1 issue three September 2005 A practical guide for small business owners The money issue Securing finance Managing finance
2 Turn yourself into an expert Why small business owners have to be financial managers Banking on credit Must-haves for bank financing; vital info checklist; equity vs loan capital; why banks decline loans Creative financing Where else to find capital; the cost of forex; talking terms; BEE funding Put your bank to work Banking online; connectivity basics; balancing the costs of connectivity The taxman and you Choosing a tax professional; registering for VAT; VAT basics; typical tax mistakes; travel allowance checklist; efiling 16 Getting to know you Improving your relationship with your 38 Analysing your vital statistics Using statistics to reach your goals; bank; helping the bank to understand useful tools; identifying trends; your business business issues 20 Kick-start your business Buying a going concern; franchising 42 Smart relationships Choosing the right ISP; paying by cell vs growth; put yourself in the seller s phone; using the Internet as a business shoes; valuing a business tool; online financial management 24 Cleaning up your credit Dealing with bad debt; bankruptcy a 46 Financial glossary of terms PLUS where to learn more must-see last resort; avoiding debt stress websites and useful contacts 18 Wind beneath your business wings The ups and downs of angel investors; local options; Raymond Ackerman a South African success story 28 As easy as 1, 2, 3? Accounting basics; the double-entry rule of thumb; making your money count; tools to build a budget 123
3 The Small Capital practical guide for small business owners is proudly brought to you by: Finance, schminance heard it all before? Securing finance and managing it wisely are two of the toughest challenges facing small business owners in South Africa. Are you reaching for the 01 headache pills already? Then read on. If approaching the bank for a loan or any kind of fi nance leaves you cold, there are some simple solutions to ensuring that the buck doesn t stop here. This Small Capital handbook is the third in a series of practical guides that provides essential advice and need-to-know info for small business owners in South Africa. This issue explores why strong fi nancial management is key to securing your business s future. It covers everything from fi nding bank fi nance, tackling investors and approaching government, to managing debt, credit and fi nancial relationships with banks, suppliers and customers just what you need to avoid that fi nancial hangover. The opinion(s) view(s), information, article(s), reference(s), competition(s) or offer(s) (the Material ), contained in this publication are published without any responsibility whatsoever on the part of Real Business, MWEB Business, Microsoft and Standard Bank (the Sponsors ) or Words worth (the Publisher ). The Material contained herein is based on the best available information at the time of publishing. The Sponsors and Publisher hereby disclaim responsibility for any Material contained in the publication which may be incorrect, unacceptable or inaccurate, and shall therefore not be held liable under any circumstances, for any loss, damage, costs, expense or injury (including without limitation direct, indirect, incidental, special, punitive or consequential loss or damage) which loss, damage, costs, expense or injury results from a reader or other third party, utilising any Material herein. Don t miss out Send us your details and we ll put you on the Small Capital mailing list to receive future editions for FREE. Subscribe online at
4 2 Financial manager vs bookkeeper A financial manager is concerned with planning, policies, controls and procedures, while a bookkeeper records normal business transactions in accordance with the instructions established by an accountant. The accountant may help to select and train the bookkeeper as well as provide technical supervision. The accountant normally reports to the financial manager, but in the case of a small business, the same person might fill both roles. The financial manager could be the business owner or an outside expert, depending on the size of the business, its financial complexity and the capabilities of the owner. In many instances, the small business owner handles day-to-day financial management and uses an accountant a few times a year to deal with more specialised tasks such as preparing year-end statements and expanding the business. Most office software systems include financial management tools that are ideal for small business owners. For example, Excel spreadsheets can be used to prepare sales forecasts, income statements and cash flow projections. For more information on financial and accounting templates visit Turn yourself into an expert You run a business that is in the business of making money but are you managing your own finances properly? Sound fi nancial management is part of everything that you do. Whether it be sales, produc- Improve your ability to do things right the fi rst establish levels of customer satisfaction. tion or personnel, good fi nancial management time. helps you to deal with each of these functions effi ciently. Legislative issues are a major challenge for small business owners in South Africa, and proper All your activities have a fi nancial implication systems help to ensure that the basics are taken directly or indirectly and good organisation care of so that you can get on with the business is a must if you want