Absa Business Banking Director Elizabeth Wasunna (left) with Melanin Kapital CEO Melanie Keita during the signing of a partnership on access to finance for women-owned and led SMEs. PHOTO | DIANA NGILA | NMG
Volatile. Uncertain. Complex. Ambiguous. Small businesses have experienced all these in the period commonly referred to as VUCA.
From the conflicts in Syria and Ukraine, the 2008 global financial crisis, to the 2016 Brexit referendum and the Covid-19 pandemic, businesses globally have suffered the brunt of global disruptions.
Small businesses have been disproportionately affected due to a lack of business maturity and shock absorbers to absorb the numerous shocks in the VUCA environment.
In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs. Based on these statistics, small businesses are not just a part of the economy but a key driver of the global economy.
However, between February 2020 and April 2021 70 per cent to 80 per cent of SMEs in OECD countries lost 30-50 per cent of their revenue.
The challenge for most SMEs is inherent in their business structure. Due to their size and resources, SMEs tend to be reactive with short-term decision-making processes due to the lack of adequate financial and technical resources, with long-term strategies sacrificed for urgent and immediate needs.
Financial capital and cash flow also hold back SMEs from funding their operations and scaling innovation and productivity and most SMEs lack the right talent and capabilities.
Based on this, policymakers have a role to play in these challenging times to build the sustainability and resilience of small businesses.
One constant thread in the conversations with the SME ecosystem in America during my current Eisenhower Fellowship has been the role of the small business administration (SBA) in supporting SMEs.
While the SBA might not be a silver bullet, there is an opportunity to identify areas of intersection based on lessons learnt over many years.
President Dwight Eisenhower signed the Small Business Act into law on July 30, 1954, creating a new agency, the US Small Business Administration (SBA).
SBA is the only Cabinet-level federal agency fully dedicated to small businesses and provides capacity building, advice, capital, and contracting expertise as the nation’s only go-to resource and voice for small businesses.
This has created a strong SME ecosystem with positive spillovers.
At the heart of the support for SMEs is access to affordable and patient capital. Governments can use the policy and regulatory space to enable increased SME access to finance.
Due to old business models and reliance on legacy processes, the banking and financing systems often struggle to create the right lending solutions for their SME customers and fail to adequately address the needs of women businesses and small businesses in capital-intensive sectors like manufacturing.
This can be tackled by designing targeted SME funds and setting up credit guarantee schemes that work. In the US, for example, such funds are channelled through small business investment companies (SBICs) licensed by the SBA with an incentive structure in place for banks to invest in the funds.
Improving credit infrastructures like credit reporting systems and collateral registries can also lead to greater SME access to finance as alternative data for credit decisioning and supply chain financing.
Finance on its own is, however, not a panacea, with the development of managerial skills in small businesses being equally important.
Research reveals that over 50 per cent of new businesses fail during their first five years and the most effective way to support SMEs is by pairing financial support with advisory services.
Although SMEs can close shop for many reasons, the importance of professional advice and expertise to help guide the business through the myriad of business issues is vitally important.
Government policy must therefore buffer financial support with managerial and entrepreneurial skills development and capacity building.
Policies to support business incubation and acceleration programmes can equally play an important role in supporting SMEs’ business plans and navigating challenges from the idea stage through the growth stage.
The programmes can also include access to common user facilities for SMEs and linkages with academia for the incubation of businesses and tax incentives for public-private partnerships.
These programmes should ideally be linked to local procurement and internationalisation that enable SMEs to strategically expand beyond their home markets.
The writer is the senior private sector development advisor, Industrialisation Practice at Tony Blair Institute for Global Change.
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