recommendations for further research. It also brings to the fore key
considerations and makes recommendations that focus on addressing the identified
obstacles, provides a summary of the research and conclusions on the problems of
access to SMME finance.

1.8. SHORTCOMINGS OF THE STUDY

There has not been much research into the issues of accessing SMME finance in
South Africa. The lack of research on a secondary level puts a strain on the literature
review. However, the access of financing has been researched in other countries. As a
result, this study endeavoured to create a platform by means of which to highlight the
current position of entrepreneurs in their effort to access finance, especially during the
start-up phase. Also most of the entrepreneurs contacted were from the small size
firms and very few from the micro firms. Most are survivalist industries and are
therefore not formally registered. Further research is therefore suggested as a means
of establishing the specific relationships and correlated variables presented by the
funding institutions and the entrepreneur.

16
CHAPTER 2: ENTREPRENEURSHIP: A SOUTH AFRICAN
PERSPECTIVE

2.1 Introduction
As a field of study, entrepreneurship has been undergoing expanded and updated
definitions that include the need to more precisely explore who creates new business
opportunities for the manufacture of goods and services (Alstete, 2002:223). The
notion of value creation through new ventures is common to most definitions.
However, literature shows that there exists no generally accepted definition of
entrepreneurship. The following are some of the definitions which were deemed
sufficient for the purposes of this study:
• “Entrepreneurship is the act of forming a new organization of value” (Bateman
and Snell 1996: 208).
• “….the creation of an innovative economic organization (or network of
organizations) for the purpose of gain under conditions of risk and uncertainty”
(Dollinger, 1995:7).
• “….the process of conceptualising, organising, launching, and – through
innovation – nurturing a business opportunity into a potentially high growth
venture in a complex, unstable environment” (Rwigema and Venter, 2004:6).
• “….the process that causes changes in the economic system through innovations
of individuals who respond to opportunities” (Nieman, et. al. 2003:9)
• “any attempt at new business or new venture creation, such as self employment, a
new business organisation, or the expansion of an existing business, by an
individual, teams of individuals, or established businesses”. (DTI, 1998:1).

Entrepreneurship embraces the emergence and growth of new businesses. It is also

the process that causes changes in the economic system through innovations of
individuals who respond to opportunities in the market. These definitions, when
integrated, provide an opportunity to capture as broadly as possible the critical
aspects of entrepreneurship. Foxcroft, et al (2002:16), for instance, explicitly
recognise self-employment as one manifestation of entrepreneurship. It takes note
of the critical aspect of entrepreneurship which has an important bearing on
sustainable job creation, in particular – establishing sustainable business.

17
The final point to make with regards to the definition of entrepreneurship for the
purposes of this research is that entrepreneurship extends beyond individuals and
groups to organisations, society and culture. Thus in a broad sense
entrepreneurship is regarded as a set of qualities and competencies that enable
individuals, organisations, societies and cultures to be flexible, creative and
adaptable in the face of, and contributors to, rapid social and economic change
(Bukula, 2000:2).

2.2 Entrepreneurship versus small business management

The role of entrepreneurship as an economic driving force was emphasised in

Chapter one. However, an important distinction that has to be made is the
fundamental difference between entrepreneurship and small business management.
These constructs are both critical to the performance of the economy but serve
different economic functions. They both need entrepreneurial action for start-up,
but the small business venture will tend to stabilise at a certain stage and only grow
with inflation (Nieman, et al. 2003:10). A small business is any business that is
independently owned and operated, but is not dominant in its field and does not
engage in any new marketing or innovative practices (Carland, 1984 in Nieman,
2004:10).

Rwigema and Venter (2004:7) define a small business as a distinct business whose
size lies below specified thresholds. The Small Business Act (1996) specifies that
the number of employees determines whether business is micro, very small or
small:

- A small business can employ up to fifty people.

- A very small business employs no more than ten people.

- Micro or survivalist businesses are usually one person operations, though they
could employ up to five persons.
Timmons (1999:27), and Van Vuuren and Nieman (1999:27) regard
entrepreneurship as the starting of a business (utilising of an opportunity) and/or
the growth and development of that specific business. Small business management
is seen as the starting of the business, growth and development up to a certain

18
stage, then the loss of its entrepreneurial flair. Consequently owners of small
businesses are not necessarily interested in growth as an objective, but they see
themselves as successful when their businesses are successful.

Trevisan, Grundling and de Jager (2002:135), in an investigation of the

importance of entrepreneurial qualities among small business owners, found that
creativity is the characteristic where the difference between small business owners
and those who are not small business owners showed at its best. Rwigema and
Venter (2004:7) indicate that not all small businesses are entrepreneurial since
many are started with limited growth ambitions. By contrast entrepreneurs usually
aim for high potential ventures. Table 2.1 below shows the distinguishing
characteristics of a dynamic entrepreneur in contrast to those of an average small
business owner:

Table 2.1 The characteristics of an entrepreneur versus the average small

business owner

Small/Medium Business Owner Dynamic Entrepreneur

Static Growing
Status quo Vision, opportunistic
Local Global
Limited Expanding
Internal resources External resources
Self employed Professional team
Avoids competition Seeks competition
Risk averse Risk taking and sharing
Survival Success
Source: As adapted from De Clerq et al (1997:7)

Various terms are used to indicate small business undertakings. These terms
normally refer to the size of the business for example: small and medium sized
enterprises (MSE), small scale enterprises (SSE), and micro and small enterprises
(MSEs). However, this study deals with small, micro and medium enterprises
(SMMEs) and the term small businesses will be used interchangeably.

19
2.3 Special contributions of small business

Small, medium and micro-enterprises (SMMEs) represent an important vehicle to

address the challenges of job creation, economic growth, and equity in South
Africa. Throughout the world, one finds that SMMEs are playing a critical role in
absorbing labour, penetrating new markets and generally expanding economies in
creative and innovative ways. Small businesses make the following contributions

to the South African economy:

a. Providing job opportunities

According to the 2002 October Household Survey (CSS, 2002:17), South Africa
had a 23.3 percent unemployed rate in 1999. In 1999, small business in South
Africa employed 16.3 percent of the country’s economically active population.
Business Partners Limited is taking the initiative and is addressing the question of
developing entrepreneur-driven SM. Its five point-plan for developing SMMEs
revolves around the following:

• Creating an environment that will encourage entrepreneurship and development

of SMMEs.

• Mobilising financial resources to promote SMMEs by means of financial

support programme.

• Making available low-cost and affordable business sites in areas that lack them.

• Upgrading SMMEs managerial skills and knowledge.

• Introducing appropriate professional aid programmes.

b. Introducing innovative products

Innovation is the transformation of an idea or invention into new, socially
accepted and usable products or services. Small firms are extremely innovative
and can generate more innovations per worker than large firms (CSS. 2002:18).

c. Stimulating economic competition

When economic competition exists, business vies for sales and customers have
greater freedom of product choice. Some producers may set high prices, withhold

20
 technological developments, exclude new competitors or abuse their position of
power. Small businesses compete against large producers and improve the nature
of the competitive environment

d. Aiding big business.

Some functions can be performed efficiently and effectively by small business,

and therefore small business contributes to the success of the larger companies.

Small business can perform the following functions better than large business,
namely:

• Distribution function
Small business such as wholesale and retail outlets perform a valuable

service for big business by distributing its products to customers

• Supply function
Small business can function as suppliers to, and subcontractors for large
companies. Where the large company agrees to a long-term relationship
with the small company, the latter can supply a specified level of quality,
can offer lower prices and can generate cost-saving ideas.

e. Producing goods and services

Small businesses are not burdened by large hierarchical organisational structures,
entrenched culture and firm strategies that limit the flexibility and productivity of the
company. The owners of small businesses are often the managers thereof, and have
the authority to make decisions regarding the operations to increase efficiency.
(Longenecker, Moore and Petty. 2000:31).

2.4 Global perspective

On a global level, especially in Asia, Africa and Latin America there has been an
imperative need by humanity as a whole to find means and ways of improving the
social and economic well-being of the poorest of the poor. Declining productivity,
falling global markets, and International Monetary Fund (IMF) recommended
structural programmes have led to a general increase in the level of unemployment

21
worldwide. The formal sector has not been able to provide employment to alleviate
the suffering of these populations and this has resulted in a proliferation of innovative
interventions over the years such as cooperatives, credit unions and micro finance
institutions – both formal and informal- in an effort to finance small business that can
earn them a decent living. Developed and newly industrialised nations on the other
hand, have realised that it is unacceptable to have income disparities as do exist at
present and hence socially, if not morally justifiable, to assist in balancing the
inequalities to achieve global peace (Kirby and Watson, 2003:10).

Corporate businesses for years have enjoyed much support from governments,
financiers, and other stakeholders. This situation is, however changing rapidly in all
the economies of the world (Scaborough and Zimmerer 1996:25). The success of the
leading countries, such as the United States of America, Japan and Great Brittan, has
proven that the only growth sector in the economy is the SMME sector, driven by
entrepreneurs (Nieman, et. al, 2004:4). The focus is shifting towards small business
development. Corporate entities are trying to survive and become more competitive
by downsizing and merging. This process results in many retrenched and unemployed
people establishing their own small business enterprises, not only for survival, but
also to generate wealth in their respective communities.

One of the key reasons governments across the globe is eager to encourage and
support small businesses has been their perceived contribution to employment and
economic growth. Storey (1994) in Kirby and Watson (2003:1) has concluded that
small businesses do create jobs at a faster rate than large businesses and that they are
more consistent, since they are less influenced by changes in the macro-economy. In
the United Kingdom (UK) between 1995 and 1999, new businesses created 2.3
million jobs and the vast majority (85%) were provided by micro, small, and medium-
sized enterprises (Kirby and Watson,2003:1). In the United States of America (USA)
during the past ten years, new business incorporations average 600 000 per year, with
an all-time-record of 807 000 new small firms being established in 1995 (Kuratko and
Hodgetts, 2004:3). However, very few businesses survive, and even a smaller
proportion actually grows (Storey, in Buckland and Davids,1995:40). It is though
evident that, most SMMEs all over the world experience problems of access to
funding due to that fact that the low risk propensity of financial institutions. Most of

22
the people involved in the small businesses, especially in the informal sector, are poor
and do not have any form of collateral as security.

In an effort to alleviate the plight of the poor in Bangladesh, the Grameen Bank was
established. The bank provides small businesses with loans on a group liability basis
instead of requiring any collateral. The Grameen borrowers do not have access to
conventional sources of credit because they have no collateral (Wahid, 1999: 94).
According to this micro-finance organisation, it is important to charge market rates of
interest, but access to finance is more important than cost of finance.

Financial support for Small and Micro Enterprises in Thailand’s working paper has
some of its summaries as:
• The observation that best practices in micro-finance include group-based
lending in which loans to individuals are guaranteed by the group
• a requirement that loan amounts be based on a multiple of a member’s
savings in the programme
• the application of market rates of interest to at least cover operating costs,
and
• intense and transparent monitoring.
Due to a well-developed lending network, below market rates of interest are charged
by the majority of lenders making access of finance easier to the poor people. It is
perceived that commercial banks are currently not receptive to expand lending to
SMMEs because the sector is not worth their while and risk averse. The Thai
government however is encouraging all lending institutions to participate. The
government itself has taken the initiative to capitalise on its ownership of the
Government Savings Bank (GSB) to expand lending at rates of interest a percentage
point lower than commercial banks.

Within the Southern African region, the Namibian government amended its Usury
Act to register and monitor micro credit agencies (NEPRU, 1999:1) in reaction to
complaints of exorbitant finance charges; stating that “….it was necessary to protect
people from being stripped by so called loan sharks … mushrooming cash loan
agencies that do not provide small short term loans, are indicative of the

23
conservative and bureaucratic lending policies of financial institutions, and to which
the already over indebted households turn to as a last resort”. This is a clear
indication that small enterprises in Namibia are experiencing problem in accessing
finance from the established financial institutions.

In a survey conducted by Orford et.al (2003), selected experts in South Africa and
other participating countries identified the three most important factors that limit
entrepreneurial activity in their country. Table 2.2 below shows the top two limiting
factors and the percentage of experts who considered that factor a limitation:

Table 2.2 Limiting factors most frequently identified by country experts in

each country

Country Primary limiting factor Secondary limiting factor

South Africa Finance (24%) Education (12%)
Culture (12%)
Entrepreneurial
capacity(12%)
Argentina Culture (36%) Government policies (26%)
Brazil Government policies (22%) Finance (20%)
Chile Finance (26%) Education (19%)
Culture (26%0
Venezuela Politics Finance (20%)
Society and Institutions(28% Government policies (20%)
Thailand Entrepreneurial capacity (25%) Culture (15%)
Uganda Finance (24%) Culture (15%)
All GEM Culture (21%) Finance (20%)
Developing Finance (21%) Culture (18%)
Government policies (18%)

Source: Adapted from Orford et al (2003:11)

Previously, experts in South Africa identified education and training as the most
important factor inhibiting entrepreneurial activity. However, in 2003 “financial
support” is identified as the number one limiting factor. From this survey it has been
concluded that for all developing countries, financial support is the number one
limiting factor with the primary problem being access to finance. This is a problem
common to many countries assessed in the GEM with the evidence suggesting that
entrepreneurs across the globe find it difficult to secure formal financing for new
venture creation unless they have collateral or some form of credit history which

24
serves to mitigate the inherent risk in starting a new business (Orford et al 2003:12).
Within the general problem of financial support it is clear that experts believe that the
primary problem is access to finance.

2.5 Entrepreneurship in South Africa

The promotion and development of entrepreneurship in South Africa is currently the

focus of much attention in a wide variety of fields because it is regarded as a major
key to economic development and wealth creation, thereby contributing towards
social prosperity and upward mobility. The demand for an entrepreneurial-driven
economy in South Africa is increasing particularly because of the employment
creation benefits it offers. The SMME sector is globally regarded as the driving force
in economic growth and job creation (Lunsche and Barron, 2000:1).