your business to be profi table. You need to know exactly how your business of doing business. is doing and how successful you want it to be. For example, you need to develop a good tax and Unemployment Insurance Fund (UIF) system Having good systems that you can manage to manage the daily running of your business easily and effectively help you to cope with and to enable you to retrieve information as unexpected demands and deal with the everyday quickly as possible. If SARS requires information running of your business in a planned manner. on your employees you have to be able to fi nd But it is not just about bookkeeping. Proper and provide the correct PAYE and UIF information (as well as your own) almost immediately. fi nancial systems enable you to: Keep track of how your business is doing. Not keeping the necessary employee records, or Manage cash fl ow, workfl ow and meet not being able to access them easily enough, deadlines. can have harmful ramifi cations for your business. Monitor how well things are being done and In a nutshell, fi nancial management helps you
5 What does a financial manager do? As a small business owner, your responsibilities include keeping records, preparing budgets and forecasts, cost accounting, exercising internal controls, preparing government reports (where applicable), obtaining and monitoring insurance and data processing. 3 to obtain the fi nancial statements you need to measure your company s success, meet government requirements and gather facts for making sound management decisions. It also allows you to analyse how profi table certain activities are, so that you can take advantage of those that make more money for your business, and eliminate those that don t. Other important functions include analysing data and determining how your company is performing, making recommendations about whether to expand or downsize, as well as coordinating your personal financial and tax goals with those of the business. Your money management systems should enable you to: Handle company finances with the aim of maximising profits while maintaining liquidity and financial stability, with or without increased sales. Protect company assets from employees and outsiders. Plan financially to achieve company and personal goals, including non-financial company goals (such as having the best premises you can afford or offering the best quality products) and owner goals such as security, retirement, or leisure activities. Prepare financially for unknown developments such as new technology, competition and customer needs, changes in the economy and legislation. This also includes planning for the continued life of the company.
6 Are you banking on credit? Your business is up and running and in need of a cash 4 injection, so you ve decided to approach your bank for a loan. But getting it might not be that easy Who can help? Business consultants situated in Standard Bank branches across the country. Standard Bank website: Visit the BRAIN website at for a list of other financial institutions and what they offer small business owners, or call BRAIN on It is said that you need money to make money, and many small business owners in South Africa fi nd themselves in this Catch 22 situation when applying for fi nance. It can be a slow, frustrating and sometimes disappointing process. There are four main reasons why South African banks are wary of granting loans to small business owners. These include: 1. Your contribution (or capital injection) into the business speaks volumes. If you have contributed little or no equity to the business, banks will be wary of granting you a loan. Remember that banks don t fi nance businesses, they fi nance operating assets and working capital. So if your business is under-capitalised it may be diffi cult for you to raise a bank loan. 2. Your small business may not have a structured balance sheet as many SMEs typically do not keep accurate books. 3. Your business might not have a strong cash fl ow. The bank must be satisfi ed that you will be able to repay the loan, but this can prove diffi cult if your cash fl ow is strained. 4. You may lack the necessary business management skills to run a small business. Having an existing relationship with the bank will certainly help in your efforts to secure a business loan. For example, at Standard Bank the turnaround time for loan requests is much quicker if you have an existing current account that is well conducted. Turnaround times on loan agreements differ depending on the type of application and the extent to which the bank is provided with the required information upfront. Standard Bank s
7 usual turnaround time for a small, simple request from an existing customer, is 48 hours. However, in general, a request for an application for a new customer, where fi nancial statements need to be assessed, may take longer. If you apply for a more involved, less straightforward loan, such as Khula credit, the process can take up to three or four weeks. For more information on Khula see page 14. Some banks have specialised business managers who are specifi cally trained to provide assistance and process fi nance applications for small business customers. For more information, visit your local Standard Bank branch or call the helpline for business banking customers on Constraints facing SMEs The unfortunate reality is that there are many constraints facing small business owners who need finance. The main problem is that as talented as you might be in a particular field, you might not have all of the competencies needed to ensure the viability of a small business. There is greater potential for such a business to fail, which is why banks are often reluctant to approve a loan application. 