Ombud will level playing field for small business

The proposed ombud for small business will level the playing field for these enterprises as it could help SMEs to resolve conflicts faster and without the need to incur hefty legal fees.

The only question is how long this will take, as the department of small business development is not known for its speed.

Minister of small business development, Stella Ndabeni-Abrahams, published a summary of the National Small Enterprise Amendment Bill before she introduces it to parliament. The bill will amend the National Small Enterprise Act to:

• provide for the establishment and registration of the Small Enterprise Development Finance Agency (SEDFA) and the subsequent disestablishment of the Small Enterprise Financing Agency (Sefa), the Co-operative Banks Development Agency (CBDA) and the Small Enterprise Development Agency (Seda) in terms of the Companies Act;
• establish the Office of the Small Enterprise Ombud Service;
• enable the minister to declare certain practices related to small enterprises to be prohibited as unfair trading practices and make regulations about it;
• amend section 20(2) of the act to bring that section in line with a recent Constitutional Court judgment.  

The bill provides for the establishment of the Office of the Small Enterprise Ombud Service and for an ombud and deputy ombud to perform the functions of the office and regional offices when necessary.

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The ombud will consider and dispose small business’ complaints about the interpretation of the terms of an agreement for the procurement of goods or services, as well as the late or non-payment of amounts due to be paid to small businesses.   

In addition, the ombud will handle complaints in a procedurally fair, economical and expeditious manner and look at what is fair in all the circumstances depending on the contractual arrangement or other legal relationship between the complainant and any other party and the provisions of the Act. 

Other duties of the ombud

The office of the ombud will recommend to the minister to prohibit certain practices in relation to small businesses and provide for guidelines to do this, as well as the rights of small businesses. The minister can also make regulations relating to unfair trading practices.   

According to the summary, the bill aims to remedy the lack of effective and affordable access to a justice mechanism for small businesses as disputes between businesses and late or non-payment of amounts due are a significant reality for these enterprises across the world, with very adverse implications for their growth. 

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Therefore, small businesses need effective mechanisms to resolve their disputes in an efficient and cost-effective manner. In most, if not all, jurisdictions the most prevalent way of resolving disputes legally is by going to courts. However, the litigation route for resolving disputes places small enterprises at a significant disadvantage relative to their larger business counterparts, because:

• The financial cost of unresolved disputes is heavy for small businesses to bear;
• Even if the amount involved is large, going to court is still a prohibitive proposition for small businesses;
• The process is cumbersome, time consuming and expensive.

In any of these situations the cost for the small business may not be limited to the actual amount in dispute only but may extend to loss of the business relationship with the customer, which means loss of future revenue.

Efficient ombud can resolve complaints faster

Barry Venter, CEO at Nashua, says seeking justice in the courts is expensive and time-consuming for small businesses and therefore most small business owners are reluctant to initiate legal action when they have a dispute with other businesses and suppliers.

“An efficient ombud’s office could help them to resolve such conflicts faster and without the need to incur hefty legal fees. One of the major challenges SMEs face is getting paid on time, with many large customers managing their cash flow by delaying payments to their suppliers.”

Research shows that 91% of SMEs are currently owed money outside their payment terms and have, on average, nearly R100 000 outstanding at any given time.

“Small business owners often feel powerless when a larger customer delays payments beyond 30 or 60 days, or even does not pay at all. The knock-on effects of late or non-payment may include SMEs not being able to pay their suppliers and employees or needing to take out loans to make their payments. This bill, if enacted, could help SMEs to improve their cash flow and financial health.”

Venter also points out that the provisions of the bill are wide and go far beyond non-payment, enabling business owners to dispute incidences of “unfairness”, “abuse or unjustifiable exercise of power or unfair or other improper conduct or undue delay”, and “practice, act or omission which results in unlawful or improper prejudice to a small enterprise”.

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He says that this could offer SMEs protection against abuses such as larger companies using their market power to extract predatory pricing or unreasonable terms and conditions from smaller suppliers and customers or unreasonably disputing a credit card transaction or a large company trying to make unilateral changes to a business contract.

“Given that our franchisees are SMEs who serve the SME community, we understand the challenges small businesses sometimes face in getting paid on time and treated fairly. Levelling the playing fields and empowering these businesses could help boost their confidence and help them to thrive in a challenging landscape.”

Other amendments

Other amendments include the establishment of SEDFA that will give effect to a cabinet decision to enable and provide for integrated financial and non-financial government support to small enterprises, which are defined as including co-operatives.

The SEDFA will ensure that the small enterprise and co-operative ecosystem offers the most efficient business advice, business development services, investment support, business facilitation and incubator support as a leading business development entity that will drive economic transformation and inclusive growth in the economy by ensuring the provision of customised financial and non-financial support and greater access to finance for small enterprises and co-operatives. 

The bill also provides that the SEDFA must be established as a state-owned company with the minister as the sole representative of the shareholder. Its operations will be subject to the PFMA and the Companies Act and a board will be appointed to run it. 

The SEDFA will have to design and implement financial and nonfinancial support programmes for small enterprises, promote a service delivery network that increases the contribution of small enterprises to the economy and enhances economic growth, job creation and equity to historically disadvantaged communities and promote and develop co-operative banks and cooperative financial institutions. 

The entity will be funded by parliament, grants, donations and bequests and funding will be raised through investments. There are also criteria for using money appropriated by parliament.