The South African economy has declined over the past twenty years. The year on-
year change in the value of real gross domestic product (GDP) determines the real
growth rate of a country (Nieman, et al, 2003:4). In the 1960s South Africa’s GDP
averaged six percent per year. During the 1980s, the GDP decreased to 2.2 per cent,
with no growth in the 1990s. Lack of growth in the economy has led to fewer
employment opportunities being available. This has given rise to high unemployment
rate of about 30 percent. In creating wealth, small businesses in South Africa
contribute approximately forty-two percent to the country’s gross domestic product
(GDP), (Nieman, et. al 2003:10)

According to the 1995 White Paper on Small Business Development, the goals of the
South African SMME promotion strategy are:

• Economic growth and development;

• Poverty alleviation;

• Income redistribution;

• Employment creation;

• Economic empowerment of previously disadvantaged population groups;

• Democratization of economic participation;

25
• Replacement of the present rather oligopolistic structure of the economy with one
that allows a much higher degree of competition.

Through the National Small Business Act (1996) the South African government
acknowledges the economic potential of a strong Small-, Micro and Medium
Enterprise sector and is committed to its promotion and growth. The government
aims not only to increase the number of new ventures, but also to create an enabling
environment to ensure the survival and growth of small businesses. According to Van
Eeden, Viviers and Venter, (2003:13) the National Small Business Act (1996) has
been instrumental in the creation of an enabling environment by means of its
provision made for financial and non-financial governmental assistance to all South
African entrepreneurs.

The South African government support structures for SMMEs include the following:

• The center for Small Business Promotion, established by the Department of

Trade and Industry (DTI) at national level is responsible for SMMEs policy-
related matters and support programmes.

• Small Enterprise Development Agency (SEDA) is responsible for non-

financial services like marketing, training programmes, procurement advice,
technology assistance and mentoring to businesses. Most of these services are
rendered to SMMEs through service providers, such as Tender Advice
Centres (TACs) Manufacturing Advisory Centres (MACs), Local Business
Services Centres (LBSCs), Non Governmental organizations (NGOs) and
Community Based Organizations (CBOs).

According to Foxcroft et al. (2002:19 ) the Global Entrepreneurship Monitor (GEM)

project involves thirty seven countries which explores the relationship between
entrepreneurship and economic development. International comparisons of the thirty
seven participating countries in this report show that South Africa ranks:

26
• 15th in start-up activity (a start-up is a business that has not paid salaries and
wages for longer than three months) with just under 5% of the adult population
involved in starting a business.
• 29th in new firm activity (a new firm is a business that has paid salaries and wages
for longer than three months but less than 42 months) with only 2% of the adult
population involved in new firms.

According to the Foxcroft, et. al. (2002:16), start-ups are estimated to have created
140 000 jobs and new firms are estimated to have created nearly one million jobs in
South Africa between January 1999 and July 2002. For South Africa to increase
economic growth and employment creation, it needs a higher proportion of
entrepreneurs to progress beyond the start-up phase. The survey reaffirms the point
made by Driver, Wood, Segal and Herrington (2001:22), namely that South Africa
has a reasonably high number of start-ups, but few of these reach a stage where they
are able to pay salaries and wages for longer than three months. According to Streek
(2001) quoted by Louw, Van Eden and Bosch; (2003:5) the South African economic
sector lost more than R68 million in the past four years as a result of the failure of
117 246 small businesses that were receiving government assistance. Some of the
reasons for this high rate of failure include unfamiliarity with established business
practices, lack of managerial expertise in business management and lack of finance to
fund the business.

With the official unemployment rate at 30 percent (those looking for work) and the
expanded rate (if those who at the time had not job-hunted for four weeks are
included), at 41.2%, job creation is one of South Africa’s main priorities. It is
estimated that 300 000 jobs must be created annually just to halt unemployment
(Rwigema & Venter, 2004:10). So bleak a scenario underscores the need for
entrepreneurship and the role it must play in South Africa. Without a steady supply of
entrepreneurs, South Africa is likely to stagnate and decline economically. The
SMME sector can thus be perceived as a vehicle by which the lowest-income people
in our society gain access to economic opportunities - at a time that distribution of
income and wealth in South Africa is amongst the most unequal in the world.

27
In the current macroeconomic context, it is imperative that significant investment is
made in the SMME sector, in order to create both short and long term capacity for
labour absorption and output growth, as well as improve income generation and
redistribution. These objectives are firmly recognized in the main development and
macroeconomic strategies adopted by this government, in the Reconstruction and
Development Programme (RDP) and the Growth, Employment and Redistribution
(GEAR) (DTI, 1998:1). Specifically the RDP undertook several areas of government
intervention:

“The democratic government must, in consultation with financial institutions,

establish prudent non-discriminatory lending criteria, especially in respect of
creditworthiness and collateral; ...require banks to give their reasons when turning
down a loan application; develop simpler forms for contracts and applications, and
create an environment which reduces the risk profile of lending to small black-owned
enterprises and requires banks to lend a rising share of their assets to small, black-
owned enterprise”.
In relation to the total number of employed people in South Africa (11.4 million),
entrepreneurial firms account for one third of total employment. This suggests that
entrepreneurial firms play a vital role in overall job creation. By comparison with
other measured countries, South Africa is weakest in terms of new firm and
established firm entrepreneurship, both of which are primary sites of job creation.

Lack of education and training is one of the problems that lead to a low
entrepreneurial activity in South Africa. According to Orford et al (2003:15) experts
in South Africa isolate education and training as South Africa’s main weakness with
regard to an enabling environment for entrepreneurship. Thus problems in the
education system are associated with a lower prevalence of entrepreneurial activity
among young adults in South Africa. The quality and content of the educational
system is identified as being a key limiting factor for entrepreneurship. “Until
recently, the school curriculum did not adequately integrate entrepreneurship”, and,
according to experts interviewed by GEM, has left a legacy of lack of confidence,
initiative and creative thinking. Furthermore, problems in the education system are
more likely to impact on the entrepreneurial behaviour of younger people, which is
precisely where South Africa appears to lag behind other developing countries

28
(Orford et al 2003:17). The focus of the study is on the obstacles in the accessing of
SMME finance in South Africa and this will now be dealt with in the next section.

2.6 Issues pertaining to SMME finance in South Africa

A diversified financial sector capable of meeting the full range of demand for
financial services is needed to facilitate the objectives to raise the ability of the self-
employed to sustain the economic activities essential for their survival. The challenge
for the SMME sector is now to establish good practices for SMME financing and the
provision of non-financial services to the SMMEs. Although the SMME sector has
been hailed for creating jobs and improving economic conditions in South Africa,
lack of financial support is widely viewed as the main problem facing entrepreneurs.

Throughout the GEM environment, formal financial institutions appear to provide

funding to a small minority of entrepreneurs. The sources of funding for start-ups in
South Africa include “self” (the owner’s savings and income); “personal network”
(the owner’s family, relatives, friends and neighbours, colleagues and employer); -
“and institutional finance” (banks, other financial institutions and government
programmes) (Foxcroft, et al 2002:34). A research intervention conducted by Naude
and Havenga (2004) indicated that most entrepreneurs struggled with accessing
financing from banks due to excessive red tape and administrative burden. According
to Naude and Havenga (2004:15) financial institutions rarely finance start-up
businesses, are bureaucratic without any knowledge or understanding of
entrepreneurs, not willing to assist and wary in providing finance to people who do
not have a business record.

The lack of sufficient financing is a serious constraint during the formation of new
ventures as well as at later stages, as business requires additional inflows of capital to
support expansion and growth (Nieuwenhuizen and Groenewald, 2004:9). Inadequate
bookkeeping is also responsible for deficiencies in several other areas of financial
management.
Although support providers are in place, certain businesses and prospective
entrepreneurs, through either ignorance or lack of information could still remain
unknowledgeable about the availability and accessibility of these support systems.

29
In an investigation into the programmes being used in South Africa to develop the
SMME sector, Pretorius and Van Vuuren (2003:519) found that the core focus of the
programs from Khula, IDC and SEDA include finance, growth, expansion and
competitiveness (through export) that are more relevant for existing business than for
start-ups. There is a general tendency of the Khula, IDC and DTI programmes to
focus on the larger and existing ventures as their target audience. Very few
programmes are aimed at micro and small enterprises.

2.7 Conclusion
Small, medium and micro enterprise (SMME) development has been identified by the
South African government as a priority in creating jobs to solve the high
unemployment rate in the country which currently stands at 37%. This means that 6.9
million people out of a possible 18.8 million economically active people are
unemployed. In addition, 400 000 job losses per year, owing to downsizing, re-
engineering and re-organization. The growth of the labour force is about 2.8% per
annum and an average annual real economic growth rate of approximately 6% per
annum is required to keep pace with labour force growth (Nieman, 2001:22).

It is internationally accepted that the SMME sector is an essential factor in promoting

and achieving economic growth and development and the widespread creation of
wealth and employment. However in South Africa, entrepreneurial activity is
hampered by the lack of access to finance, as supported by evidence conveyed in the
latter chapter.

30
CHAPTER 3: THE SMME FINANCIAL SECTOR

3.1 Introduction

The SMME sector has a major role to play in the South African economy in terms of
employment creation and income generation. Small, micro- and medium enterprises
(SMMEs) account for approximately 60 percent of all employment in the economy
and more than 35 percent of South Africa’s gross domestic product (GDP) (Ntsika,
2002:110). They are also often the vehicle by which the lowest income people in our
society gain access to economic opportunities – at a time that distribution of income
and wealth in South Africa is amongst the most unequal in the world. In South Africa,
as in many developing and semi-industrialised countries, the main problem
experienced by owners or operators of SMMEs, is the difficulty in accessing business
finance. In the current South African socio-political context, the “access to finance”
issue becomes even more topical and sensitive as unemployment; income and wealth
inequality levels continue to increase (Ntsika, 2002:111). Thus it is imperative that
significant investment is made in SMMEs in order to create both short-term and long-
term capacity for labour absorption, as well as to improve income generation and
redistribution.

This chapter encompasses a comprehensive literature study on state and role played
by the SMME sector to the South African economy. It also looks at the
obstacles/constraints faced by the SMME sector when trying to access funds from the
funding institutions, which is the focus of this study. The issue of access to finance is
a problem facing most existing and new businesses in South Africa today. The various
sources of finance available to the entrepreneur are also looked at in this chapter.
These sources include using your own money, borrowing money from friends and
family, commercial banks, asset finance houses, small business loan organisations and
private equity and venture capital.

3.2 Role of the SMME sector in the South African economy

Central to the growth of the economy is the development of a vibrant SMME sector
which development experts agree, is the key to resolving many societal challenges,

31
including job creation (Entrepreneur SA, 2005:3). The statistics below show how
important the SMME sector is in the general drive to grow the South African
economy:
• SMMEs represent 97.5% of the total number of business firms in South
Africa.
• Contribute 34.8% of the country’s GDP.
• Employ 55% of the country’s labour force.
• Contribute 42% of total remuneration.

According to Rwigema and Venter (2004:393), it is estimated that the SMME sector
contributes approximately 40 percent of South Africa’s GDP and accounts for some
3.5 million jobs. The sector is estimated to have between 500 000 and 700 000
businesses.

For the economy as a whole, Harper (1994) in Luiz (2001:16) argues that:
“small businesses are likely to be more resilient to depression, and to offer a
steadier level of employment than large ones; their activities and locations are
diverse, they depend on a wide variety of sources and types of raw material,
their owners, if only for the want of any alternative, are likely to stay in
business and maintain at least some activity and employment in conditions
where foreign investors… would have closed their factories…”.

Comparative studies of large and small businesses, carried out in other countries,
confirm that SMMEs generally employ more labour per unit of capital, and require
less capital per unit of output, than do large businesses (Luiz, 2001:16).

It is therefore evident that the SMME sector, in a formal context, provides

employment, pays taxes (contributing to government revenue) and can be included in
the government statistics and in labour market information analyses (Antonites,
2003:15). It also acts as a training ground by offering apprenticeships for the young.
Generally, not only do SMMEs provide income-earning activities for themselves, but
also for all those individuals from whom they obtain supplies and services. Besides
the already mentioned issues of job creation, economic growth and development, and

32
an increase in GDP, other potential benefits directly accruing to local governments
are:
- the empowerment of local citizens
- competition among the developing businesses in tandem with the positive
benefits of quality by the suppliers and a broader base and choice for the
consumer
- a reduction in crime rates, since instead of being idle, citizens are productively
engaged, and
- an improvement in the rates base since more citizens can thereafter afford to
pay for services (Yanta, 2001:44).

The SMME sector as a whole improves the general standard of living of the society,
which leads to political stability and national security. This will indirectly induce an
environment for national and regional economic growth and development.

3.3 State of the SMME sector in South Africa

Current levels of investment in SMMEs are inadequate for achieving the growth
levels anticipated in the government strategies such as the Growth, Employment and
Redistribution (GEAR) macroeconomic strategy. A key factor militating against
increased investment in the SMME sector is the structure of the financial sector. The
sector is composed of a concentrated formal banking sector targeting corporate
accounts and competing with smaller niche banks. Furthermore, there is a dearth of
strong alternative financial institutions providing credit to the self-employed for
productive purposes. A further concern is the risk aversion of institutional investors
(e.g. pension and insurance funds) who tend to focus on “safer” and larger
investments, which yield relatively few social and economic benefits (The DTI 1998:
3).

As a result, a large portion of the SMME sector does not have access to adequate and
appropriate forms of credit and equity or indeed to financial services more generally.
In competing for the corporate market, formal financial institutions have structured
their products to serve the needs of the large corporate businesses. Alternative
financial institutions such as Non Governmental Organisations (NGOs) offer a limited
range of products and do not have the infrastructure to reach a significant number of

33
SMMEs. It is estimated that NGOs currently serve only six percent of the survivalist
and micro-enterprise sector. The net result is that there is almost no debt finance
available to SMMEs in loan sizes ranging from R10 000 to R50 000, and very little
between R6 000 and above R100 000, access remains inadequate to meet the demand
(DTI, 1998:3).