5 Must-haves for bank finance You need collateral Before lending you money most banks will ask for collateral or security. Collateral is any asset that you own and promise to hand over to the lender if you cannot pay them back. This includes a house, a building, investments, savings or any other asset. Unfortunately, the smaller your business, the more collateral the bank may demand, as you are perceived as being a high risk. The irony is that the smaller you are, the less collateral you are likely to have. Be patient One of the most frustrating things about applying for finance is that there can be long delays in processing your application and granting a loan. Ensure that you provide all the necessary documentation to reduce the time taken. Clean up your credit record If you have a bad credit record, even if it dates back years, it works against you when you apply for assistance from a bank. Before you even apply for a loan do everything you possibly can to settle your old debt and clear your name. Be totally open and upfront about it with your bank. See page 24 for tips. Be flexible The four main banks in South Africa all have special divisions for small businesses. Even though banks regard lending to small businesses as risky, they are required by the Financial Sector Charter to promote this sector. This is exacerbated when: The application shows a lack of feasibility or pre-screening. The business plan is poor possibly as a result of being drawn up by a consultant, with little input from the owner. The proposed business plan is based on unsustainable margins. In general, banks prefer to offer asset finance rather than a general business loan, because they can use the asset itself as part of the collateral. If you fail to pay back the money, they can take back the asset, and in this way their risk is reduced.
8 Save time and money The documents required for loan applications vary according to the type of business that you run, and compiling these can be a job in itself. That s why, when you walk into a bank, you should be prepared for any eventuality. Use this checklist to ensure that you have everything you need for the bank to process your loan application quickly and efficiently. 6 Sole proprietors and sureties Copy of ID document Proof of income Signed statement of assets and liabilities 12-month cash flow forecast Close corporations Companies Trusts Partnerships Registered founding statement (form CK1) or amended founding statement (CK2) Annual founding statements/ management accounts* 12-month cash flow forecast IDENTITY DOCUMENT IDENTITEITSDOKUMENT Certificate of incorporation Certificate to commence business Certificate of change of name (if it applies) Memorandum and articles of association Annual audited financial statements/ management accounts* List of directors/ shareholders 12-month cash flow forecast Copy of ID documents Trust deed Letter of authority Annual financial statements/ management accounts* 12-month cash flow forecast Copy of ID documents Partnership agreement (if it applies) Annual financial statements/ management accounts* 12-month cash flow forecast Copy of ID documents * If company is older than six months.
9 Check list of vital info and documents It takes patience (and paperwork!) to apply for a loan, and it helps to be prepared and well organised when compiling the essential documents. Reading the small print Once a loan is granted, the terms and conditions of the agreement are confirmed in writing and a letter of grant or offer is signed. The letter of grant includes: The size of the loan. Its intended use. Collateral details. Details of the principal debt. Instalment details. Fees and interest. General terms and conditions. 7 Some South African banks use the behavioural scorecard method to work out how much they are prepared to lend you. This system calculates your credit rating by analysing patterns of behaviour in how you have conducted your account. For example, if you have issued a cheque without the funds to cover it, this will work against you in your scorecard rating. If you fi rst informed the bank that this might happen, it could work in your favour. Whether you are a fi rst-time loan applicant who has no history with the bank, or an existing customer whose requested amount exceeds what the bank would normally be willing to grant, the type of information required for the application are more or less the same. You will need to supply: Your business address, telephone and fax numbers and details. Income tax and VAT numbers. Annual turnover fi gure. Two trade references. Description of your business, including product or service offered, customer and competitor information, how you get your product/service to your customers, etc. Type of business entity, eg, sole proprietor or close corporation. Details of existing bank accounts or credit with the institution. Use the table opposite as a checklist for additional documents needed. If you feel that you are drowning in legalese when reading these agreements, you re not alone. Ask your business banking consultant what the small print means. Banks and their staff are required by the Financial Advisory Intermediary Services (FAIS) Act to help customers understand the documents they are signing and what the possible implications are. Don t be afraid to ask.
