WHY SMALL BUSINESSES IN LOW-INCOME COUNTRIES FAIL

SMALL businesses play a vital role in low-income economies. They create jobs, drive innovation, and contribute to poverty alleviation. However, the failure rate of small businesses in these countries is alarmingly high, with many shutting down within the first few years of operation; Eswatini is one of them. From a broader perspective, this has led me to the conclusion that it is not just an Eswatini problem, but rather a problem faced by underdeveloped countries as a whole. One of the most significant challenges faced by small businesses in low-income countries is limited access to capital.

Struggle

The struggle for financial aid is a real one. Small businesses often rely on personal savings, loans from friends and family, or informal lending arrangements, which may not be sufficient to meet operational costs or scale the business. In many cases, access to formal financing, such as bank loans or venture capital, is restricted due to high-interest rates, stringent collateral requirements and an underdeveloped financial sector. Microfinance institutions do exist in most of these countries, but they are often overwhelmed by demand and unable to provide the necessary funds for growth. Without adequate financing, small businesses struggle to invest in critical resources, such as technology, training or expanding their product offerings. The lack of financial support leads to stagnation or premature closure when businesses cannot weather operational challenges, including cash flow issues, unexpected expenses or market fluctuations.

When large businesses struggle, the small ones often drown. The standard of living itself is unkind to such businesses. Infrastructure in many low-income countries, such as reliable transportation, electricity and communication networks, is often underdeveloped, making it harder for businesses that rely on these resources to survive and produce quality goods. Small businesses in such environments face higher operational costs due to unreliable energy supplies, poor road networks and limited internet access.

Failure

For example, the failure to access consistent electricity can disrupt production processes, leading to lost revenue and decreased productivity. Similarly, poor transportation networks can make it difficult for businesses to source raw materials, distribute products, or even reach customers, especially in rural areas. Inadequate infrastructure hampers business growth by increasing operational inefficiencies and driving up costs, making it harder for small businesses to compete with larger firms or informal competitors who may be able to bypass these challenges more easily.
Can this change? Perhaps if we tackle as many of these issues as we can. Small businesses in low-income countries often operate in highly localised markets with limited access to broader regional or global markets. This is partly due to poor infrastructure, as mentioned, but also because many small businesses lack the marketing knowledge or resources to expand their customer base. There is limited education on business standards and operations, so many are just ‘learning on the job,’ which is dangerous when resources are equally limited. Furthermore, low-income consumers themselves may have limited purchasing power, which creates a small market for many products and services.

Many small businesses fail because they are unable to identify or cater to niche markets that could support long-term growth. In countries where informality is widespread, businesses also face competition from unregistered enterprises that operate without paying taxes or adhering to regulations, making it hard for formal businesses to gain traction. In addition, in some countries, the lack of effective digital infrastructure limits the ability of businesses to reach customers online. Without e-commerce capabilities, small businesses in such countries may struggle to access larger customer segments, both locally and internationally. The average person running a shop barely knows anything about digital marketing or how they can use digital platforms to their advantage to grow their business. They rely on traditional methods of marketing in a fast-paced world, cutting down their opportunities to create outstanding branding.

Frameworks

The business environment in many low-income countries is characterised by weak regulatory frameworks and inconsistent enforcement of laws. Formal hurdles, such as excessive paperwork, unclear business registration processes and inefficient legal systems, can deter entrepreneurs from starting or scaling their businesses. Additionally, many small businesses find it difficult to comply with tax regulations, labour laws or environmental standards due to a lack of awareness or limited access to legal support. Many do not even have the financial education required to keep up with the legal jargon and requirements to stay legitimate and afloat.

As a result, costs are added to extend these services to others, and sometimes they resort to bribing their way out of it. Corruption is another major issue that complicates business operations. Small businesses often face demands for bribes or are subjected to arbitrary fines and penalties from government officials due to a lack of knowledge. This not only increases the cost of doing business, but also undermines trust in the formal economy, leading some entrepreneurs to operate in the informal sector, where they are more vulnerable to legal issues.

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