An overarching concern is that previously disadvantaged individuals do not have

adequate access to formal financial institutions and, therefore, are forced to seek
relatively expensive (and often inadequate) amounts of credit from alternative
financial intermediaries, sometimes illegally (DTI 1998:5). Several reasons account
for the lack of access in addition to the factors above. These include lack of collateral,
bad credit or no credit histories, an exaggerated risk perception of previously
disadvantaged borrowers, discrimination on the basis of gender and race, and at times
inability to afford the high levels of interest such as the one that prevailed in 2000-
2001.

According to Orford et al (2003:36) a lack of access to financial support is widely

viewed as the main problem facing entrepreneurs in South Africa. In a survey done by
the authors, it was found out that 18% of the national experts in South Africa
identified lack of adequate financial support as a major weakness in the national
environment for entrepreneurial activity. This was the second most frequently
mentioned weakness in South Africa as shown in table 3.2 below.

Table 3.1: The national experts’ assessment of financial support for

entrepreneurs in various countries.

Frequency that financial Ranking out of all

support mentioned as
major weakness
weakness (%)
Argentina 13 4
Brazil 14 3
Chile 23 2
India 15 3
Mexico 18 2

34
 South Africa 15 2
Thailand 16 3
Developing 16 4
OECD 20 2
All GEM 18 3

Source: As adapted from Orford et al (2003:32).

Other findings include the following:

• Formal financial institutions play a limited role in supporting entrepreneurship
in GEM developing countries including South Africa
• More widely used sources of finance are the entrepreneur’s own savings and
their ability to access informal investment from friends, family and colleagues
• The primary focus of policy initiatives should not be aimed at increasing
access to institutional finance but rather, attention should be paid to other areas
such as financial management practices of entrepreneurs.
• In order to increase the ability of the poor to access finance, reforms should be
aimed at allowing people to leverage the assets they already possess. For
example, land and property in South African townships are unavailable for use
as collateral and cannot be readily transformed into the capital necessary for
starting or growing businesses.
• The reasons why these assets are heavily or entirely disregarded by banks as
collateral include high probability of criminal damage to property, uncertainty
over property rights, and potential difficulties in selling properties in
townships, former homelands and inner cities
• Three-quarters of entrepreneurs who proactively manage cash flows are
successful in applications for bank loan finance.

In a survey done by Foxcroft et al (2002) in South Africa on the entrepreneurial

framework conditions, the following challenges facing the informal and formal
entrepreneurs were revealed as shown in Table 3.3 below:

35
Table 3.2 Challenges facing the informal and formal entrepreneurs in South
Africa
Informal Formal
• There is a lack of an effective • Average success rate for applying
community based micro-finance for finance is 33%. A substantial
infrastructure proportion of the remainder don’t
• The recurring key constraint is qualify. Access and availability of
that finance is not available for finance are therefore problematic
amounts under R10 000 and also • Collateral is a problem for the
not accessible mainly due to lack bulk of disadvantaged
of collateral, well-developed idea entrepreneurs in this sector
or business plan • Banks are the key services
• Banks are not in a position to providers the majority seeking
service this sector profitably finance
• High interest rates are charged by • The IDC and Business Partners
micro-lenders service a small minority at the
• There is lack of awareness of and upper end of this market
information about Khula and reasonably well
other financial institutions • The perspective of the experts was
• There is a limited availability of that there is a poor relationship
micro-loans to rural and women between banks and the
entrepreneurs (e.g. Khula start entrepreneurial sector
offering R300-3500 loans • The venture capital market caters
for a tiny high-potential section of
this market

Source: Foxcroft et al (2002:48).

Therefore it can be safely concluded that banks restrict access to finance for small
businesses due to the nature and extent of the risks to the bank or indeed to the
entrepreneur. According to Orford et al (2003:46) it would seem both reasonable and
desirable that banks channel finance primarily towards those applicants with greater
probabilities of success. Banks in general are risk averse to small businesses,

36
especially to entrepreneurs or businesses with no track record, no collateral and little
business experience. As such South Africa cannot rely on the banking sector alone to
solve the problem of finance for entrepreneurs. A further problem in South Africa is
that micro-finance is often used for consumption rather than production (Foxcroft, et
al. 2002:16). Overall, the efforts to increase access to finance among small businesses
have only made a difference to a small minority of disadvantaged entrepreneurs
Rwigema & Venter 2004:415).

3.4 Obstacles faced by the SMME sector

Ten years after the attainment of democracy, some of the SMMEs in South Africa
appear not to have shaken off the legacy of apartheid, which confined their access and
spheres of activity to a very narrow segment of the economy. Within the formal sector
SMMEs suffer from the structural weakness of the economy that wealth generation is
concentrated in a limited number of sectors which do not have strong linkages with
the rest of the economy. Also, these sectors contend with competition from
established global competitors, whose greater size enables them to use predatory
business practices to ward off competition. As a result the SMME sector is
characterised by the incidence of a high failure rate. It is estimated that the failure rate
of SMMEs in South Africa is between 70% and 80% (Van Eeden. et al. 2003:20).
Hence, it was estimated that the South African economic sector lost more than R68
million over the period 1994 and 2000, as a result of the failure of 117 246 small
businesses (Streek in Rwigema and Venter, 2004:394). Both the establishment and
operational aspects of SMMEs is hampered by insufficiency of technological and
managerial knowledge, the scarcity of financial resources, the inadequate skill of
labour, lack of information on markets and lack of basic education (Wickham 2004:
50)

3.4.1 Training for SMMEs

Though the majority of SMME operations are not complex, it should be noted that a
basic level of education is pre-requisite to the successful management of the small
business unit (Antonites and Van Vuuren 2004:4). This basic educational level is not
usually the norm amongst especially the micro and medium entrepreneurs; a factor
found militating against them. On the part of the entrepreneur or small

37
businessperson, there seems to be not enough practical or vocational training readily
available for skills training and enhancement. Chapter 2 emphasized the fundamental
difference between entrepreneurship and small business management. Carland et al
(1984) quoted by Hughes and Storey (1994:43), empirically proves that the difference
between the two concepts is situated within innovative behaviour and the cognitive
style of entrepreneurs versus small business managers or owners. Experts in South
Africa isolate education and training as South Africa’s main weakness with regard to
the enabling environment for entrepreneurship (Orford, et. al. 2003:15).

3.4.2 SMME support

Due to limited managerial resources, small business owners play the roles of financial
controller, marketing manager, and operations manager, purchasing manager, and
dealing with staff matters as well as executing key strategic decisions similar to that
of the chief executive officer. This places intolerable pressure on the SMME owner,
making time the main constraint to the growth of the business (Naude and Havenga,
2004:110). However, in the research done by Netswera (2001:67), it is pointed out
that entrepreneurs revealed that training for skills development and – improvement is
the most accessible support system. Hands-on, managerial and staff development
training are indicated to be the most available form of training for small businesses.

Pretorius and Van Vuuren (2003: 519) investigated the programmes being used in
South Africa to develop entrepreneurial development - [the Department of Trade and
Industry’s three implementation arms: the IDC, SEDA (Small Enterprise
Development Agency) and Khula. They found that the core focus of the programmes
includes finance, growth, expansion and competitiveness (through export) that are
more relevant for existing business than for start-ups. There is a general tendency for
Khula, the DTI and the IDC programmes to focus on the larger and existing ventures
as their target audience. Very few programmes are aimed at micro and small
enterprises. Although some programmes do focus on start-ups, the pre-requisites
suggest that they are more relevant for larger ventures.

Pretorius and Van Vuuren (2003:519) found that there is no indication that these
programmes contribute directly towards the development of entrepreneurial
orientation. The role of SEDA is more towards the assistance of small business and

38
the creation of more micro business where one would tend to find programmes that
are more related to entrepreneurial culture.

Nhlapo (2004:67) found that 40% of the entrepreneurs were not aware of the services
provided by government agencies such as Khula Enterprise Finance Limited, and
SEDA, previously Ntsika Enterprises. Those who knew were not successful in their
applications for a loan. This is consistent with the findings of the GEM report of 2003
(Orford et. al. 2003) that indicates that these programmes are not well known to the
people and accessing them is complex.

The success or failure of the SMMEs is determined by the quality and level of
infrastructure. This includes provision of water, sanitation, electricity, roads,
communications and land. The lack of access to markets means that the opportunity
for growth is limited (Niewenhuizen and Kroon, 2002:34). Unfortunately, most
municipal infrastructural policies are market-oriented, focusing on how consumers
can afford, rather than what social and economic potential can be derived from the
provision of certain levels of infrastructure (Yanta, 2001:45).

3.4.3 Financial constraints

Among all the problems confronting the SMME sector, few have proved to be as
difficult to solve as those embracing the financial variables applicable to this sector.
In South Africa, not even short-term funds are easily available to the small
entrepreneur. The social, economic, financial, legislative, political and banking
systems characteristic of the previous dispensation, have all combined to make the
financial problem in the SMME sector particularly difficult. Put at its crudest, the
financial problem of the small firm is that of finding funds for expansion at the right
time or the right type, and in the right quantities at various stages of development.
Three fundamental difficulties facing entrepreneurs in this regard are:
- the small business may not be able to demonstrate its chances of success in
order to persuade potential lenders even though many large firms also face this
problem
- the existing lending and financial institutions may not cater for the special
problems involved in small business finance

39
 - the business person and his advisors may not know how or where to get the
money
The government needs to assist in stimulating a greater diversity of alternative
financial institutions that serve as vehicles for savings and loans to low and middle
income individuals, as well as the self-employed. Therefore the only reliable sources
of finance would be the entrepreneur’s own savings or borrowings from family
members, friends and relatives. This is the most efficacious form of finance because
no cost or relinquishment of ownership is involved. However, the reality is that many
South Africans do not have money to invest in start-up businesses, due to the high
levels of poverty and unemployment (Rwigema & Venter 2004:410).

The problems or constraints experienced by the SMME sector in South Africa can be
summarised as shown in Table 3.1 below.

Table 3.3 Obstacles experienced by entrepreneurs

OBSTACLE FORMAL INFORMAL

Lack of money for running costs 39% 65%
Lack of money to buy capital items 45% 63%
Transport 41% 50%
Weather 35% 43%
Competition 41% 40%
Theft 39% 32%
Unavailability of electricity 20% 34%
Lack of business skills 27% 33%
Unavailability of water 16% 31%

Source: Foxcroft et al (2002: 32)

Other obstacles that small firms frequently experience include:

• Marketing risks from a limited product range. Many small firms produce
just one type of good or service – or at least a very limited range of them. This

40
 exposes them to problems should consumer tastes and demand conditions
change.
• Difficulty in finding suitable and reasonably priced premises. The best
locations tend to be expensive and often only affordable by larger firms
• Lack of education –In general terms, owners of SMMES do not have the
ability to present a proper budget case to potential financiers. They do not
have the basic understanding of organisational strategy and financing needs
that are essential to sustainable growth.
• Problems in raising both short- and long-term finance. Small firms have
little security to offer banks in exchange for loans and this makes obtaining
finance much more difficult than for most larger firms. In addition, suppliers
may be reluctant to sell goods on credit if the business has only been operating
for a short time.
ƒ Inefficiencies – Poor financial systems, lack of regulations and anti-
competitive policies. Also, poor business processes and procedures and the
existence of a “business as usual” attitude.
ƒ There are also policy-generated costs that constrain financial development
such as implicit taxation through financial (interest rate) repression, taxation
through unremunerated reserve requirements, and a poor legal system for loan
recovery (Naude and Havenga, 2004:112).

3.5 The SMME financial sector

3.5.1 The enabling environment

The South African government aims not only to increase the number of new ventures,
but also to ensure the survival and growth of existing small businesses. Van Eeden, et
al in Niewenhuizen and Groenewald (2004:14), indicate that the National Small
Business Act of 1996 has been instrumental in the provision of creating an enabling
environment by means of its provision made for financial and non-financial
governmental assistance to all South African entrepreneurs. An enabling small
business environment refers to a supportive environment in which emerging
entrepreneurs can function (Nieman, et al 2003:166). The government by means of

41
legislation and policies should establish this environment. A climate favourable to the
entry of entrepreneurs should be created by means of the following:

• Financing by ordinary financial institutions such as banks

• Venture capital access
• Training and development programmes to encourage entrepreneurship
• Infrastructural development – a prerequisite for any economic activity at an
advanced level
• Deregulation with regard to economic activities, as well as legal regulations

A cooperative environment must also be fostered so as to allow other institutions

to actively promote entrepreneurship, such as:

• Tertiary institutions for education and training

• Institutions giving support, finance and/training
• Involvement through SMME development units
• Non-governmental organisations (NGOs)
• International aid agencies

It has therefore been noted that the socio-cultural, economic, technological, political
and legal environments have enduring influences on the development of personality
attributes such as entrepreneurship (Nieman, et al 2003:167). These environments can
either facilitate or hinder the development of entrepreneurship in developing nations.
According to Naude and Havenga (2004:10), most entrepreneurs in South Africa
indicated that they struggled with financing from banks, excessive red tape and
exhaustive labour laws. They concluded that South Africa has a hostile environment
for entrepreneurs.

Van Eeden et al (2003:14) highlighted that South African entrepreneurs view

economic uncertainty, crime, corporate taxes and labour legislation, as the biggest
threats facing the small business sector. Fluctuating and high interest and inflation
rates result in higher costs to the small business sector, and hamper their ability to

42
plan and budget effectively. It was also indicated that there is lack of mentorship and
support from the government.