10 Show me the money There are several finance options available to entrepreneurs 8 who want to grow a small business into a bigger one. And choosing the right type of finance could determine whether Loan vs own Most businesses usually use a combination of loan and equity capital to balance the pros and cons of each. Loan capital allows you to pay the money back over a period of time and keep control of your business. However, because you have to start repaying the loan immediately, it is worth keeping the loan amount (and therefore the repayments) as low as possible. Equity gives the other party some control over how the business is run while also reducing your risk. Even if your business does not succeed, you will only be liable for a percentage of what is owed. Banks are more likely to grant loans to business owners who have already invested some of their own money, as this demonstrates their commitment and confidence. you sink or swim. There are two main sources of fi nance open to small business owners: loan capital and equity. Equity is money invested in the business from either your savings or your family and friends. Formal equity may come from public or private venture capitalists, business partners or public stock companies. Equity Equity fi nance is the capital granted by a person or institution that takes a share of your company in return for its money. This is normally used for small businesses that have good prospects for fast growth and above-average returns. To attract equity fi nance your business needs to have a good track record or a competitive product or service. You are also required to have the experience and ability to run your own business. Investors will want to see growth potential and have a good idea of what the return on their investment will be. There are disadvantages to fi nancing a small business with equity. Firstly, you have to share ownership with the investor. Secondly, it can prove costly, as you also have to share the profi ts. Loan capital Loan capital is money that you borrow from personal contacts, banks or credit lenders, usually in the form of personal loans, business loans, credit cards or other lines of credit. The main disadvantage of loan capital is that the
11 repayments negatively affect your cash fl ow each month. Therefore, banks will usually advise you to apply only for the amount of fi nance that is actually needed and to focus on appropriate capitalisation in terms of the life cycle and needs of the business. Any debt is risky if you cannot cover the monthly repayments, the fi nancier can take legal action against you. Personal loans There are many lending institutions that offer personal loan products, all with their own terms and conditions. Shop around and get a number of quotes to ensure that you fi nd the best interest rate and lowest monthly repayments. Visit for links to some of the country s most trustworthy and cost effective lenders. Business loans These are the most likely sources of credit for SMEs. Banks require a business plan and cash fl ow projections in order to evaluate the viability of the business for which you require the loan. Credit cards These come in useful when businesses wish to procure goods online, or need to pay immediately for goods and services and do not want to carry cash. They also provide a transaction history for your business. Credit terms vary and most banks offer similar options for paying the whole amount back at the end of the month or making regular payments over a set period, based on a percentage of the total borrowed. Standard Bank offers a second credit card for which no annual card fee is charged, as well as a garage card that can be linked to the credit card. Private equity heads or tails? Advantages You don t need to pay any interest as you would with a loan. Your private equity partners could bring new networks, useful contacts and management expertise to the business. The involvement of private equity in your business usually makes it easier to get other forms of finance, should you need it. It focuses your business s objectives and ensures structure, discipline and a stable base for strategic decision-making. The capital injected strengthens your balance sheet and reduces gearing (the proportion of debt relative to equity). Another avenue for finance Private equity is capital that is put into a new or growing business in return for part-ownership of the business and a share of the profits. Typically, a private equity or venture capital investor does not want permanent ownership of your business. They want to exit your business within five to seven years by selling the shares you gave them at a good profit. Disadvantages Your business will be expected to generate substantial profits so that equity partners earn good dividends on a regular basis. You will be required to regularly generate detailed information on your business s performance and prospects. The cost of complying with financial regulations can be high. It requires you to give up a share of the business and share decision-making and profits. The demand for high returns may introduce the danger of short-term thinking. 9
