Are SMEs ready for SA’s economic rebound?

• Survey shows 94% of SME businesses suffered more than a 50% drop in monthly turnover due to Covid-19 pandemic.
• Rise in eCommerce resulting in more businesses’ models shifting online.
• SME cash flow vital to improve liquidity ahead of peak season trading.

The Covid-19 pandemic and the resulting global recession handed a severe blow to South African Small to Medium Businesses (SMEs). According to a Mckinsey SME Financial Pulse survey published in July, 70% of SMEs were already cutting back on expenditure and retrenching staff. By the end of the second quarter, StatsSA reported 2.2 million job losses.

Trevor Gosling, Co-founder and CEO of Lulalend, says that within the SME sector a number of key industries were severely hit by the national lockdown, mainly; travel, hospitality, offline (non-essential) retail, consumer goods manufacturing and construction.

Gosling points out that SMEs saw a significant drop in sales revenue across all sectors. “Based on our SME survey data collected in July, 94% of businesses had suffered more than a 50% drop in monthly turnover, with 75% of our clients indicating that they had seen more than a  75% drop in revenue.”

In addition, during the peak of the lockdown, approximately 90% of Lulalend’s customers indicated that they only had a one-month cash runway.

“Most SMEs don’t have large reserves of funding to see them through extended periods of low turnover and cash flow. Without the necessary funds, many businesses have struggled to meet their payment obligations, including staff payroll, rent, essential support services, as well as inventory and supply chain payments,” Gosling adds.

At the onset of the pandemic, the government launched a number of relief funds with the intention to support SMEs with access to capital during the period when economic activity was negatively affected by Covid-19. But with more applications for relief than funding available, or slow approvals of applications, many businesses have been left in a precarious financial position.

Gosling explains that low or paused trading and limited access to funding over the lockdown period had a compounding effect on many businesses. In addition, many SMEs are now gearing up for the peak summer trading period. “Now more than ever, this is the time when a healthy cash flow is vital to be in a strong position to grow. Significantly reduced liquidity impacts SMEs’ ability to service existing debts and plan for growth.”

In a report published by Deloitte on the impact of Covid-19 in SA, it noted that despite the negative impact on small business, there has been an increase in social cohesion and support for local businesses emerging from the shutdown.

This is something that Lulalend has seen across its customer base. Gosling says that the easing of lockdown regulations has contributed to a significant increase in SME confidence and business health, particularly in the retail and manufacturing sectors.

As the economy starts to recover and consumer demand starts to increase ahead of the holidays, Gosling explains that it is important for business owners to understand what their cash flow looks like over the next three to six months, and take action to strengthen it.

“Does your business have enough working capital to meet a backlog of orders or a surge in demand during the peak trading season? Understanding this and creating some predictability in cash flow allows an SME to plan ahead and invest more accurately for the future,” he adds.

Gosling says that having a healthy cash flow is critical for SMEs to take advantage of growth opportunities during this time. “A business needs to be able to make those upfront payments for inventory, fund marketing campaigns or invest in developing Ecommerce capabilities’’.

An acceleration in tech development and changing customer behaviour has led to more businesses’ models shifting online. “The boom in eCommerce and online shopping that occurred during the pandemic is here to stay for the long-term. With businesses responding to this change, we have seen a 20% increase in the number of applications coming from online retailers,” Gosling points out.

There is tremendous value for businesses in going online. Across almost all sectors, SMEs who integrate digital technology into their operating models are more likely to grow, reach new audiences, increase sales and increase efficiencies.

While many businesses would normally go the traditional lending route to access working capital, Gosling says that digital lending platforms have been able to adapt quickly to the changing landscape, and respond to the urgent need to get funding in the hands of cash strapped SMEs.

“Fintech companies, like Lulalend, have developed advanced digital systems that are able to assess the true creditworthiness of borrowers and provide the appropriate loan instruments a lot faster and more accurately than the large banks, who have not amended their lending policies to enable more SMEs to access funding,” he explains.

“With the uncertainty of the long-term impact of the pandemic and recession, business owners need to be cautious and have contingencies in place, including building up their cash reserves to improve their liquidity,” Gosling says.

Recognising the importance to SMEs of access to cash during this period, Lulalend is providing its customers with a payment holiday that would allow them to access vital working capital at no cost over the peak season. Any business that takes out funding before the end of November will only have to start repaying from 11th January 2021.