In recognition that access to capital was a key constraint to development of SMMEs,

the Department of Trade and Industry (DTI) of South Africa put in place a set of
incentives designed to leverage greater private and non-governmental sector
investment in SMMEs. Thus, the National Small Business Act of 1996 opened the
way for the Department of Trade and Industry to address SMME development in
South Africa. This came about after the publication of the “White paper on National
Strategy for the development and promotion of small business in South Africa” and
the first “President’s Conference on Small Business” in March 1995 (Republic of
South Africa, 1995).

The Department, through the Centre for Small Business Promotion, is responsible for
all policies relating to SMMEs – support programmes directly and indirectly assisted
by government. Notably, two institutions, Khula Enterprise Finance Limited and
Small Enterprise Development Agency (previously known as Ntsika), were
established in 1996 to create increased delivery capacity to SMMEs. Ntsika did this
mainly with the help of a number of local business service centres (LBSCs), which are
accredited countrywide to give support to SMMEs. Among the services provided by
LBSCs are training, counselling and business planning. Recently many of these
LBSCs also became retail financial intermediaries for Khula Enterprise Finance
Limited to offer micro loans to entrepreneurs. Although these LBSCs seem to be
delivering on grassroots level, the success of these institutions and/or their financial
interventions has not yet been determined (Nieman 1998:169). They provide support
infrastructure and absorb a portion of the risk and cost of private investment.

3.5.1.1 Public Institutions

i. Khula Enterprise Finance Limited

Khula was established in 1996 as an agency of the Department of Trade and Industry.
Khula does not provide assistance directly to entrepreneurs. It is a wholesale
financier, which facilitates access to credit for SMMEs through various delivery
mechanisms, including commercial banks, retail financial intermediaries (RFIs), and

43
micro credit outlets (MCOs). The financing assistance that Khula provides includes
loans and credit guarantee schemes. According to Rwigema and Venter (2004:395)
an impact study done by the Bureau of Market Research in 2001 showed that more
than 1.5 million people have benefited directly or indirectly from Khula’s assistance
since 1996. This is a remarkable achievement considering the reluctance of the formal
banking sector to lend to small businesses due to the perceived risk associated with
that market.

Khula provides guarantees to registered commercial banks and other private sector
financial institutions that finance entrepreneurs in the SMME sector. These guarantees
serve as collateral for entrepreneurs, and are based on a risk sharing arrangement,
whereby Khula assumes a portion of the risk associated with lending to the SMME
sector (Rwigema and Venter, 2004:396).

ii. Small Enterprise Development Agency (SEDA)

The Small Enterprise Development Agency (SEDA) is the Department of Trade and
Industry’s new agency for supporting the development of small business in South
Africa. SEDA was formally launched in December 2004 and it replaces the previously
existing small business support institution (Ntsika Enterprise Promotion Agency) and
has representation at all levels of government. SEDA’s role is to render an efficient
and effective promotion and support service to SMMEs in order to contribute towards
equitable economic growth in South Africa. Thus, it provides a wholesale non-
financial support service for SMME promotion and development.

3.5.1.2 Private Financing

i. Own savings, family and friends
According to a survey carried out by Foxcroft, et al (2002:34) the most important
source of funding in all countries included in the GEM was the entrepreneurs
themselves. Fifty-four percent of South African entrepreneurs reported that they had
used or expected to use their savings and income to fund their businesses. Friends and
family are less likely to attach onerous terms to the repayment of the loan. For this
reason financing through friends and family is considered to be the next best
alternative to self-funding. Thus, institutional finance is less important in financing

44
start-ups than entrepreneurs’ own savings and their ability to mobilise finance from
their personal network of family, friends and colleagues.

ii. Commercial banks

Commercial banks are by far the most frequently used source of short-term finance by
the entrepreneur when collateral is available. These include the Standard Bank,
Amalgamated Banks of South Africa (ABSA), First National Bank, and Nedbank.
The funds provided are in the form of debt financing, and as such require some
tangible guarantee or collateral – some asset with value. According to Hisrich and
Peters (2000:363), collateral can be in the form of business assets (land, equipment or
building of the venture), personal assets (the entrepreneurs’ house, car, land, stock or
bonds). In general banks have three main loan products – overdrafts, term loans and
mortgages. In addition, the banks all have subsidiaries or partners who can assist with
asset finance (such as leasing and hire purchase). There are also special equity funds
set up by the banks to invest in small black-owned businesses that do not have enough
collateral for a term loan (e.g. First National Bank’s Progress Fund and ABSA’s
Incubator fund).

Conventional banks in most cases refuse to grant loans to small business applicants.
According to Schoombee in Rwigema and Venter (2004:393), there are a number of
reasons for this, which includes the following:
• There is a higher risk that entrepreneurs in the SMME sector will default on
loan repayments, due to insufficient cash flow.
• As a result of the general conditions of poverty and limited resources,
entrepreneurs do not have adequate collateral to secure their loans.
• The administrative costs involved in screening loan applications from
entrepreneurs are high.
• Banks face low returns when investing in the SMME sector.
• Entrepreneurs experience language and cultural barriers when accessing
banks.

Other factors include: a lack of clear business plans and ideas; lack of preceding
market research and risk of under-capitalisation and/or delays in reaching break-even

45
points. These factors can adversely influence profitability, cash flow and the
applicant’s solvency over the first one or two years (Ntsika 2002:110).

Judging from statistics about South African small business start-ups, these fears are
not misplaced. In the past four years, the financial sector has lost R68 million as a
result of the failure of 117 245 small business enterprises that were receiving
government assistance. (Streek in Rwigema and Venter, 2004:394)

iii. The Industrial Development Corporation (IDC)

The Industrial Development Corporation (IDC) is a self-financing national
development finance institution. Its primary objectives are to contribute to the
generation of balanced, sustainable economic growth in Africa and to the economic
empowerment of South Africa population, thereby promoting economic prosperity of
all citizens (Ntsika: 2002:129). The IDC has increasingly supported SMMEs over the
past few years.

Through its financing activities since 1996, over the past five years, the IDC created
almost 55 000 direct jobs and generated R10 billion export earnings through SMME
funding. A number of financial products are available from the IDC and these
products are structured to meet the entrepreneurs’ needs. These include equity
investments, quasi-equity investment and commercial loans (Ntsika, 2002:128).

(iii) Micro finance lenders

Micro financing provides an important source of funding for those entrepreneurs
excluded from formal financial institutions. Sources of micro finance include the
Matshonisa, private institutions, and non-governmental institutions (NGOs).

(a) Matshonisa
Informal money lenders in townships of South Africa are known as Matshonisa. The
term “Matshonisa” loosely means “making you poorer” and is a reference to the
interest payments attached to the loans, or to the debt trap into which the borrowers
often fall (Rwigema and Venter, 2004:394). Loans of up to a maximum of about R5
000 are made available to individuals. As soon as borrowers receive their monthly
income, they are expected to repay their loans and the interest amount.

46
(b) Micro lenders
Micro lenders provide small loans averaging R1600, which do not require any form of
collateral, over a period of one month. These suppliers concentrate on personal,
relatively short-term loans to (preferably) regular salary earners, with good security
(in the form of an ID and salary printout showing the potential for a garnishing order),
and a reasonable credit record, checked through an efficient industry-wide referral
system (Ntsika, 2002:115). This limits availability of loans only to those who are
gainfully employed. The bulk of the loans are for household needs and the balancing
of income fluctuations. An insignificant share of five to ten percent of these funds are
utilised for business purposes.

(iv) Non-governmental organisations

Non-Governmental organisations (NGOs) serve as a channel for donor funding.
NGOs offer a limited range of products and do not have the infrastructure to reach a
significant number of SMMEs and hence each is sporadic. According to the DTI
(1998:3) it is estimated that NGOs currently serve 6% of the survivalist and micro-
enterprise sector.
However, not many entrepreneurs know about the existence of NGOs and the fact that
they can get funding for their businesses. Hence, many people especially in the
townships have turned to community or group savings in order to get money that can
be used as start-up for their small businesses.

(v) Community or Group Savings

Community or group savings and loan schemes are an important source of finance for
the SMME sector. According to Rwigema and Venter (2004:399), there are some
2000 “stokvels” in South Africa. The “stokvels” do not provide loans per se, but
distribute collective contributions of members. Groups of individuals contribute a
specified amount each month and on a rotational basis, members get a chance to take
home the month’s collected cash. This cash can be used to buy stock or finance new
equipment. “During recent years, many if not most of these schemes have linked up
with banks for safe –keeping and handling of their funds” (Ntsika 2002:115). This

47
creates an important link through which these schemes might gradually evolve into
specialised banking and loan facilities.

3.5.2 Formats of SMME finance

According to Smith and Smith (2004:508), there are various sources of business
financing where the providers have different objectives, capabilities and constraints.
Some like banks seek low-involvement, low-risk investments, usually of short
duration. Others, like business angels, seek high-risk, high involvement investments
of moderate to long duration. Different financing sources protect the value of their
investments in different ways. Some, like venture capitalists, engage in active
monitoring to protect their investments. Others, like factoring companies and most
lenders, rely heavily on collateral. Table 3.1 below shows the list of financing sources
for new ventures and private businesses in the USA.

Table 3.4 Partial List of Financing Sources for New Ventures and Private
businesses

Asset-Based Lending Friends and Family

Business Angels Public Debt Issue
Capital Leasing (Venture Leasing) Registered Initial Public Offering
Commercial Bank Lending Royalty Financing
Corporate Entrepreneurship Self (Bootstrap)
Customer Financing Small Business Administration Financing
Direct Public Offering Term Loan
Economic Development Programme Small Business Investment Company
financing Financing

Employee-Provided Financing Research & Development Limited

Partnerships
Equity Private Placement Relational Investing or Strategic
Partnering
Factoring Vendor financing
Franchising Venture Capital

48
Source: Smith & Smith, (2004:508)

3.5.2.1 Internal or external

There are a variety of possible sources of finance available to the SMME sector in
South Africa although they are less than those available to our American counterparts
as indicated in Table 3.1 above. These can be classified as internal and external.
Internal sources of finance include the personal equity of the entrepreneur, usually in
the form savings re-mortgages, or perhaps money rose from family and friends. After
the initial start-up, retained profits and earnings provide internal capital. The principal
sources of external sources include bank loans, equity capital from venture capitalists
and short-term credit (Longenecker, et. al. 2003:362).

For many small businesses in South Africa, certain sources of finance are not
available due to barriers of entry. For example, most SMMEs are automatically
excluded from certain financial sources, such as public sources like the Johannesburg
Securities Exchange (JSE). They also face difficulties raising certain types of finance
such as long term loans because of the automatically higher risk associated with
businesses which have little equity in the form of share capital (Deakins, 1996:73).

3.5.2.2 Debt or equity

Start-up capital for SMMEs can be in the form of debt financing or equity financing.
Debt financing is method that involves a loan, the payment of which is only directly
related to the sales and profits of the venture. Typically, debt financing requires that
some asset (such as a car, house, plant machine or land) be used as collateral. Equity
financing does not require collateral and offers the investor some form of ownership
position in the venture. Therefore, choosing between debt and equity involves
tradeoffs for owners with regard to potential profitability, financial risk and voting
control. (Longenecker, et.al. 2003:236). Debt increases the potential for higher rates
of return to the owner and allows the owner to retain voting control of the business.
On the other hand equity financing limits the potential rate of return and the owner
has to give up some voting control. While equity funds have been seen as a way to
stimulate the growth and development of SMMEs, particularly owned by previously

49
disadvantaged, the preferred investment ranges are too high to significantly reach
these enterprise sectors.

3.5.2.3 Venture capital

Venture capital is a form of private equity that focuses on relatively high-risk
businesses, in the expectation that the profits will be above average. Venture capital is
a professionally managed pool of equity formed from the resources of wealthy limited
partners. Other principal investors in venture-capital limited partnerships are pension
funds, endowment funds and other institutions including foreign investors. These are
vitally important sources of seed capital, start-up capital, and expansion capital for
entrepreneurs who have demonstrated the viability of their ventures but are unable to
source funds from the formal banking sector (Kuratko & Hodgetts, 2001:441). In
addition, venture capitalists provide entrepreneurs with equally valuable technical
advice, strategic support, research, mentorship, and managerial experience.
Scarborough and Zimmerer (1999:508) adds that venture capitalists invest in ventures
with high growth and profit potential in exchange for some ownership and control

Of late, venture capital in the form of seed capital and start-up capital has become
increasingly difficult to obtain. Seed capital is the relatively small amount of money
needed to prove that the concept is viable and to finance feasibility studies. Seed
capital is not usually used to start the business, but just to investigate its possibilities.
On the other hand start-up capital is funding that actually gets the company organised
and operational. It puts in place the basics of product development and the initial
marketing effort. Start-up capital is invested in the business before there are any
significant commercial sales; it is the financing required to achieve these sales. As a
result venture capitalists are increasingly turning towards companies that:
- are more mature
- have established products or services that generate high levels of revenue
- have an impressive client list, and
- have capable and experienced management team (Van Yoder, 2003:32-34)
Moreover, SMMEs cannot meet the increasingly stringent requirements by venture
capitalists. Some of the requirements include:
- loans that require collateral in the form of assets

50
 - liquidity preferences greater than the amount of the investment
- priority over managers with regard to profits and creditors with regard to debt;
and a greater emphasis on due diligence the net result is that venture capital is
becoming more difficult to source. It is indeed a “long and arduous process that
requires a lot of preparation and advance planning,” (Van Yoder 2004:34).

Quantitative surveys conducted on venture capital in South Africa to date are those of
KPMG (KPMG 2000 and KPMG 2001), which assessed the composition, and
performance of venture capital funds in South Africa during 1999 and 2000. KPMG
identified 55 private equity firms in South Africa. According to the 2001 KPMG
report, the venture capital industry still largely comprises captive funds, although
independent funds, those funds that generally manage third party funds, are becoming
an increasingly important segment of the South African private equity landscape.
R33.1 billion of private equity funds is under management including R7.5 billion of
undrawn commitments as shown in Figure 3.1 below.