12 10 Collateral clarified Collateral or the lack thereof is viewed as a that cannot provide collateral, as long as the barrier to fi nance, and with good reason. Banks business owner meets certain criteria. You will have a responsibility to protect depositors funds qualify for a Khula loan if: and any entrepreneur applying for a loan opens You are the full-time manager of the business. the bank to risk. Collateral provides security You are a South African citizen. should a loan not be repaid. You make a 10% owner contribution. See page 14 for more information. There are two kinds of collateral: traditional and non-traditional. Most banks prefer traditional Historically, non-traditional collateral has been collateral, which includes assets such as property, denied to small business owners. This includes fi xed deposits, shares or supported guarantees. the accumulation of wealth and/or assets. However, in the current business climate, new Collateral free loans opportunities are opening up, especially for Khula credit indemnity supports most SMEs black-empowered businesses. How will you measure up? To qualify for bank finance SMEs are usually assessed using four main categories: MANAGEMENT? Profile of entrepreneur: This demonstrates your background, qualifications and expertise.? Management, financial and marketing skills: How you will bring in new business.? Technical qualifications: These give the bank an idea of your technical expertise. FINANCIAL? Owner s contribution: The more you put in, the better your chances.? Realistic projections: These indicate the likelihood of business success.? Debt carrying capacity: How much you can realistically borrow and pay back.? Assets: These can be used as collateral. SECURITY? Tangible collateral: Property or investments.? Intangible collateral: Suretyships, eg, by member/s of the CC.? Personal assets: You can use these to act as security for a loan.? Cash flow: The stronger your cash flow, the less risky your business looks. ENVIRONMENTAL? Industry risk: Is there a risk of pollution in the area where your business is based?? Location: Is it convenient for your customers?? Competition: Where are your competitors and how saturated is the market?? Entry barriers: Includes legislation around franchising, issues relating to how long it will take to build up your reputation and the costs of entering the market.
13 Other types of loans Most local banks offer other types of funding that include: Secured fi nance in the form of asset fi nance, Khula guarantees and other traditional banking products. Unsecured fi nance offered to the borrower in absence of security on a loan, for example in the form of an overdraft. This type of loan carries a higher price as the bank needs to cover itself for possible losses in the future. Mezzanine fi nance this may take the form of convertible debt, senior subordinated debt or preferred equity. Mezzanine debt is actually closer to equity than debt, in that you relinquish some ownership of the business and forfeit possible future profi t. Because mezzanine fi nance is not classifi ed as pure debt or pure equity fi nancing, it is diffi cult to classify. If you become insolvent, the repayment of mezzanine debt is secondary to that of an overdraft or other primary debt. Other forms of credit to start the work. Contract fi nancing, as supplied by Standard Bank, is when the bank enters into a cash fl ow lending agreement off the back of a fi rm contract. A specialist team reviews the contracting environment and assesses applications on an individual basis. As the business performs on the contract, so the bank pays regulated amounts into a controlled account. The bank will also negotiate elements of the contracting environment to facilitate greater access for BEE suppliers and enhance their sustainability. Leveraged finance provides empowerment fi nance to SMEs in the form of acquisition and expansion capital. When supplied by Standard Bank, this takes the form of structured deals normally ranging from R1 million to R25 million. This funding also includes advice on identifying a BEE partner, legal documentation to facilitate a transaction and advice on suitable tax-effi cient funding structures, such as the formation of a new company or a preference share structure. Reasons why banks decline loans Business is unsound, risk is too high, or the bank cannot determine the level of risk. Insufficient security. Lack of owner commitment. Business plan does not provide adequate information. Purpose of loan not justified. Poor character or lack of suitability of owner. Passive investment for example if you want to apply for a loan with the bank and your grandmother signs surety, she has a passive interest. Banks will regard it as reckless to risk the livelihood of your grandmother if the business does not work out. 11 There are various credit mechanisms in place to give SMEs access to fi nance one of which is For information on leveraged fi nance and contract finance. A small business might be other business banking solutions visit awarded a contract to do a particular job, but call might not be able to access the fi nance needed or visit your local Standard Bank branch.
