The impact of the South African business enviroment on the availability of debt finance to new small and medium enterprises
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Date
10-Jul
Authors
Fatoki, Olawale Olufunso
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
South Africa suffers from high unemployment with an official estimate of approximately
24.5% of the economically active population unemployed (Statistics South Africa, 2009). In
addition, the country experiences high levels of poverty and income inequality. SMEs are
expected to be an important vehicle to address the challenges of job creation, sustainable
economic growth, equitable distribution of income and the overall stimulation of economic
development. According to Maas & Herrington (2006) the contribution of the SME sector
cannot be sustained without the creation of new SMEs. New SMEs are seen as a significant
component of the solution to South Africa's development issues. Maas & Herrington (2006)
also point out that the creation rate of new SMEs in South Africa, as measured by the Total
Early-Stage Entrepreneurial activity is one of the lowest in the world. In addition, the failure
rate of new SMEs is one of the highest in the world. Non-availability of finance is one of the
primary causes of failure for new SMEs in South Africa. The two major external sources of
finance for new SMEs are equity and debt. External equity is generally unavailable for new
SMEs in both developed and developing countries. New SMEs in developed countries, unlike
developing countries such as South Africa, are able to access debt finance from commercial
banks and trade creditors.
The primary objective of this study was to determine how to improve the availability of debt
from commercial banks and trade creditors to new SMEs. The argument of this study was
that there are factors in the business environment that cause debt not to be available to new
SMEs. Understanding the causes of non-availability of debt is important to determining how
to improve the availability of debt to new SMEs. For this purpose an initial 52-item
questionnaire was developed after a thorough review of the literature on the business
environment and debt finance and administered to 100 respondents from commercial banks
and 100 respondents that were trade creditors in a pilot study. Exploratory factor analysis
resulted in the reduction of 52-item questionnaire to a 43-item questionnaire and nine
underlying factors for commercial banks and 39-item questionnaire and nine underlying
factors for trade creditors. The nine factors included four internal factors and five external
factors. The internal factors were labelled as managerial competencies, collateral, networking
and business information. The external factors were labelled the macro-economy, the legal
environment, ethics, crime and corruption. Another objective of the study was to investigate
empirically if commercial banks and trade creditors perceive new SMEs as beneficial to their business.
Empirical research was conducted to investigate the impact of the nine factors on non availability
of debt to new SMEs. The instrument used was the self-administered
questionnaire. The statistical analyses included descriptive statistics, frequencies, factor
analysis, T-test, ANOVA and Pearson correlation. The Cronbach's alpha was used as a measure of reliability.
The research findings were:
• There is a significant positive relationship between lack of managerial competency and non-availability of debt from commercial banks and trade creditors to new SMEs.
• There is a significant positive relationship between lack of business information and non-availability of debt from commercial banks and trade creditors.
• There is a significant positive relationship between lack of collateral and non-availability of debt from commercial banks and an insignificant relationship for trade creditors.
• There is a significant positive relationship between lack of networking and non-availability of debt from commercial banks and trade creditors.
• There is a significant positive relationship between bad macro-economic environment non-availability of debt from commercial banks and trade creditors.
• There is a significant positive relationship between the inefficiency of the legal environment and non-availability of debt from trade creditors and an insignificant relationship for commercial banks.
• There is a significant positive relationship between ethical perception of new SMEs and non-availability of debt from trade creditors and an insignificant relationship for commercial banks.
• There is a significant positive relationship between crime and non-availability of debt from commercial banks and trade creditors.
• There is no significant relationship between corruption and non-availability of debt from commercial banks and trade creditors.
• Commercial banks and trade creditors perceive new SMEs as beneficial to their business.
The findings suggested that there is a significant relationship between the business
environment and the availability of debt. Eight out of the nine variables in the business
environment have significant relationships with the availability of either bank credit or
trade credit. The findings also indicated that are some similarities and differences with
respect to why debt is not available to new SMEs from commercial banks and trade
creditors. In addition, the findings suggested that internal factors are more important than
external factors with respect to why debt is not available from both commercial banks and
trade creditors. The study suggested some recommendations to improve the availability of
debt finance to new SMEs. The recommendations included the need to improve the
investment readiness of new SMEs. To access debt, new SMEs must have collateral and
adequate owners' equity. Training and communication can also help new SME owners to
get investment ready. In addition, owners of new SMEs should network by attending
seminars and trade fairs. The legal system has to be made more efficient in practice to
reduce unethical behaviour, crime and corruption.
Description
Thesis (Ph.D.(Business Management))--University of the Free State, 2010
Keywords
Small business -- South Africa -- Finance, Small business -- Economic aspects -- South Africa, Financial institutions -- South Africa, South Africa -- Economic conditions -- 21st century