Total funds under management at 31 December 2000

Figure 3.1
Source: As adapted from KPMG Report (2001:6)

51
Figure 3.2 Relative size of international private equity markets

Source: As adapted from KPMG Report (2001:7)

Although our industry is a fraction in comparison with that of the United States, it is larger
than those of many European countries including Sweden and the Netherlands. In terms of
size relative to GDP, South Africa’s private equity industry is more significant than most of
Europe’s, but still some way off Israel’s (12,1% of GDP), and the USA (4,9% of GDP).

The survey by KPMG shows us that South Africa has still a relatively small venture
capital market, compared with the USA and UK as shown in figure 3.2. It is also
evident that according to the sectoral analysis of investments in 2000, the
manufacturing sector draws the largest percentage of venture capital and that the
majority of the investments are allocated for replacement and buy-out purposes.

52
Figure 3.3 Sectoral analyses of investments

Source: As adapted from KPMG Report (2002:7)

In South Africa private equity fund managers are very conservative. The investors are
usually banks or families or individual entrepreneurs who have who have been
successful with their businesses. Because of the low levels of trust in South Africa –
and, until recently, pessimism about the economic future of South Africa – only about
R2 billion of the R8 billion available for private equity investment was actually put to
use. This was only used for safe deals, such as corporate buy-outs and mergers.
According to KPMG report (2001:19), the fund managers are scared stiff of investing
in small businesses.

53
Figure 3.4 Investment in 2000 - by stage

Source: As adapted from KPMG Report (2001:8)

3.6 Conclusion
This chapter focused on the importance of the SMME sector to the South African
economy. The small business sector contributes significantly to the South African
economy through job creation and income generation and a general improvement in
the standard of living of the general population. However, the SMME sector faces a
number of obstacles in its effort to access funds for start-up and expansion purposes.
These constraints include lack of adequate training, lack of adequate support and most
important is the lack of access to finance as banks see small businesses as being risky.
Under political pressure from the government, South African banks are starting to
take needs of small businesses more seriously. Banks have set ambitious lending
targets to demonstrate their commitment to support more small businesses in future.
However, still not many businesses can access this finance due to a lack of collateral.

Distinction has been made between self-financing through an entrepreneur’s own

money and debt and equity financing. The most common form of debt financing is
bank loans but many entrepreneurs are excluded from the formal banking sector
because of the requirement of security in the form of collateral. In addition bank loans
are costly because of the interest charged. Micro lending is an important alternative of

54
which the various sources include Matshonisa (informal lending in the townships),
micro-lending organisations in the private sector and non-governmental organizations.
Khula Enterprise Finance Limited also provides loans to entrepreneurs indirectly. It
funds retail finance intermediaries, which are then approached by entrepreneurs for
loans. In addition, Khula provides guarantees that serve as collateral for loans from
commercial banks. Equity financing requires that a portion of the ownership of a
venture be given up in exchange for capital. Venture capital is thus an important
source of equity finance especially for more mature ventures but it cannot be easily
accessed by the SMME sector.

The smaller end of the enterprise spectrum, ranging from survivalist, micro and very
small enterprises have very little access to capital, from either alternative financial
institutions or the formal financial sector. This is a critical issue in the South African
context, as most previously disadvantaged entrepreneurs operate in these sectors, thus
perpetuating a situation of unequal racial and gender access to finance. Yet these
sectors have the greatest potential for labour absorption in the short-run.

This chapter concludes the literature study, as the first phase of the research. The next
phase is the planning and conducting of the empirical research. Here information will
be obtained from various lending institutions and entrepreneurs. The following
chapter will deal with the research methodology as well as the design of the
questionnaire for the empirical research. The results will be analysed and integrated
with the theories and concepts identified during the literature study.

55
CHAPTER 4: RESEARCH METHODOLOGY

4.1 Introduction

The research process involves the application of various methods and techniques in
order to create scientifically obtained knowledge by using objective methods and
procedures (Welman and Kruger: 2001:2). The purpose of this chapter is to present
the methods and techniques applied to obtain the findings presented in Chapter 5.

Walliman (2005: 238) provides the following steps in the research process:

The research process

Figure 4.1

Source: Walliman, (2005:238).

The situation and research topic are discussed in Chapters 2 and 3, and the current
chapter will focus on the research methodology.

Aspects of the research method to be covered in the chapter include the basic type of
research design, a definition of the population, the measurement instrument, the data
collection methods used and the statistical techniques applied to analyse the data. The
chapter starts by revisiting the problem statement and the research objectives.

56
4.1.1 Problem statement
Most SMMEs in South Africa fail due to a number of reasons namely lack of
education, lack of experience and entrepreneurial culture and most important of all,
lack of and access to financial resources. Evidence referred to earlier on in this study
demonstrates that there is a serious problem, which pertains to small business getting
access to finance. Thus, improving access to finance as a fundamental approach to
improve/enhance South Africa’s entrepreneurial performance. Given this state of
entrepreneurship in South Africa, it is necessary to identify what issues hinder the
access of SMME finance from the perceptual view of the entrepreneur and/or small
business owner. It is furthermore critical to identify potential demographical
variables affecting the access to SMME finance in order to address the relevant
issues/obstacles effectively.

4.1.2 Primary objectives

1 To identify the obstacles faced by entrepreneurs in accessing small business
finance from financial institutions.
2 To determine the basic demographic of entrepreneurs in the Tshwane
Metropolitan area with reference to gender, age, language group and level of
education.
3 To determine the entrepreneur’s work experience and the phase of entrepreneurial
process in which the entrepreneur is in.

4.1.3 Secondary objectives

1 To identify the industries in which the entrepreneurs operate.
2 To determine the kind of training and support that entrepreneurs need
3 To determine possible solutions to make accessibility of small business finance
easier and thus improve on the success rate of this sector.
4 To determine how government can intervene to improve the accessibility of
small business finance to entrepreneurs

57
4.1.4 Hypothesis Statement

H1 Small, medium and micro-enterprises (SMMEs) do not perceive

obstacles in accessing finance from financial institutions in Tshwane

H1a Small, medium and micro-enterprises (SMMEs) perceive obstacles in

accessing finance from financial institutions in Tshwane

H2 Gender differences do not exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H2a Gender differences exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H3 Ethnic differences do not exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in
the Tshwane area

H3a Ethnic differences exist in terms of the perceived obstacles in obtaining

finance by small, medium and micro-enterprises (SMMEs) in the
Tshwane area

4.2 Research design

The research design is the plan and structure of investigation so conceived as to obtain
the answers to the research question” (Kerlinger: 1986:279). The plan is the overall
scheme or program of the research.

In starting to plan the research a distinction is made between two basic types of
designs: Experimental and non-experimental research. Experimental designs all

58
involve an intervention, which refers to the exposures of research subjects to
something to which they otherwise would not have been subjected (Wellman and
Kruger: 2001:69). Kerlinger (1986:348) provides the following definition of non-
experimental designs:

“Non-experimental research is systematic, empirical inquiry in which the

scientist does not have direct control of the independent variable because their
manifestations have already occurred or because they are inherently not
manipulable”

Within non-experimental research designs there are again various different types of
research. These include descriptive research, historical and correlation designs.
Salkind (2000:11) describes the purpose of descriptive research to describe the
characteristics of an existing phenomenon. Historical research relates events that have
occurred in the past to current events and correlation research examines the
relationship between variables.

Kerlinger (1986:359) mentions that one of the great weaknesses of the non-
experimental design, as compared to experimental research, is that non-experimental
research lacks control: control over the independent and dependent variables.

It is noted that the variable under study in the current research does in fact not lend
itself to manipulation and the aim of the research is to describe the phenomenon:
Financing difficulties experienced by entrepreneurs. Therefore the current research is
classified as non-experimental research. More specifically, the current research is
known as descriptive research.

4.3 Description of the Population and sampling frame

The population is defined as a collection of all the observations of a random variable

under study and about which one is trying to draw conclusions in practice. A
population must be defined in very specific terms to include only those units with
characteristics that are relevant to the problem (Wegner 2003:5)

Two distinct populations were targeted in the current study. The populations for the
current study are defined as the entrepreneurs and the financial institutions. Zikmund

59
(1997: 417) describes the target population as the complete group of specific
population elements relevant to the research project. For the purposes of this research,
the target population comprises entrepreneurs from the small medium and micro
enterprises level and financial institutions such as local commercial banks. The
geographical location is Tshwane Metropolitan Municipality.

It is possible to construct a so called sampling frame, having defined the population.

A sampling frame is a listing of all the elements in a population and the actual sample
is then drawn from this listing. It is possible that biases could exist between the
opinions of members of the sample frame and population. Therefore, the adequacy of
the sampling frame is crucial in determining the quality of the sample drawn from it.

Sample frames may differ from the population in the following ways:
• The frame may contain ineligibles or elements that are not part of the
population
• The frame may contain duplicate listings, and the frame may omit units of the
population, which is by far the most serious problem.

Due to the fact that no complete list exists of all small, medium and micro enterprises
(SMMEs) in South Africa, Braby’s Database (2002) was used to draw a sample.
Braby’s lists more than 15000 businesses in South Africa. It must be acknowledged
though, that Braby’s Database, as also other lists of businesses, would include more of
the formalized businesses, i.e. licensed businesses registered for Value Added Tax
(VAT). This possible shortcoming was addressed by distributing a mail questionnaire
to businesses drawn from the above list but supplementing the sample with
questionnaires distributed ad hoc at the business centres in the Tshwane Metropolitan
Municipality.

4.3.1 Sampling technique

Techniques that make use of probability theory can both greatly reduce the chances of
getting a non-representative sample and, permit precise estimation of the likelihood
that a sample differs from the population by a given amount. One of the main
characteristics of the stratified random sampling technique is that it tends to reduce
sampling error and decrease the required sample size (Hussey and Hussey, 1997:116).

60
Since the aim of the study is to make probability based confidence estimates of certain
parameters, a probability sampling technique, namely systematic sampling will be
utilized.

4.3.2 Sample size

The estimation of the sample size was influenced by the following principles:
• Research propositions
• The variance within the population
• The sampling technique
The level of precision, or in other words the level of sampling error one is willing to
accept in a research also influences sample size. In reality the sample statistic is
known but the population statistic is unknown, so, the difference between the sample
and the population value can be assessed in terms of the likelihood that a sample value
differs by a certain value from the population value (Leedy, 2005:35). Establishing a
confidence level, i.e. a range in which it is fairly certain that the population value lies
does this. Moreover, precision is directly related to sample size. Larger samples are
more precise than smaller ones. Probability theory enables the calculation of the
sample size that would be required to achieve a given level of precision. It was
decided to accept a 5% confidence level.

• Determining the sample size

Taking the above factors into account 600 questionnaires were distributed. The mail
survey was enhanced by telephonic communication before, and during the survey. In
order to partially address the informal sector, the various business information centres
of the City of Tshwane Metropolitan Municipality (CENBIS) was used to distribute a
100 of the 250 questionnaires to business owners that utilized their services on a
random basis.

4.4 Research instrument

In scientific research variables must be measured (Craziano & Raulin 1998: 68).
There are four basic types of measurement options. The different levels of
measurement include:

61
 • Nominal scales: this is the lowest level of measurement, the scale with the
least matching to the number system. Classification of variables is into
unordered qualitative categories; for example, the race variable in the current
study. (Craziano and Raulin:1998: 71)
• Ordinal scales: Classification into ordered qualitative categories; e.g., social
class (I, II, III, etc.), where the values have a distinct order, but their categories
are qualitative in that there is no natural (numerical) distance between their
positive values. An example of ordinal scales in the current study is the
education level of respondents.
• Interval: When the measurement conveys information about the ordering of
magnitude of the measurement and about the distance between the values.
(Sekeran, 2003: 71). The rating of service quality in question 10, while streaky
speaking are ordinal in nature, are often considered as interval scales by
researchers to enable the calculation of means and parametric significance
testing.
• Ratio: These are measurements where there is equal distance between the
numbers, as with interval scales, yet it also has an absolute zero. No ratio
variables were included in the current study.

The current study made use of one instrument, designed specifically for the
population targeted: the entrepreneurs, This measurement instrument took the format
of a questionnaire. Salkind (2000:136) defines questionnaires as paper-and-pencil set
of structured and focused questionnaires. The following advantages to using
questionnaires are also provided:

• It is possible to survey a broader population as surveys can be mailed

• They are cheaper than one-on-one interviews
• People may be more willing to be truthful because their anonymity is all but
guaranteed.

Please see appendix for the research questionnaire used in this study.

62
4.5 Data collection

There is no simple answer as to which of the available methods of data collection the
researcher should use when collecting data. There are however, three major criteria
for evaluating a measurement tool (Cooper & Schindler 2003:231):
• Validity refers to the extent to which the test measures what we actually wish
to measure,
• Reliability has to do with the accuracy and precision of a measurement
procedure, and
• Practicality is concerned with a wide range of factors of economy,
convenience and interpretability.

The survey was done via mail and a telephone survey was done as a follow-up to non-
respondents. For the more informal business sector, questionnaires were handed out at
business centres.

4.5.1 Format of the questionnaire

A questionnaire was sent out, focusing on the entrepreneurs in the Tshwane
Metroploitan Area as unit of analysis. The questionnaire was structured as follows:

Section A: Demographic Information

This section used close-ended questions to gather information such as gender, age,
home language and education. Participants were simply expected to click the space
containing the applicable response. The questions in this section were in a multiple
choice format which allowed participants to choose one or more alternatives in some
instances. The rational behind these demographic questions is that it places the results
in a frame of reference and might provide insights into differences between
demographic groups or correlation with regards to entrepreneurial behaviour.