14 12 Talking terms New and small businesses are not really in a position to be generous with credit. For example, if you import products (such as the jewellery company mentioned in the case study opposite) you need cash on hand to pay duties and taxes on products when they come through customs. The ideal way to keep customers happy without getting too deep into the debt trap is to charge a deposit upfront (eg, 50%) with the balance due on delivery. Most small businesses can get away with demanding shorter terms in return for lower pricing and superior service. You may, however, encounter difficulties when supplying larger businesses, which often have long and complicated supplier payment procedures. Balance the value of their business with the cost of carrying the debt. Also bear in mind that if you choose to carry stock to speed up the delivery process, you need to factor in the actual cost of holding the stock, eg, warehousing and storage fees, and then build this into your pricing. As a small business, try to limit your terms to 14 days maximum, and make sure these terms are understood and agreed upon by your customer before a sale is made. Who says financing your business is not creative? There may be some good reasons why you don t want to use a bank as a source of funds, and there are other ways of going about it. How you do this depends on how much you need, and it pays to be a little creative. There are a number of fi nancial sources available to you over and above the traditional ones. Start by taking a closer look at your business itself. Customer/supplier assistance Approaching your customers and/or suppliers for help can generate a healthy cash fl ow in the short term. If you have an exemplary business record you may fi nd that one or two of your bigger customers are prepared to pay on invoice or even in advance. After all, it is in their interest to ensure that a reliable and trusted source of supply remains viable. Likewise, your record could see your suppliers allocating goods to you on consignment, which means that you won t have to pay for them until they are sold. Inventory financing This is a way of borrowing cash by using your inventory as security. Manufacturers of consumer products, which tend to form a large portion of their assets, often make use of inventory fi nancing. Inventory is typically made up of merchandise, raw materials and fi nished and unfi nished products that have not yet been sold. These are considered liquid assets since they can be converted into cash quite easily. There are various means of valuing these assets, but to be
15 CASE STUDY: The cost of forex A local entrepreneur recently started a wholesale company (www.jewellerygallery. co.za) importing upmarket costume jewellery. Initial investigations at craft markets and boutique owners in KwaZulu-Natal showed a positive response. The products have since been launched in South Africa. One of the owner s concerns, however, is how to manage the financial implications of selling a product in Rands after a delayed period, when it is initially paid for in forex. André Joubert, general manager of MWEB Business, responds: The obvious concern is that if you set your prices in Rands, changes in the exchange rate might mean you wind up paying more for a batch of products than you can sell them for. At the same time, you d like to be able to offer your regular buyers consistent pricing in the local currency. Your best option is to investigate forward cover, a type of foreign exchange insurance that is available to businesses of any size. You pay a forward rate today, which covers you for a set period against fluctuations in the currency tomorrow. It costs money, but this can be built into your pricing structure. The advantage is that it allows you to fix your prices for extended periods, or at the very least, minimise the impact of changes in the exchange rate. You can therefore plan accurately, without any nasty surprises. Think carefully about how far forward you would like to cover yourself the last thing you want is to be covered at a rate that is way in excess of the actual exchange. Your bank should be able to advise you on how to go about doing this. For more small business case studies, read the Real Business supplement in Business Day or visit 13 conservative the lowest value is usually used in fi nancial statements. new business prospects. The travel agent could market the tour operator s itineraries on their website, while the tour operator could conduct the tours. terms. Other times the conversion feature can be granted as a sweetener, providing the investor with the option of converting debt into equity if results are good. Strategic alliances Another option is to join forces with a company that complements your business, and agree to leverage off each other s strengths in order to achieve a common goal. For example, a small travel agent and a tour operator could work together to obtain and provide services to Convertible debt This is a term used to describe debt fi nancing that has a feature allowing the debt to be converted to equity, often at the option of the investor, in the event of a default on repayment Whichever route you choose, remember that alternative fi nancing options can be tricky. Unless you are an experienced business person, it is always advisable to use a trusted consultant.
