Abstract
New SMEs are very important to the economy of South Africa. Their failure rate at about 75% is one the highestin the world. Lack of finance is one of the primary reasons for the failure of new SMEs in South Africa. About75% of all applications for bank credit by new SMEs are rejected. This objective of the paper was to investigatethe determinants of credit approval for new SMEs. The survey method and self-administered questionnaires wereused for data collection. 445 respondents took part in the survey. Data was analysed by logistic regression. Theresults indicate that managerial competencies, business information, networking, location, crime, business sizeand incorporation are significant determinants of credit approval.
Highlights
Small and medium enterprises (SMEs) are increasingly seen as playing an important role in the economies of many countries
The results indicate that apart from owners’ funds, commercial banks are the major potential source of funds for new SMEs
Out of the 406 respondents that applied for credit from commercial banks, 112 respondents (27.6% were successful and 294 (72.4%) were unsuccessful
Summary
Small and medium enterprises (SMEs) are increasingly seen as playing an important role in the economies of many countries. Gree & Thurnik (2003) argue that the contribution of the SME sector cannot be sustained without the creation and sustenance of new SMEs. According to Maas and Herrington (2006) a new SME in South Africa can be described as an SME that has been in existence for less than forty two months. Various challenges and impediments prevent the creation of new SMEs and as well cause the high failure rates of new SMEs in South Africa. One of these is the non availability of formal sector financing
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