Section B: Profile of business activities

Close-ended and open ended questions were used to gather information such as the
number of years of experience as an entrepreneur. Their position or role in the
business and whether the business is micro, small or medium sized. Entrepreneurs

63
were also asked how they raised start-up capital, which financial institutions they
approached for financing and at which institution their application was successful.
Finally, entrepreneurs were asked to indicate what obstacles they experienced during
the application process and whether they need training in motivation, entrepreneurial
or business skills.

The questionnaire was distributed with a covering letter (see addendum). The
covering letter included the following:
• An explanation of the relevance of the study
• A brief description of the objectives of the study
• Instructions on how to administer the questionnaire
• Assurance of confidentiality
• Contact details if any difficulties were encountered
A copy of the questionnaire is attached as addendum A.
The questionnaires were distributed as follows:

Table 4…… Distribution of Questionnaires for the Entrepreneurs

Number Number Percentage of total

distributed returned returned
600 200 33%

A total of 600 questionnaires were distributed to entrepreneurs and a total of 200 were
returned. This means a response rate of 33%.

4.6 Data analysis and statistical techniques used

There are two major components of the discipline of statistics: descriptive and
inferential statistics.

Rosnow and Rosenthal (1999:10) defines descriptive statistics as condensing large

volumes of data into a few summary measures. The author defines inferential statistics
as the area of statistics which extents the information extracted from a sample to the
actual environment in which the problem arises.

64
4.6.1 Descriptive Statistics

Descriptive statistics used in the present study include frequency counts, mean scores,
standard deviations and cross tabulations. Frequencies are defined by Kerlinger
(1986:127) as the number of objects in sets or subsets. More simply, then number of
times a certain answer appears in the data. The mean calculates an average across a
number of observations and the standard deviation is the square root of the variance
around the mean, in other words, how well the mean represents the data (Field
2005:6).

A cross tabulation is just a more advanced method of presenting frequency data. It

presents the frequencies in a matrix. For instance: Number of entrepreneurs in each
race group within each gender.

4.6.2 Inferential statistics

The following inferential techniques were used:

• Chi-Square Test

The Chi-Square Test procedure tabulates a variable into categories and computes a
chi-square statistic. This goodness-of-fit test compares the observed and expected
frequencies in each category to test either that all categories contain the same
proportion of values or that each category contains a user-specified proportion of
values (SPSS 11.5:2004). This is the significance test used when making use of
the cross-tabulation technique

• The t-test for independent measures

The t-test assesses whether the means of two groups are statistically different from
each other. The t-test is defined as the difference between the two samples’ means
divided by the standard error of the difference.
(http://research.med.umkc.edu/tlwbiostats/ttest.html).

When the two means are from dependent groups (two measurements from the same
group), the t-test for dependent measures is used.

65
4.6.3 Statistical significance

Test statistics such as the inferential techniques described above, are used to tell the
researcher about the true state of the population – inferred from the sample. Field
(2005:31) explains that there are two possibilities in the real world (in the actual
population):
1) there is, in reality, an effect in the population or
2) there is no effect in the population

Although we have no way of knowing which is the true situation, Fields (2005:31)
explains that by looking at the test statistically and the associated probability, one can
decide which of the two is the most likely.

A general decision rule is set against which the p-value is evaluated when deciding
whether the observed effect in the sample is true also for the population. For the
current study this is 0.05. Therefore all p-values less than 0.05 are considered as an
indication of an effect in the population.

4.7 Statistical Analysis Software

All statistical analyses in the present study were computed using the SPSS statistical
package for Windows version 11.1 (SPSS, 2001). SPSS stand for Statistical Package
for the Social Sciences.

66
CHAPTER 5: RESEARCH RESULTS

5.1 Introduction

The current chapter presents the empirical research findings of the study which
focused on assessing obstacles in the access to Small, Medium and Micro Enterprise
finance. The analysis is based on 200 responses out of the 600 questionnaires that
were sent out to entrepreneurs.

Firstly the results of the “Entrepreneur survey” are presented. The first section of
these results presents the structure of this sample in terms of the demographic profile
of the sample. The second section provides the profile of the business operations of
the entrepreneurs. The next section looks at the business financing used and
challenges facing business in terms of financing. The last section compares certain
demographic groups in terms of their views on financing problems experienced.

5.2 Demographic profile of respondents

The sample structure is described in terms of gender, age, home language, race and
education level. The sample consists of 70% males and 30% females, as presented in
Figure 5.1 below.

Figure 5.1: Gender composition (n = 200)

Female
30%

Male
70%

Table 5.1 presents the descriptive information for the age of respondents. Two
respondents did not provide their ages.

67
Table 5.1 Descriptive information for Age (n = 198)
Std.
Minimum Maximum Mean Deviation
Age 27 64 42.21 7.60

The average age of entrepreneurs is 42 years of age. The youngest respondent is 27

years of age while the oldest is 64 years old. A relatively small standard deviation of
7.6 indicates that 66% of the sample is between the ages of 34.6 years and 49.8 years.

Figure 5.2 presents the language distribution of entrepreneurs in the sample.

Respondents mostly speak Afrikaans (39%), Sotho (24%) and English (18%). Some
African languages with very low incidence of 0.5% - 3% were grouped into one
category, namely “Other African”. Other African languages include Zulu, Ndebele,
Pedi and Swati.

Figure 5.2 Home language (n = 200)

100 %

80

60
39
40
24
18
20 12
7

0
Afrikaans Sotho English Tswana Other
African

The ethnic group of respondents is given in Figure 5.3. 44% of the sample is African
and 42% is Caucasian. Coloured and Asian respondents represent a small percentage
of the sample (6% and 8% respectively). Due to the small representation within the
Coloured and Asian segments, these ethnic groups will be excluded from any
subsequent inferential statistical analysis.

68
Figure 5.3 Ethnic group distribution of the sample (n = 200)

100 %

80

60
44 42
40

20
6 8

0
African Caucasian Coloured Asian

Generally entrepreneurs in the sample have only a Grade 12 or less qualification

(37%) or a certificate or diploma (35%). 1 in 3 respondents do have a university
degree, either a Bachelor’s degree (27%) or post graduate degree (3%).

Figure 5.4 Education of the sample (n = 199)

Matric/Grade 12 or
37
less
Certificate/Diploma 35

Bachelor’s degree 27

Honours degree 1

Master’s degree 1

Doctorate 1

0 20 40 % 60 80 100

As part of an in-depth exploration of the demographic variables, the ethnic group and
education distribution of males and females are examined through a cross-tabulation
of the variables. Table 5.2 presents the cross-tabulation between gender and ethnic
group and Table 5.3 the cross-tabulation between gender and education.

69
Table 5.2 Cross-tabulation between Gender and Ethnic Group (n = 200)
Gender
Male Female
% %
African
45.0 41.7
Caucasian
42.1 41.7
Coloured
6.4 5.0
Asian
6.4 11.7
Total 100% 100%

There is no difference between the ethnic group distribution of males and females as
the significance value is not below the set level of significance of 0.05 (Chi-square =
1.692; p = 0.639).

Table 5.3 Cross-tabulation between Gender and Education (n = 199)

Gender
Male Female
% %
Matric/Grade 12 or less
38.8 31.7
Certificate/Diploma
37.4 28.3
Bachelor’s degree
22.3 36.7
Honours degree
3.3
Master’s degree
0.7
Doctorate
0.7
Total 100% 100%

No significant difference is seen between the education level of male and female
entrepreneurs in the sample (Chi-square = 10.329; p = 0.066), although the males tend
to have a slightly lower general level of education – 22% or males have a Bachelor’s
degree compared to 37% of females.

A cross-tabulation between ethnic group and education also reveals that there is no
real significant difference between the education levels of entrepreneurs from
different ethnic groups in the sample (Chi-square = 20.224; p = 0.163).

70
Table 5.4 Cross-tabulation between Education and
Ethnic group (n = 199)
Ethnic group
Black White Coloured Asian
% % % %
Matric/Grade 12 or less 47.7 28.9 41.7 12.5
Certificate/Diploma 23.9 38.6 41.7 68.8
Bachelor’s degree 25.0 31.3 16.7 18.8
Honours degree 1.1 1.2 0 0
Master’s degree 1.1 0 0 0
Doctorate 1.1 0 0 0
Total 100% 100% 100% 100%

The average age of males and females were also compared using the T-test for
independent measures which revealed that males are slightly older on average (43
years) then females (40 years). The average ages of the different race groups are also
close together, ranging from 40-43 years.

In summary the sample shows a good balance between the demographic profiles of
males and females and different race groups.

5.3 Profile of business activities

This section focuses on providing the profile of the entrepreneur’s businesses in the
sample. Aspects covered include the role of respondents in the business, the length of
time the business has been in operation, the economic sector in which entrepreneurs
operate and the size of the business in terms of employee numbers.

Most respondents are the owners of their own businesses 86% and in addition 12%
are also managers of their businesses.

71
Figure 5.5 Role of respondents in the business (n = 199)

Manager
Owner 2%
86%
Both
12%

Most of the businesses in the sample have been in operation for more than 5 years
(60.3%) as is seen in Figure 5.6 below.

Figure 5.6 Length of time in operation (n = 199)

100 %

80

60
42.7
40
27.1
17.6
20 12.6

0
0-2 years 3-5 years 5-10 years 10+ years

72
Respondents were asked to classify their business into an economic sector. Table 5.7
below presents the number of businesses in each sector.

Figure 5.7 Economic sector (n = 199)

Business Services 29.6

Customer Services 20.1

Health Care, Education, Social Services 11.1

Construction, Mining 11.1

Wholesale, Motor Vehicles and Repairs 8

Finance 8

Transport, Communication 6.5

Manufacturing 4

Agriculture 1.5

0 20 40 % 60 80 100

Table 5.5 Economic Sector

Sector Frequency Percentage

Business Services 59 29.6
Customer Services 40 20.1
Construction, Mining 22 11.1
Health Care, Education, Social Services 22 11.1
Finance 16 8.0
Wholesale, Motor Vehicles and Repairs 16 8.0
Transport, Communication 13 6.5
Manufacturing 8 4.0
Agriculture 3 1.5

The largest economic sector is Business Services, with 29.6% of the sample
classifying their businesses into this sector. Customer Services also has a relatively
large representation in the sample (20%).

73
Figure 5.8 Size of the business (n = 199)

A micro enterprise (< 5 People ) 21.1

A very small business (6-20

64.8
people)

A small enterprise (20-50

11.6
people)

A medium enterprise (50-200

2.5
people)

0 20 %40 60 80 100

Most business are small rather than medium enterprises. 64.8% have between 6-20
employees and 21.1% have 5 or less employees.

5.4 Small and medium business financing

5.4.1 Methods of obtaining business financing

This section focuses on the core results of the survey, the financing of small and
medium enterprises and the obstacles they experience.

The first question in this section asked respondents to identify the current life cycle
phase of their business in terms of financing. Nearly all businesses (98%) are in the
Expansion phase, which involves obtaining working capital for initial growth and
major expansion. This figure is in line with the length of time the businesses have
been in operation (see figure 5.6), considering that most have existed for more than 5
years.

74
Figure 5.9 Phase in Life Cycle (n = 199)

Bridge financing - to prepare

1.5
company for public offering

Expansion - Working capital for

initial growth and major 98
expansion

Start-up - Funding to actually

0.5
get company operations started

0 20 % 40 60 80 100

The methods employed to raise start-up capital is given below in Figure 5.10. 57.5%
made use of their own savings and 46.5% obtained money from friends and family.
Only 20% obtained money from commercial banks, and 2% used Khula Finance
limited.

While respondents could indicate more than one method, the most overlap between
the methods is between “own savings” and “family and friends”. 23% of
entrepreneurs used a combination of these to obtain start-up capital. Only 17% of
those that obtained money from commercial banks also sublimated this with their own
savings.

Figure 5.10 Methods of raising start-up capital (multiple answers possible)

%
100
80
57.5
60 46.5
40
20
20 2 1.5
0
ds

nk

s
d
ng

er
ite
en

ba

th
vi

m
f ri

O
sa

al

Li
ci
d

e
n
an

er

nc
w

m
O

na
i ly

om
m

Fi
Fa

a
ul
Kh

75
Entrepreneurs were given a list of problems in respect of financial support for their
businesses and asked to indicate which ones they have experienced. The results are
presented in Figure 5.11.

Figure 5.11 Financial support problems experienced (multiple responses

possible)

Lack of start-up capital 82.5

Lack of funds for expansion 36.5

Lack of credit facility from the
33.5
suppliers
Lack of establishing
2.5
funds/capital
Other 2

Lack of bridging capital 0.5

0 20 % 40 60 80 100

A lack of start-up capital is by far the biggest problem among the entrepreneurs in the
sample (82.5%), a lack of funds for expansion and a lack of credit facilities from
suppliers are experienced by 36.5% and 33.5% respectively.

The financial entities which the entrepreneurs approached for financial assistance, are
given in Table 5.8 below.
Table 5.6 Financial entities approached for assistance (multiple responses)
Financial entity Frequency Percentage

ABSA Bank 119 59.5

Standard Bank 113 56.5

First National Bank 69 34.5

Nedcor Bank 29 14.5

Khula Finance Limited 17 8.5

Micro Lenders 11 5.5

Business Partners 4 2

Others 4 2

Stokvel 1 0.5

76
Respondents were more likely to approach one of the four major banks in South
African as opposed to trying alternative lending entities. Of the four banks, ABSA and
Standard Bank were approached the most (59.5% and 56.5% respectively). Nedcor
was approached by only 14.5% of respondents.

5.5% of entrepreneurs tried to borrow money from Micro lenders. Black entrepreneurs
were more likely to attempt to access funds through Micro lenders (6 of the 11).

Although entrepreneurs might have approached the above mentioned financial

entities, their applications might not have been successful. They were therefore also
asked to indicate where their applications have been successful.

