BRENDAN OLIVIER: SMEs the canary in the coal mine, struggling for air

In the intricate machinery of SA’s economy small & medium-sized enterprises (SMEs) play a dual role: they are the resilient backbone supporting employment and growth, yet they are also the sensitive canary in the coal mine, the first to signal systemic distress. 

Today, that canary is struggling for air. In the face of persistent economic headwinds the survival of these vital businesses hinges on a fundamental mindset shift — from passive hope to proactive, legally-enforced defence.

While occasional glimmers of optimism emerge, the landscape is fraught with peril. A confluence of global and domestic pressures is creating a perfect storm. Foreign factors such as US tariffs, persistent geopolitical instability and the looming threat of a global slowdown compound SA’s internal woes. At home, the picture is just as grim. According to Stats SA unemployment climbed to a staggering 33.2% in the second quarter of 2025, fuelling discourse of an impending fiscal cliff. 

Unsustainable sovereign debt levels are strangling public services and crowding out private investment, making capital scarce. This hostile environment is squeezing SMEs from all sides. Hailed as the engines of job creation, they are now fighting for their own survival. Recent data underscores the immense strain: over half of surveyed small businesses fear they will not survive the next 12 months. Burdened by escalating operational costs, only one in four reports any growth — the rest are stagnant or shrinking. 

This distress is starkly reflected in financial data, with the Organisation for Economic Co-operation & Development highlighting a significant rise in non-performing loans, a trend that is particularly pronounced among SMEs. The message is clear: there is no quick relief on the horizon. 

Caught between demanding financial institutions and increasingly delinquent customers, SMEs face a perilous cash flow crunch. As payments lag across supply chains, their debtors' books swell. Yet, a dangerous instinct often prevails: the desire to preserve long-standing business relationships. 

Misguided strategy

SME directors hesitate to take decisive action, viewing the pursuit of debt as a confrontational step that could jeopardise future business. This leniency, while understandable, is a misguided and unsustainable strategy. Turning a blind eye to delayed payments might feel commercially savvy, but it is a decision based on hope, not reality. Leniency towards debtors cannot come at the expense of an SME’s own obligations to lenders, who rarely extend the same grace.

When pressure mounts, a strategic pivot is not just advisable; it is essential. Directors must abandon the soft approach and embrace formal, structured intervention to secure payments. The justification of preserving ties with a defaulting client over honouring commitments to the bank is untenable and invites severe consequences.

Lenders will not hesitate to enforce their security under mortgage bonds, notarial bonds over movable assets, or cessions of income and debtors’ books. This can quickly escalate to personal sureties being called upon, placing the personal assets of directors and shareholders at risk. In the worst-case scenario, the SME itself faces the threat of liquidation.

The solution lies in engaging legal assistance at the first sign of trouble. This is not about escalating conflict, but about managing risk and protecting the lifeblood of the business: its cash flow. Early intervention dramatically maximises the prospects of recovery and minimises long-term damage. The process begins not with a court but with a strategic review of the business’s internal processes. Simple preventive tweaks — such as implementing tighter credit policies and clearer terms of trade with robust clauses for interest and cost recovery — can significantly reduce the incidence of defaults from the outset.

—  With the prior legal groundwork in place, an SME can enter litigation, mediation or arbitration from a position of strength.

For existing delinquencies, the next step is a formal demand from an attorney. The psychological impact of a lawyer’s letterhead cannot be overstated; it immediately signals that the matter has moved from a commercial dispute to a serious legal issue, often prompting swift payment. Where immediate payment isn’t possible, an attorney can negotiate structured settlement agreements. These legally binding documents can include acknowledgments of debt that streamline future litigation, provide for the recovery of legal fees, and even secure additional collateral from the debtor, strengthening the SME’s position.

Should these amicable efforts fail, legal proceedings become necessary. While this can be a daunting prospect, it should be viewed as a strategic tool. With the prior legal groundwork in place, an SME can enter litigation, mediation or arbitration from a position of strength. Even the challenge of a debtor entering business rescue — a process often abused to delay creditors — can be navigated effectively with expert legal guidance. A seasoned attorney can scrutinise the viability of a rescue plan, advocate for creditors’ rights, and push for a resolution that prioritises payment.

Many business owners view legal engagement as a prohibitive cost. In this strained economy it must be reframed as an essential investment in survival. Waiting until a cash flow crisis becomes a full-blown catastrophe is a recipe for disaster. By acting promptly and decisively, directors not only protect their companies but also fulfil their fiduciary duties, mitigating the risk of personal liability.

Seeking sound legal and financial counsel is no longer optional — it is an imperative for building resilience. By doing so, SA’s SMEs can transform their vulnerability into strength, ensuring they not only weather this economic storm but emerge ready to rebuild.

• Olivier is director: insolvency & business rescue at Werksmans Attorneys.