The real cost of hiring: What SMEs often overlook when expanding

South Africa’s small to medium enterprises (SMEs) are under increasing pressure to grow cautiously as economic volatility, rising operating costs and stubbornly high unemployment continue to reshape hiring decisions across the country’s small business sector.

According to Statistics South Africa’s Quarterly Labour Force Survey, the country’s official unemployment rate climbed to 32.9% in Q1 2025, with formal sector employment declining by 245 000 jobs over the same period.

At the same time, SMEs remain one of the country’s most important economic engines, contributing an estimated 60% of employment and accounting for the majority of formal businesses in South Africa.

Against this backdrop, many SME owners are grappling with a critical question: should they hire full-time employees or lean more heavily on contractors to remain agile?

According to Garth Rossiter, chief credit & capital officer at Lula, the answer is far more nuanced than a simple salary comparison.

“Payroll is often the single biggest cost line item for SMEs, particularly in uncertain economic conditions,” he says. “Business owners are balancing the need to grow with the need to remain financially resilient. That’s why the hiring versus contracting decision has become such an important strategic conversation.”

Rossiter says many SMEs underestimate the true cost of full-time employment beyond monthly salaries.

“Hiring a permanent employee comes with a range of additional costs: statutory contributions, onboarding, equipment, software licences, management time and cultural integration,” he explains. “There’s also the risk associated with hiring the wrong person, which can be incredibly costly in terms of time, productivity and operational disruption.”

Recent data from the Absa/SACCI Small Business Growth Index shows that many South African SMEs remain focused on survival rather than aggressive expansion, with rising transport, utility and input costs placing additional pressure on already thin margins.

Rossiter says this environment is driving greater interest in flexible workforce models.

“Contractors can make a lot of sense for SMEs entering new markets, launching new products or taking on specialised short-term projects,” he says. “It allows businesses to test opportunities and access critical skills without immediately committing to long-term fixed costs.”

However, he cautions that over-reliance on contractors can create long-term operational risks. “Businesses still need institutional knowledge, culture and continuity. Core functions that drive long-term value should ultimately sit with people who are invested in the business over the long term.”

Lula says one of the clearest indicators of confidence in the SME sector is recruitment activity itself, with many businesses currently seeking funding specifically to expand operational capacity and hire talent.

“We’re seeing more SMEs looking for growth funding to support expansion plans and build teams,” says Rossiter. “That’s generally a positive sign because recruitment usually reflects optimism about future demand and market opportunity.”

For SME owners weighing up their next hire, he says the key is resisting reactive decision-making. “Don’t hire simply for the sake of hiring. The real question is whether the role is core to the future of the business and whether the timing is right. It’s far better to spend time finding the right person than rushing into the wrong hire.”

Image credit: Magnific