Funding strategies for small business sustainability in eThekwini Municipality.

Abstract

Like other developing countries, South Africa faces diverse socioeconomic challenges, such as high unemployment, skills shortages, and poverty. Various researchers have identified the creation and sustainability of small businesses as the most effective long-term solution to these issues and low economic growth. Despite their crucial role in the economy, data shows that 50% of small businesses in South Africa close within 24 months of starting, and between 70% and 80% of those that survive the initial period fail within their first five years. The situation is similar in KwaZulu- Natal, with a reported 71% failure rate for SMEs within the first 24 months as of 2020. This study aimed to identify financial strategies that new SMEs can adopt to achieve sustainability during their first five years. A qualitative multiple case study design was used, employing semi-structured interviews for data collection. The findings revealed that most SMEs heavily rely on internal financing, as it is the most cost-effective option available. Additionally, internal sources of capital are the only funding sources available to them in the first years since banks perceive new SMEs as highly risky clients and equity is not popular among the new SMEs community. For equity, SMEs must be willing to compromise a share of their business along with a certain level of control to an external entity; for most SME owners, this is too expensive even to consider. The study observed a knowledge gap in the SME community regarding other forms of funding, such as angel investors, venture capital, and strategic investors and mostly focused their attention to internal funding. Findings realised the need for substantial support from capital providers such as banks and the government to educate infant SMEs on good practices that might improve their probability of survival and sustainability. This study suggests further exploration into the high failure rate of SMEs beyond financial constraints, considering other contributing factors. The findings can benefit new small business owners, government and financial institutions supporting SMEs, and policymakers responsible for creating regulations that promote SME sustainability.