African Journal of Business Management Vol. 4(13), pp. 2763-2770, 4 October, 2010 Available online at http://www.academicjournals.org/AJBM ISSN 1993-8233©2010 Academic Journals Full Length Research Paper The determinants of access to trade credit by new SMEs in South Africa Olawale Fatoki 1 * and Akinwumi Odeyemi 2 1 Department of Business Management, University of Fort Hare, Eastern Cape, South Africa. 2 Department of Statistics, University of Fort Hare, Eastern Cape, South Africa. Accepted 30 July, 2010 This study investigates empirically the determinants of access to trade credit by new SMEs in the Eastern Cape Province of South Africa. The review of literature revealed that non-availability of finance especially trade credit is one of the primary reasons for the high failure rate of new SMEs in South Africa. Data was collected through self-administered questionnaire from 417 respondents out of which only 71 were able to access trade credit. The results of the logistic regression indicate that managerial competency, the availability of business plan, belonging to trade associations, previous relationship, location, business size, insurance and incorporation are significant determinants of access to trade credit by new SMEs in South Africa. Key words: New SMEs, trade credit, logistic regression. INTRODUCTION South Africa suffers from high unemployment with an official estimate of approximately 23.5% of the economically active population unemployed (Statistics South Africa Labour Force Survey, 2009). SMEs are therefore expected to be an important vehicle to address the challenges of job creation, sustainable economic growth, equitable distribution of income and the overall stimulation of economic development. SMEs (refer to Table 1 for definition) are also an important source of innovation in the development of new products, services and technologies. The contribution of SMEs to private sector employment (56%) and to gross domestic product (36%) implies a very high labour absorption capacity and highlights the job creating potentials of this sector and its importance to the reduction of unemployment in South Africa (Ntsika, 2002). Gree and 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 *Corresponding author. E-mail: ofatoki@ufh.ac.za. Tel: 00927 40-653-2248. than forty two months. Wong et al. (2005) point out that Schumpeter in 1934 was one of the earliest economists to argue for new firm creation. According to Schumpeter, new firms are the vital force behind the progress of capitalism. The innovative activity of entrepreneurs feeds a creative ‘‘destruction process’’ by causing constant disturbances to an economic system in equilibrium, creating opportunities for economic rent. According to Maas and Herrington (2006) new SMEs are seen as a significant component of the solution to South Africa’s development issues which include poverty, income inequality and unemployment. However, the creation rate of new SMEs in South Africa as measured by the total early-stage entrepreneurial activity is one of the lowest in the world. Herrington et al. (2009) observe that in 2008, South Africa ranked 23rd out of 43 countries, with a Total Early-Stage Entrepreneurial Activity (TEA) of 7.8% which was below the average rate (10.6%) of all the countries surveyed by global entrepreneurship monitor. The TEA is a primary measure of new small firm creation used by GEM. South Africa’s TEA rate of 7.8% is significantly lower than the average for all efficiency-driven economies (developed countries) (11.4%) as well as the average for all middle to low