COVID-19 and small business support: South Africa needs a credit guarantee scheme

As South Africa deals with its worst crisis since the start of democracy, the implications and potential fallout for small businesses requires urgent measures that respond to the different needs and requirements of the range of small enterprises.

Small businesses stand to be hard hit by COVID-19. With limited availability of cash on hand to buffer the typical small business, both the time in lockdown and the immediate period before (with increasing social distance measures), would drain all but the most resilient nonessential services enterprises. While different for different sizes of small businesses, the resources available to small business are typically limited, and a period of low demand, then a shut-down, followed by a prolonged recession is bound to cripple the sector. In the current national and global situation, companies may not be able to borrow at all and implementing a support measure to improve access to finance could be a lifeline for many small businesses while further government measures are implemented establishing effective systems to support the recovery. Furthermore, support measures need to be considered not only for those businesses that will require funds to continue operations, but equally for new entrants who will be coming into the small business space –either because they have been retrenched and looking for a new form of livelihood, or those who identify new business opportunities in a very different economic landscape that will emerge as a result of the COVID-19 crisis.

This policy brief identifies the benefits of implementing a comprehensive credit guarantee scheme that would move the needle in small business support and improve liquidity. Three possible measures that could be used are proposed:

• a credit card that is guaranteed by the government;
• a guarantee for trade credit providers;
• and a credit guarantee for bank SME portfolios.