South African SMEs are feeling the pinch of higher interest rates, as the cost of capital and bad debt begins to rise. While the majority of SMEs appear to be confident in their ability to weather the storm, it is the start-up and micro-enterprise that finds itself at most risk in the face of adversity.

This has emerged from the findings of SME Survey 2008, which explored the impact of infrastructural challenges on SMEs during a time of increasing inflation, interest and petrol prices.

According to principal researcher Arthur Goldstuck, SMEs tend to get off the ground without troubling banks for business-specific loans, looking instead to existing sources of capital such as mortgage bonds. This tactic, however, leaves especially start-up companies with particular sensitivity to interest rate fluctuations.

“Although a large proportion of SMEs across the board are concerned by the impact of interest rates on their businesses, it is the micro-enterprise – companies with one to five employees – that appears worst affected,” he says.

The changing economic circumstances are reflected in whether or not companies are taking or intend to take loans. While one out of every five SMEs surveyed took out a loan in the past year, just 6% of companies surveyed indicated plans to borrow money in the coming year – and it tends to be the more established organisation that seeks funding for expansion.

“The survey suggests that micro-enterprises at the one end of the scale and larger businesses at the other are least likely to borrow, but for different reasons. The micro-enterprise owner may not qualify for a loan or is funding the business from existing resources, such as a bond, while the larger company is likely able to fund itself. Less than 4% of micro-enterprises and 13% of those with 6-10 employees plan to take a loan in the coming year. That figure rises steadily, reaching 18% of companies with 51 to 75 employees that will borrow. However, for the larger enterprises in the survey, those with more than 100 employees, the figure falls to just 4%. This suggests that the larger a company is, the better it is able to fund expansion from its own operations,” Goldstuck says.

Micro-enterprises are also most likely to fret over cash flow, with 20% of these companies indicating this to be a big issue for them. That drops to between 16 and 17% for those SMEs with up to 100 employees, and drops to 13% for those with more than 100 staff. “This shows that the micro-enterprise has the least resilience; they are not as diverse and do not enjoy the established cash flow of a more substantial organisation,” says Goldstuck, “Bad debt of course has an even more dramatic impact on cash flow for these businesses.”

However, he says, having a positive cash flow has no impact on whether the SME decision-maker has sleepless nights over high interest rates. “That is spread evenly over those SMEs with positive and negative cash flows. This makes clear the fact that SMEs are universally concerned over the precariousness of the market as it relates to the higher cost of living and doing business.”

Returning his attention to bad debt, arguably a major threat as higher interest rates restrict money supply, Goldstuck says this has increased by 31% for those companies with a negative cash flow and by a lower margin of 22% for those with a positive cash flow. “Bad debt is clearly a factor in not having a positive cash flow and is a headache for any SME,” he notes.

SME Survey is sponsored by Standard Bank and Fujitsu Siemens Computers. It is in its sixth year and tracks trends and opinions of more than 5,000 South African small, medium and micro enterprises.