16 Sting in the tail for BEE funding 14 We all know that the government offers funding to blackempowered small business owners, but where do you apply and what is required? Helping BEE SMEs Standard Bank has dedicated Business Banking staff that assess the viability of SME customers. The bank also has a department dedicated to ensuring that BEE SMEs can apply for finance in an environment that fully understands their needs. Each province has a BEE Champion to direct and drive BEE within the province, and to assist various bank branches to develop black business prospects and opportunities. For more information visit If you are a BEE small business owner it can be a frustrating task fi nding information on how to apply for government funding. Accessing available online information is diffi cult, and searching the information super highway could quickly lead to cyber road rage! Many websites give a good indication of what government funding can do for your business, but offer no assistance on how to go about it. They also give no indication of what the criteria are. However there is light at the end of the tunnel. There are two support agencies to which you can apply for funding, both of which are linked to the South African Department of Trade and Industry (the dti). They are Khula Enterprise Finance Limited and the Small Business Enterprise Development Agency (SEDA). Khula was established in 1996 to facilitate access to fi nance for SMEs. Khula is a wholesale fi nancier, which means that you do not apply to Khula but rather to your local commercial bank, retail fi nancial intermediary or micro credit outlet. Khula fi nance is a good option for business owners who have insuffi cient or no assets to offer as collateral. To qualify for a Khula-supported loan you will need to contribute 10% of the amount you want to borrow, either in cash or equipment that will be used in your intended business. Bear in mind that an annual 3% fee is required in advance for the duration of the loan. Khula also provides services to guide and counsel you in various aspects of managing your business. Call: Toll-free helpline Visit or visit a business banking consultant at a Standard Bank branch.
17 SEDA is the dti s new support agency for the development of small business in South Africa, and was formed through the merger of the NAMAC Trust and Ntsika Enterprise Promotion Agency. SEDA offi ces offer entrepreneurs help with business plans, technical advice and marketing, and information on exporting, tenders and incentives. topics, including fi nancial guidelines on: Writing a fi nancial plan for your business. How to fi nd fi nance, where to go. Preparing your business plan for presentation to a fi nancial institution. How to tender for business. Other options There are two main types of organisations specialising in small business finance whether you are black-empowered or not: The SEDA website includes small business fact sheets that provide valuable guidance on various Assistance from the dti The Black Business Supplier Development Programme (BBSDP) is the dti s cost-sharing, cash grant incentive scheme, which offers support to black-owned enterprises in South Africa. The scheme offers small businesses funding for up to R , and provides access to business development services to assist in improving their core business competencies and managerial capabilities. You qualify if: You are majority black-owned (51% or more) and have a significant representation of black managers on your team. You have a maximum annual turnover of R12 million. Call: Web: You have been in business for at least a year. You are compliant with commercial regulatory requirements in the relevant areas of business, eg, registration with CIPRO and SARS. See How to apply Obtain the information brochure, application guidelines and an application form from the dti Customer Contact Centre. Complete the application form, attach a tax clearance certificate and submit it to the dti. For more information contact the dti Customer Contact Centre on or visit 1. Those that lend directly to small businesses These organisations consider loans to businesses that would not usually qualify for a bank loan. They are less strict on the criteria involved, but are more expensive than bank loans. You can approach Khethani Business Finance (a non-profit organisation) New Business Finance (a commercial small business) and Business Partners (see website below). 2. Those that make access to bank loans easier Organisations like Khula guarantee a portion of your bank loan while you provide collateral for the remainder. These companies take over the cost of screening applications and reduce the risk of lending through mentorship programmes. Another option is venture capital, in which investors provide funds in return for shares in the business. After three to seven years, they usually sell their shares back to the original owner or to another investor. Venture capitalists usually expect a 30% return on their investment. For more info see the Business Partners website 15
18 Getting to know you Banks have changed in recent years and 16 are not as cold and unapproachable as they may have once seemed. In turn, bank staff are encouraging customers to be open and honest about their small business needs. Approaching your bank for expansion or any other kind of fi nance can be nerve-racking, but don t let it put you off. A positive attitude will help you to start off on a good footing with your bank manager. Ensuring that the relationship with your bank manager is open on both sides is also vital. Issues such as access to fi nance cannot be done in isolation and it is imperative that your business banker knows who you are and what your company does. A strong relationship is key to ensuring that an overall Improve your relationship Be open and honest. Provide as much information as possible. Interview your bank manager to ascertain if he or she understands your business. Save time by providing information for your credit profile. Keep him or her informed of the developments within your business. Invite your banker to visit your premises.
