Tide turning for small business

Johannesburg - Small and medium-sized businesses have endured a long winter of discontent in South Africa, what with the recession and structural cost increases such as higher electricity tariffs.

The good news, however, is that legislative changes and other sorts of government-backed intervention will make it easier to start a small business.

In June, government hopes to pass an amendment to the Companies Act allowing cash-crimped business owners to place a moratorium on creditors.

In essence, the amendment wants to give business a second change by buying it time to restructure.

This legislative "tweaking" has been heralded by Neren Rau, CEO of the South African Chamber of Commerce and Industry (SACCI), as "broadly positive on the business regulatory landscape".

In addition, the trade and industry department unveiled a payment assistance hotline on Monday, aimed at assisting the small and most vulnerable companies with late payments.

Rob Davies, trade and industry minister, said late payments remained one of the biggest complaints of micro-, small and medium business enterprises (SMMEs).

"Although the Public Finance Management Act and treasury regulations require payment within 30 days of receiving the invoice, we know this does not always happen," said Davies.

The hotline has been operating as a pilot since April and takes telephonic and e-mail queries from public sector SMMEs regarding late payments. So far, half of the 500 queries received have been resolved.

"If they are late because of bureaucratic inertia and problems of that sort, then we want to know where this is happening," said Davies.

The Industrial Developmental Corporation (IDC) and the Development Bank also try to rescue businesses during tough times.

Industrial Sectors executive at the IDC, Shakeel Meer, said the IDC had R6.1bn to assist companies experiencing financial difficulty as a result of the economic crisis for the current and next financial years.

"Approvals for funding can include moratoria on repayment of loans for a certain period to further assist the business to stand on its own legs," said Meer.

Part of the funding could either be applied as working capital until the businesses' cash flow situation improves, or equipment that would improve the business' competitiveness, he said.

Liquidations rising

It's been a tough time for businesses. Liquidations rose 35.8% to 2 379 in the seven months to July this year compared to 2008, according to Stats SA.

According to Adam Harris, a liquidations expert at Bowman Gilfillan Attorneys, anecdotal evidence suggests liquidations have a greater effect on small to medium companies.

Liquidations of close corporations have risen 33.5% to 1 279 in the seven months to July 2009 compared to last year, said Stats SA.

Smaller companies have greater difficulty in sourcing short term debt financing and often have less cash reserves to draw on in times when cash flows are tight.

They incur proportionally greater costs in speeding up collections from debtors, which in turn slows down payment to creditors.

Additionally, small companies with limited client bases tend to be heavily affected by the loss of a single debtor.

But while liquidations have been on the up, insolvencies - when businesses don't have enough cash flow to pay creditors - are falling.

Stats SA reported recently that insolvencies had declined 17.9% to 1 425 for the six months to June 2009 compared to the previous year.

The credit crisis had "put the squeeze" on companies, but the National Credit Act, promulgated to help banks prevent reckless lending, had been "fairly successful and that might be the reason why the number of insolvencies has declined", said Harris.

And since liquidations follow insolvencies, the lag with insolvencies supports the view that a recovery is looming.

- Fin24.com

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