This occasional research paper utilized data from the FinScope Small Business Survey South Africa 2010 covering 5,667 small businesses. An econometric model was developed to estimate the effect of access to credit on firm size. A model for sole proprietorships including licensed businesses was separately estimated from the one for close corporations due to the latter being a hybrid form of an incorporated sole proprietorship in the sense that besides having several owners it can be sole owned. Other forms of businesses such as partnerships and private limited companies were excluded because they constituted a negligible proportion of SMEs captured in the survey.
The main conclusion of the paper is that access to formal credit by SMEs constituted as sole proprietorships has a positive relationship with firm size as measured by the number of employees. The other factors that have a positive relationship to SME size are turnover and business sophistication. Informal credit is observed not to have any significant effect on SME size, a result that is consistent with prior empirical studies. Generally, access to credit (both formal and informal) has a locational dimension. Provinces with higher GDP such as Gauteng, KZN and the Western Cape have a large proportion of SMEs with access to formal credit. On the other hand, SMEs in poorer provinces such as Limpopo, Eastern Cape and North-West largely rely on informal credit.
The policy implications of the paper are instructive. Government efforts to promote access to formal credit of SMEs are synonymous with encouraging growth of these enterprises. Interventions can be pursued on the basis of evidence-based knowledge that formal finance fosters the growth of SMEs and thus enabling them to graduate into large firms. Such interventions can be ideally targeted to the poorer provinces where SMEs are observed to rely more on informal finance than on formal finance.