As not all respondents applied and received money from financial entities and the
base size for the above question is only 149. To determine the success rate of the
particular financial entities in awarding finance, the percentage of awarded is
calculated by the following formula:
number awarded/ number applied * 100

Table 5.7 Financial entities granting finance (n = 149)

Financial entity Frequency Percentage Success Rate

ABSA Bank 57 38.3

48%
Standard Bank 34 22.8
30%
Micro Lenders 13 8.7
118%
Nedcor Bank 13 8.7
45%
Khula Finance Limited 9 6
53%
First National Bank 8 5.4
12%
Business Partners 3 2
75%
Stokvel 1 0.7
100%
Others 11 7.4
48%

ABSA awarded the most applications of the four banks (48%). Although relatively
few people applied at Nedcor, 45% of applications were successful at this bank. First
National Bank is the least successful, awarding only 12% of applications.

77
The above 100% seen for Micro lenders indicates that respondents did not understand
the pervious question completely, i.e that they should mention all places applied.
However this does present interesting information as it seems that more people turned
to Micro lenders for finance when rejected by the formal institutions.

Respondents were asked how they had become aware of these financial lending
entities. Most have heard about the institutions, particularly the major banks, through
television advertising (45.5%). Yet family and friends also play a large part, with
40.5% indicating that they were referred to the financial entity by family or friends.

The department of trade and industry played a role in increasing awareness in 10.5%
of the cases.

Figure 5.12 Methods of learning about financial entities (multiple responses

possible)

%
100
80
60 45.5
40.5
40
20 10.5 9
1.5
0
Television Referral by From the Over the radio Others
advertisement friends and Department of
relatives Trade and
Industry

Those respondents who were rejected by a financial institution were asked to indicate
the reason provided for this.

78
Figure 5.13 Reasons for rejection during the application of finance

%
100

80

60

40 31
18 14.5
20
0 0.5
0
Lack of Poor Bad credit Character of Others
collateral business record the
plan entrepreneur

The most prominent reasons for failing to award credit applications is a lack of
collateral (31%), poor business plan (18%) and a bad credit record (14.5%). The
character of the entrepreneur was never given as the reason for decline of
applications.

Once rejected, respondents were asked to indicate which other institutions they
approached for finance. Figure 5.14 indicates that most respondents who had to turn
to other institutions for finance approached Micro lenders.
Figure 5.14 Alternative financing entities approached after rejection

Micro lenders 25.5

Khula Finance Limited 5

Business Partners 1

Stokvels 0.5

Small Enterprise Development

0
Agency

0 20 40 % 60 80 100

79
5.4.2 Perceptions and attitudes towards financial entities and the application
process

Respondents were asked to rate the service quality of financial institutions that they
applied for. This is a general question on perception of institutions as the question did
not specify which of the financial entities to rate (respondents applied at multiple
entities).

Figure 5.15 Percentage Very good/excellent on service attributes

Friendliness of staff 20 78

Assistance in filling forms 54 33

Supply of all information 58 20

Feedback time 57 3

Assistance in drafting business plan 37 1

0 20 40 60 80 100 120
Very good Excellent

Institutions are friendly and provide respondents with assistance in filling in forms
(98% very good/excellent). They are also forthcoming with information that they
require (87% very good/excellent) but were rated less satisfactory in terms of timely
feedback and providing assistance in drafting business plans.
Certain obstacles exit during the application for finance. The figure below illustrates
the obstacles that respondents experienced in the application process.

80
Figure 5.16 Problems experienced during the finance application process

Too many forms to fill in 71

Lack of collateral 63.5

Lack of business skills 49

Complexity of application forms 46.5

Bad credit record 15

Communication problems - no forms

5.5
in local language
Time frame of feedback was to long 2

Ability of banker to inform and assist

2
in the entire application process
Other 1

0 20 40 60 80 100

Too many forms to complete (71%) and a lack of collateral (63.5%) were the two
main problems experienced during the application for finance. A lack of business
skills and the complexity of the forms were also relatively large obstacles experienced
(49% and 46.5% respectively).

5.4.3 Need for training of entrepreneurs

All entrepreneurs in the sample think that training for entrepreneurs is needed.
Training needed revolves primarily around business skills (96.5%). Entrepreneurial
skills training(12%)is not particularly desired by most entrepreneurs.

Figure 5.17 Skills training most needed (multiple responses possible)

Business skills
96.5
training

Entrepreneurial
12
skills training

Motivation skills 10.5

Other skills 0.5

0 20 40 60 80 100

81
5.5 Comparison of demographic groups in terms of obstacles experienced during
the application for finance

To ensure that the researcher gains a comprehensive view of the obstacles

experienced by entrepreneurs during the application for finance, the views and
experiences of males and females, different race groups and age groups are compared.

5.5.1 Differences between gender groups

The table below indicates the average perception of service quality between males and
females. The t-test for independent measures was used to test for significant
differences.
Table 5.8 Differences in the perceptions of service quality of males and
females: t-test for independent measures
Male Female T-test
Std. Std.
Mean Deviation Mean Deviation t-value P-value
Friendliness of staff 4.70 0.535 4.87 0.391
-2.06 0.041
Feedback time 3.59 0.629 3.63 0.525
-2.34 0.691
Supply of all information 3.85 0.824 4.06 0.656
-0.39 0.102
Assistance in filling forms 4.15 0.682 4.28 0.627
-0.43 0.243
Assistance in drafting business plan 3.04 0.915 3.28 0.763
-1.64 0.092

Although the male entrepreneurs in the sample were slightly less satisfied with all
services there is only one aspect where males and females experienced statistically
significant differences. The p-value of 0.041 for “Friendliness of staff” is less than the
0.05 level of significance which indicates that there is a statistically significant
difference between males and females. Males are less satisfied with the friendliness of
staff.

The degree to which different obstacles were experienced by males and females are
given below in Table 5.10. As respondents could indicate more than one obstacle no
test for significance is performed, and the results are interpreted qualitatively.

82
Table 5.9 Obstacles experienced by male and female entrepreneurs

Obstacles Males Females

Too many forms to fill in 71% 70%

Lack of collateral 61% 70%

Complexity of application forms 48% 43%

Lack of business skills 44% 60%

Bad credit record 18% 8%

Communication problems - no forms in local language 6% 5%

Time frame of feedback was to long 3% 0%

Ability of banker to inform and assist in the entire application 2% 2%

Other 0% 3%

Males and females had very similar problems with some notable differences in terms
of lack of business skills and Bad credit records. Females had more problems with a
perceived lack of business skills (60% vs. 18% of males) and males with bad credit
records (18% vs. 8% of females).

5.5.2 Differences between ethnic groups

As the Coloured and Asian ethnic groups have such small representation in the
sample, only the results of the African and Caucasian ethnic groups are compared.

The table below indicates the average perception of service quality between African
and Caucasian ethnic groups. The t-test for independent measures was used to test for
significant differences.

83
Table 5.10 Differences in the perceptions of service quality of African and
Caucasian ethnic groups: t-test for independent measures
African Caucasian T-test
Std. Std.
Mean Deviation Mean Deviation t-value p-value
Friendliness of staff
4.73 0.475 4.79 0.546 -0.78 0.43
Feedback time
3.46 0.613 3.69 0.544 -2.50 0.01
Supply of all information
3.74 0.833 4.05 0.705 -2.53 0.01
Assistance in filling forms
4.10 0.663 4.26 0.657 -1.53 0.13
Assistance in drafting business
plan
3.00 0.900 3.19 0.844 -1.40 0.16

African and Caucasian respondents differ significantly in terms of their satisfaction in

regard to the feedback time and the supply of all information that they needed.
African respondents are slightly less satisfied with the service of financial entities in
these regards.

Table 5.11 Obstacles experienced by entrepreneurs from different race

groups

Obstacles African Caucasian

Lack of collateral 78% 45%

Too many forms to fill in 72% 70%

Complexity of application forms 57% 37%

Lack of business skills 55% 42%

Bad credit record 25% 5%

Communication problems - no forms in local language 13% 0%

Time frame of feedback was to long 1% 4%

Ability of banker to inform and assist in the entire application 1% 4%

Other 0% 1%

African respondents were more likely to have experienced obstacles such as a lack of
collateral (78%) and a bad credit record (25%). Caucasian entrepreneurs experienced
less obstacles overall.

84
5.4 Conclusion
This chapter has presented the findings of the research survey. The results of the
survey were analysed using the SPSS statistical package for Windows version 11.1
which presented the statistical results in terms of frequencies and arithmetic means.
Data was collected using a structured questionnaire for this study. The data has been
analysed using techniques such as tabulation, correlation and statistical graphs.

85
CHAPTER 6: SUMMARY, RECOMMENDATIONS AND
CONCLUSION

6.1 Introduction

Within the context of SMME financial support it is clear from the study that the
primary issue at hand evolves as the access to financial resources. This is a problem
common to many countries in the GEM scope of analysis, with the evidence
suggesting that entrepreneurs across the globe find it difficult to secure formal
financing for new venture creation unless they have collateral or some other form of
credit history which serves to mitigate the inherent risk in starting a new business.

The importance of SMMEs to the economy expresses itself in their contribution to the
GDP and employment which is likely to be as high as the large enterprises’
contribution. With the current context of negative growth in employment creation by
both large enterprises and the government sector, SMMEs have a major socio-
economic role to play as already shown in the study. However, this objective fails to
materialise due to the high failure rate of small businesses in South Africa. A major
factor attributed to this high failure rate pertains to the lack of access to finance
especially at start-up phase as shown in the study. However, as portrayed in the
literature study in chapter three, it has been shown that entrepreneurs across GEM
universe are heavily reliant on their own savings or friends and family for start-up
finance (Orford et al 2003:18).

This study endeavoured primarily to create a platform from which further research
can be conducted. It has evaluated the current position with respect to problems of
accessing SMME finance in South Africa. Expectantly the study will assist potential
entrepreneurs, academics, SMME support agencies, government, SMME
organisations and funding institutions to understand the problems of accessing SMME
finance.

This chapter discusses the findings in relation to research objectives and the
propositions. A summary and overview of the research is then presented, followed by

86
the shortcomings of the study, recommendations and additional research opportunities
will be identified.

6.2 Summary and overview of the research

Chapter 1 presented the background to the research, followed by a problem definition

and research objectives. The chapter was concluded with a research structure and
discussion on the chapter layout.

Chapter 2 and Chapter 3 presented a literature review regarding problems of accessing

SMME finance worldwide and in South Africa. Firstly the term entrepreneurship was
defined and a distinction made between entrepreneurship and small business
management. The study also showed that it is internationally accepted that the SMME
sector is an essential factor in promoting and achieving economic growth and
development and the widespread development of wealth and employment creation.

From Chapter 3 it has been shown that other obstacles small firms frequently
experience include lack of training and support, marketing risks from a limited
product range, lack of education, inefficiencies and policy-generated costs that
constrain financial development. Thus, the South African entrepreneurial climate has
a number of strengths but there are many challenges to be overcome before South
Africa can be considered as a country that induces an entrepreneurial culture.
Consequently the objective of identifying the obstacles experienced in accessing small
business finance is achieved.

Chapter 4 focused on the empirical research phase. The empirical study consisted of
primary data collected from an explorative structured electronic questionnaire
gathering both qualitative and quantitative data.

Chapter 5 provided a discussion of the results obtained from an empirical

investigation conducted on the problems of accessing small business finance in the
Tshwane Metropolitan area. Descriptive statistical analysis was predominantly used in
the presentation of results.

87
Chapter 6, the final phase and component of the research study, aimed at applying the
information obtained from the literature study and the empirical study as background
to provide a solution to the problems of accessing small business finance.

6.3 Primary Objectives

(1) To determine the basic demographic profile of entrepreneurs in the Tshwane

Metropolitan area with reference to gender, age, language group and level of
education.
(2) To identify the obstacles faced by entrepreneurs in accessing small business
finance from financial institutions.
(3) To determine the entrepreneur’s work experience and the phase of
entrepreneurial process in which the entrepreneur is in.

6.3.1 Secondary objectives

(1) To identify the industries in which the entrepreneurs operate.

(2) To determine the kind of training and support that entrepreneurs require
(3) To determine possible solutions to make accessibility of small business
finance easier and in consequence improve on the success rate of this sector.
(4) To determine how government can intervene to improve the accessibility of
small business finance to entrepreneurs

The primary and secondary objectives have been met. The study has shown that the
problems experienced by entrepreneurs in accessing small business finance include
the following:

• lack of start-up capital, is by far the biggest problem among entrepreneurs in

the sample (82.5%)
• lack of funds for expansion
• lack of credit facilities from suppliers
• poor business plan
• lack of collateral (63.5%)

88
 • bad credit record
• lack of business skills (49%)
• too many forms to fill during the application process, administrative burden
(71%)
• Complexity of forms (46.5%)

In terms of the training that entrepreneurs need, the study has revealed that most of
them require business skills training (96.5%), while an additional 12% need
entrepreneurial skills training as well. Thus it can be safely concluded that
entrepreneurs are often ill-equipped to development a business concept and present it
confidently. Lack of confidence in language and numeracy skills intimidates
entrepreneurs from approaching banks for financial support. The performance of an
entrepreneurial venture is critically influenced by the experience of the entrepreneur.
According to Driver et al (2001:23), South African entrepreneurs often lack
experience thereby hindering them from successfully pursuing business opportunities.
The study showed that the average number of years of personal entrepreneurial
experience is five to ten years.

The study also endeavoured to determine the stage of the entrepreneurial process the
entrepreneur is in. From the study it can be safely concluded that the majority of the
entrepreneurs are in the expansion phase. The longer the period of experience the
higher the success rate of entrepreneurs.

6.3.2 Hypothesis Testing

H1 Small, medium and micro-enterprises (SMMEs) do not perceive obstacles in

accessing finance from financial institutions in Tshwane

H1a Small, medium and micro-enterprises (SMMEs) perceive obstacles in

accessing finance from financial institutions in Tshwane.