19 solution is achieved in the ongoing process of fi nancing your business. Why forge a relationship with your bank? In the past, banks in South Africa may have felt more like Big Brothers than business partners, keeping customers at an arm s length and not seeming approachable at all. As a result, your interaction with your bank may have been limited to those times when you ve stood at the bank manager s door with your hat in your hands. Fortunately, things have improved and these days banks welcome in fact prefer building a relationship with you. This has a number of benefi ts for both parties. It helps to build up trust. Your bank gets to know you and what you do. Today banks encourage customers to keep them informed of their business s progress. You can do this by sharing your dreams and fi nancial results regularly. This approach could make future interactions with your bank easier and quicker. Keeping your eggs in one basket is a good thing. By keeping all your business in one place, you can use your personal banking profi le and existing relationship to benefi t your business. Your bank will be able to more accurately calculate the risk of lending funds to you, while you will be in a better position to negotiate lower interest rates. It makes better business sense for everyone. If your bank knows everything there is to know about you and your business, it is easier for them to assess you. Remember that your banking consultant only knows what you tell him or her. The more you share, the more he or she can help you build up your business. Must-haves when working with your bank Ensure that you have updated financial information available, including a balance sheet, income statement, cash flow projections and management accounts. Is your business plan up to date? Does it show what you are trying to achieve and how you intend to achieve it? Show that you have the passion and commitment to make your business work. Believe in what you are doing and make the bank s money work for you. Think of your bank as an investor. It has a stake in your business, so remember to treat it as you would any other stakeholder. tips to help the bank learn your business Supply your business banker with: 1. Videos and/or pamphlets of your business or products. 2. Your business plan. 3. A profile of your business and its founding members. 4. A paragraph on what your company does (keep it simple). 5. Information on your biggest clients. 6. Accreditations, certificates or awards. 7. All telephone, cell phone and fax numbers, and website addresses. 8. Information on your closest competitors. 9. Your personal business background. 10. Compliance with relevant industry standards or charters, eg, companies in the building industry must have a strong management profile that includes BEE and a policy on providing access to housing for disadvantaged people. 17
20 18 Did you know that? The term angel comes from the early 1890s when prosperous American businessmen invested their money in Broadway productions. This gave them the opportunity to associate with the theatre personalities they admired, as well as the prospect of a return on their investment. Ford Motor Company, The Body Shop and Amazon.com all had angel money backing before becoming the leading giants that they are today. Angel financing is one of the largest sources of equity capital for entrepreneurs in the United States. Is your business a candidate? Angel investors usually look for small companies that are too speculative for bank loans and too young for venture capital. Examples include the high-tech, retail, personal and health services industries. Angel investors usually prefer to invest in industries they are familiar with. For more information contact the South African Venture Capital and Private Equity Association or visit its website at Wind beneath your wings We all wish for a fairy godmother, but did you know that one in 10 start-up companies in the United States have angels on their shoulders? And they could be heading your way soon Although not a widely known concept in South the angel expecting a return of fi ve to 10 Africa, angel investing is one of the betterknown forms of private equity in Europe and the seven years. Angels tend to be more liberal in times the original amount within about fi ve to United States. It normally takes the form of a their lending criteria than venture capitalists or loan or actual equity in the start-up company. banks. Angel investors who provide funding in return Will SA go the same route? for an equity stake have usually been entrepreneurs or have enjoyed business success them- the same as overseas. Here, investments are Venture capital activity in South Africa is not selves. They are often wealthy private investors mainly tied into management buy-outs and who put money into early-stage deals offered by mergers and acquisitions, none of which involve new business owners and companies that need fi nancing start-up companies. This is because capital. major investors in South Africa are institutional; fi nancial decisions are based on a more Unlike traditional venture capitalists, angels contribute smaller amounts to businesses in the for- through the Johannesburg Securities Exchange conservative model; and access to private equity mation phase. They also add non-monetary value (JSE) is subject to rules and qualifi cations. by taking an active interest in operations, usually drawing on their own experience. Investments Not surprisingly, these institutions have a typically range from R to R , with primary responsibility to their stakeholders and
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