Hypothesis1a is rejected based on the findings illustrated in figure5.11 and 5.16. Lack
of start-up capital is by far the biggest problem among entrepreneurs in the sample

89
(82.5%), a lack of funds for expansion and lack of credit facilities from suppliers.
According to Figure5.16 entrepreneurs experienced two other major problems namely
too many forms to complete (71%) and a lack of collateral (63.5%) during the process
of applying for finance.

H2 Gender differences do not exist in terms of the perceived obstacles in

obtaining finance by small, medium and micro-enterprises (SMMEs) in the
Tshwane area.

H2a Gender differences exist in terms of the perceived obstacles in obtaining

finance by small, medium and micro-enterprises (SMMEs) in the Tshwane
area.

Based on the findings displayed in table 5.9 and 5.10, hypothesis 2a is accepted. The
results indicated that male entrepreneurs were slightly less satisfied with all the
services offered except one aspect where males and females experienced significant
differences. The p-value of 0.041 for “friendliness of staff” is less than the 0.05 level
of significance which indicates that there is a statistically significant difference
between males and females. Males are less satisfied with the friendliness of staff.
According to table 5.10, males and females had very similar problems with some
notable differences in terms of lack of business skills and bad credit records. Females
had more problems with a perceived lack of business skills (60% versus 18% for
males) and males with a bad credit record (18% versus 8% for females).

H3 Ethnic differences do not exist in terms of the perceived obstacles in obtaining

finance by small, medium and micro-enterprises (SMMEs) in the Tshwane
area.

H3a Ethnic differences exist in terms of the perceived obstacles in obtaining

finance by small, medium and micro-enterprises (SMMEs) in the Tshwane
area.

Hypothesis statement 3a is accepted, based on the findings displayed in table 5.11 and
5.12. African and Caucasian respondents differ significantly in terms of their

90
satisfaction with regard to the feedback time and the supply of all information that
they needed. African respondents are slightly less satisfied with the service of
financial entities. African respondents were more likely to have experienced obstacles
such lack of collateral (78%) and bad credit record (25%). Caucasian entrepreneurs
experienced less obstacles overall.

6.4 Shortcomings of the study

Several shortcomings were identified during the study. There has not been much
documented research on the problems of accessing small business finance in South
Africa, within an entrepreneurship research context. The documented research on this
topic fails to explicitly convey empirical findings indicating obstacles of nature.
Secondly, one of the initial aims of the study was to explore from financial institutions
what problems they encountered in financing small business entrepreneurs. However,
this objective could not materialize because of the low response rate from the
financing institutions, due to non-disclosure issues. Therefore this pursuit was
excluded from the final result generation.

The use of an electronic questionnaire was a problem due to the fact that not all
entrepreneurs have access to e-mail facilities or are computer literate enough to be
able to read instructions and respond. Therefore, a high percentage of questionnaires
were not responded to. In instances where the entrepreneur had neither e-mail nor fax
facilities, a postal questionnaire was made use of, nor an interview process was
applied. Therefore, this study is intended to act as a platform from which other
researchers can work from, with specific reference to the inclusion of the perceptual
factors as present in financial institutions operating in the SMME sector.

6.5 Recommendations

Management capability strengthens the financial capacity of SMMEs. Lenders are

prone to be favourably biased towards SMMEs who can demonstrate eloquence in
areas such as financial management (including basic book keeping), marketing and
technology upgrading. It is therefore recommended that government and other service
providers incorporate additional simplified components to their training packages to

91
cover such areas as bookkeeping and compilation of business plans. Educational
background of entrepreneurs also has a direct influence in how they respond to
training. From the interview with the lenders, it was noted that funding institutions
regard at least some basic management and financial grounding within entrepreneurs
as a guarantee that their funds will be utilised profitably resulting in the growth of
SMMEs. Also, more non-financial services, better tailored to the needs of financial
intermediaries should be put in place so as to facilitate greater access to debt and
equity finance for entrepreneurs. Specialised capacity building support (training,
workshops, and conferences) should be provided in areas such as individual lending
methodologies for small scale and start-up equity investments for equity financiers.

From the study it was noted that very few people know about the Khula Credit
Guarantee scheme and very few entrepreneurs have managed to get finance through
this scheme if they do not have resources. Thus the banking system requires some
security and collateral because banks do not see these entrepreneurs as investors. For
someone without assets, it is impossible to get a loan. Therefore, the Khula Credit
Guarantee Scheme should be revised and expanded significantly to facilitate greater
access to finance for entrepreneurs. Also, financial contracts and collateral laws
should be revised so as to facilitate the registration and realization of collateral.

Financial institutions should make financial contributions to non-financial support

services such as provision of financial management skills and mentoring. An
environment should be created to allow a far greater level of competition between
banks, as well as between banks and non-bank financial service providers, in the
provision of financial services – and particularly debt finance – to SMMEs.

Access to information about SMMEs should be increased to ensure that all

providers and potential providers of finance have a sufficient knowledge to assess the
risk of SMME applications for finance. Any intervention that improves the ability of
financial providers to accurately assess risk would increase their willingness to extend
credit and other financial services to SMMEs. Funding institutions should advertise
their services so that the entrepreneurs are aware of where to go when they need
money to start-up or grow their businesses. From the results of the study, it was noted
that bad credit record is one of the obstacles in the accessing of small business

92
finance by entrepreneurs. Therefore, it is recommended that there should be an
improved regulation of credit bureaux in order to enhance their credibility and
the integrity of the information being distributed by the credit bureau.

6.6 Further Research

Further research that can be conducted includes the following:

• The view of financing institutions on why small SMME entrepreneurs fail

to secure finance from formal institutions. Further research could be
conducted on the reasons why banks reject most of the applications for
finance submitted by entrepreneurs.

• Certain skills are a pre-requisite for a successful application for finance

such as book-keeping, cash flow management and drafting of
comprehensive business plan. Further research could be conducted into
how banks/government could impart these skills to the potential
entrepreneur.

• Further research can also be conducted to determine what strategic

alternatives can be implemented to assist SMMEs in their endeavours

6.7 Conclusion

Unleashing the growth potential of the SMME sector is often seen as a solution to
South Africa’s job crisis and a means of increasing the growth rate. However,
government’s efforts to support the sector have so far been dismal. As shown by the
study there is a high failure rate for small business mainly due to lack of access to
finance to start-up and expand businesses. What is needed is an entirely new
approach. Rather than overemphasizing costly interventions to support small
enterprises, the state should focus on eliminating the barriers created by excessive
regulation and the absence of effective markets.

93
Although government has tried to put in place policies and institutions with an aim of
improving the accessing of finance by small business owners, their success has been
minimal. It is therefore imperative that management capability and financial
management acumen be regarded as key to easy access for funding by the
entrepreneurs themselves, and the parties involved in supporting and promoting them.

94
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Annexure 1

Covering letter

103
Dear Respondent,

RESEARCH SURVEY OF THE PROBLEMS OF ACCESSING SMME

FINANCE: AN EMPIRICAL PERSPECTIVE OF TSHWANE.

The Department of Trade and Industry (DTI) has identified access to finance as an
important part of their SMME Strategy. However very little empirical evidence is
available about the obstacles regarding this issue.

This research project will assist, in trying to gain a better understanding of the
problems South African entrepreneurs experience in an effort to access SMME funds.

Your participation is needed and greatly appreciated. By answering this questionnaire

you will be contributing towards a better understanding of this vital intervention in the
field of entrepreneurship and small business management. Be assured that all
information provided will be treated in the strictest confidence.

Please acquaint yourself with the following terminology and instructions before
completing the attached questionnaire:

Instructions to complete questionnaire:

The questionnaire is a MS Word document and can be answered via Email or

fax. My fax number is (012) 429 3456, to my attention – Ashley.

Email Instructions:

1. Please save the attached Questionnaire to your hard drive.

2. Close your Email and open the saved questionnaire.
3. Proceed to answer the questions by using your mouse, click on the appropriate
square/s or by filling in the required information.
4. Once you have completed the questionnaire save the alterations and return the
document to me using the following E-mail address [email protected] by
the 31st of July 2005

Thank you for participating in this research process.

If you face any difficulties with the questionnaire, please phone

Ms. Ashley Mutezo at (012) 429 4595 OR 082 746 9314 .

Yours Sincerely

Ashley Mutezo (Mrs)

104
Annexure 2

Questionnaire

105
QUESTIONNAIRE: ENTREPRENEUR

OBSTACLES IN THE ACCESS TO SMME FINANCE: AN EMPIRICAL

PERSPECTIVE OF TSHWANE.

Answer each question by filling an X in the suitable box provided or write your answer in the shaded
space provided (open questions).

Respondent
1 2 3

Demographic information

a. What is your gender?

Male 1
Female 2 4

b. What is your age in completed years?

years
5 6

c. Which of the following languages do you

mostly speak at home?

Language
Afrikaans 1
English 2
Ndebele 3
Pedi 4
Sotho 5
Swati 6 7 8
Tsonga 7
Tswana 8
Venda 9
Zulu 10
Xhosa 11
Other 12

106
d. What is your race?

Black 1
White 2
Coloured 3 9
Asian 4

e. What is your highest formal educational

qualification?

Matric/Grade 12 or less 1
Certificate/Diploma 2
Bachelor’s degree 3
Honours degree 4 10
Master’s degree 5
Doctorate 6
Other 7

f. Shortly describe any current/previous entrepreneurial ventures

established.

Business Time (months)

1 11-13
2 14-16
3 17-19
4 20-22
5 23-25

107
1. What is your position/role in the business?

Owner 1
Manager 2 26
Both 3
None - specify 4

2. For how long has your business been in operation?

0-2 years 1
3-5 years 2 27
5-10 years 3
10+ years 4

3. In which economic sector would you classify your business (mark with
an X)?

Agriculture 1
Manufacturing 2
Construction, Mining 3
Business Services 4 28
Finance 5
Transport, Communication 6
Health Care, Education, Social Services 7
Wholesale, Motor Vehicles and Repairs 8
Customer Services 9
Others 10

4. How many people do you employ?

A micro enterprise ( < 5 People ) 1

A very small business ( 6-20 people) 2
A small enterprise (20-50 people) 3 29
A medium enterprise (50-200 people) 4
A large enterprise ( > 200 people) 5

108
5. In which stage of life cycle phases is your business currently in? (Mark
with an X).

Seed capital – relatively small amounts to prove

1
concepts and finance feasibility studies
Start-up – Funding to actually get company operations
2 30
started
Expansion – Working capital for initial growth and
3
major expansion for enterprise with growth
Bridge financing – to prepare company for public
4
offering
Other (Specify) 5

If answered other, please explain:

6. How did you raise your start-up capital?

Family and friends 1 31

Own savings 2 32
Commercial bank 3 33
Khula Finance Limited 4 34
Others (Specify) 5 35

7. Which of the following problems have you experienced in your

business in respect of financial support?

Lack of start-up capital 1 36

Lack of establishing funds/capital 2 37
Lack of credit facility from the suppliers 3 38
Lack of bridging capital 4 39
Lack of funds for expansion 5 40
Other 6 41

If answered other, please explain

109
8. Which of the following financial entities have you approached for
financial assistance? (indicate one or more)

ABSA Bank 1 42
Business Partners 2 43
First National Bank 3 44
Khula Finance Limited 4 45
Micro Lenders 5 46
Nedcor Bank 6 47
Standard Bank 7 48
Stokvel 8 49
Others (Specify) 9 50

If answered other, please explain

9. At which of the following financial entities was your application

successful?

ABSA Bank 1
Business Partners 2
First National Bank 3
Khula Finance Limited 4 51
Micro Lenders 5
Nedcor Bank 6
Standard Bank 7
Stokvel 8
Others (specify) 9

If answered other, please explain:

110
10. Rate the service quality experienced at the
financial institution/s in the application process.

Very Poor Average Very

poor good Excellent
Characteristic
1 2 3 4
5
52
Friendliness of
staff
53

Feedback time
54
Supply of all
information
55
Assistance in
filling forms
Assistance in 56
drafting business
plan
57

Other (specify)

If answered other, please explain:

11. Which of the following obstacles have you experienced in the

application process?

Communication problems – no forms in local

1 58
language
Lack of collateral 2 59
Bad credit record 3 60
Lack of business skills 4 61
Other (Specify) 5 62

If answered other, please explain

111
12. How did you know of the funding institutions for SMMEs?

Referral by friends and relatives 1 63

Over the radio 2 64
Television advertisement 3 65
From the Department of Trade and Industry 4 66
Others (Specify) 5 67

If answered other, please explain:

13. Which of the following obstacles have you experienced in the

application process for financial assistance?

Complexity of application forms 1 68

Too many forms to fill in 2 69
Lack of collateral/security 3 70
Time frame of feedback was to long 4 71
Ability of banker to inform and assist in the entire
5 72
application process
Other (Specify) 6 73

If answered other, please explain:

14. If your application was rejected, what were the reason/s for the
rejection?

Bad credit record 1 74

Lack of collateral 2 75
Poor business plan 3 76
Character of the entrepreneur 4 77
Others (Specify) 5 78

If answered other, please explain:

112
15. Which other institution did you approach to finance your business?

Khula Finance Limited 1 79

Business Partners 2 80
Ntsika Enterprise Promotion Agency 3 81
Micro lenders 4 82
Stokvels 5 83

16. If you have not approached any of the above 4(Q15), please indicate
why:

No knowledge of the entities 1 84

Inaccessible (eg phones just ringing) 2 85
Got money from friends and family 3 86
Play the lotto for hope 4 87
Other (Specify) 5 88

If answered other, please explain:

17. Do you believe entrepreneurs need training?

Yes 1 89
No 2

18. If you select yes, in question 17 above, please indicate in which field the
need for training exists

Motivation skills 1 90
Entrepreneurial skills training 2 91
Business skills training 3 92
Other skills, please specify 4 93

Thank you for participating in this research intervention.

113