Banking Support for Entrepreneurs

One of South Africa’s major banks recently announced increased levels of small business support, beyond what is normally expected from the banking industry. As one of the major stakeholders of the small business industry banks have for years benefited in many ways from the boom in entrepreneurial activity, often providing very little but high interest rates and tough terms to especially new businesses. In South Africa, small businesses account for about 40% of economic activity and provide a massive 60% of employment. Looking at the stats makes it easy to understand why banks would want to appear as small business friendly and this move hence comes as little surprise.


Nedbank Small Business Services recently announced that it is now offering a number of banking and nonbanking interventions to assist entrepreneurs as well as national social transformation. Business registration is a key focus area and the bank offers entrepreneurs the ability to register as a formal business entity through any Nedbank branch. 
The entrepreneur will simultaneously be able to register a business and register for 
value-added tax. 
The bank does not earn anything from the registration, but merely plays a facilitation role by using its technology to allow entrepreneurs to link with service providers, such as com-
pany registration business SwiftReg.

Enterprise development is also a focus point for the division and it has partnered with government financial institution Khula Enterprises to enable entrepreneurs who have inadequate collateral access to finance.



Further, Nedbank has noticed that South Africa has gone from being a largely resource-based economy to emerging as a sales-type industry. 
More Internet and service driven businesses, are emerging and there is a move away from heavy retailing to an emergence of manufacturing and a large services component in the country.

South Africa of course has a large range of business support organisations, with a real culture of entrepreneurship starting to develop within our nation. South Africans are naturally entrepreneurial, both from a necessity point of view as conditions for finding employment has been challenging for many years as well as from an opportunity perspective where the rich mix of races and cultures have brought about a wealth of idea and resulted in a breeding ground for entrepreneurs.

The bank says that they have started to play more of a facilitation role by using its technology to allow entrepreneurs to link with service providers, such as company registration business SwiftReg.

Together with the various other nationwide service providers such as SEDA, the IDC, SA Business Plans, Business Plan Software and the Investors Network we are confident that entrepreneurs in South Africa have a wealth of support that they can rely on and that, going forward into the next decade entrepreneurship will play an even bigger role in the growth and sustainability of the country.

The Business Plan

Just why the business plan has become such an important part of the business financing process in recent years comes as little surprise. Using the latest in business plan software products makes writing a business plan fairly straightforward. Very seldom do we find that entrepreneurs are all-rounder’s and have skills and experience in all the different functional areas of the business. Most often the potential business owner may have both an interest and experience in a certain area and for that reason that they may have come up with a solution to a current problem or challenge that he/she may have come across.

Most entrepreneurs are in essence advanced problem solvers and due to their strong self-belief and resourcefulness may take their solution further to the point where a new venture is created. Think about eh entrepreneurs that you know, consider their ideas and you will quickly see that they have really come up with a solution for either themselves, or someone they may know, whether that is a friend, customer or family member. So the point I’m making here is that the solution obviously comes from their area of expertise, plus of course a healthy serving of imagination and creativity.

When it comes to the actual starting and running of the business, numerous other skills are also involved, whether those are marketing, finance, operational, customer service or service delivery skills seldom would you have thought through the processes involved in addressing these areas. This is where the business plan becomes such an important issue.

Banks and business investors are very well aware of the large failure rates for start-ups. It’s their business to understand the risk that they are taking on and hence believe that one way for the risk to be managed is to ensure that the entrepreneur have actually through thought the various issues while engaged in the process of writing he business plan. The plan will require you to look at just about everything from marketing, to ecommerce, operational aspects, sourcing suppliers and even the legal issues involved in starting and running your business.

It’s a pity then that too often today, the only reason why someone may draw up business plan would be to comply with the demands from the bank or investor as it really can serve as a major tool to ensure that the all too often mentioned business failure rate can be improved and more entrepreneurs can make a success from all the initiative, energy and capital that goes into starting a new business.

Financing for home based entrepreneurs

A key issue for many businesses hoping to start or grow is the ability to raise financing for the business. Financing your business can be challenging despite so may sources available today and will firstly require a well written business plan. With bank lending becoming less popular with many entrepreneurs, business owners are increasingly turning to alternative sources of funding. As the owner of the business you are responsible for the rasing of finance. Few others in your business will be as committed to the process as you may be.


With the use of the internet, trade publications and newspapers it wont be long until you have a number of possibilities for business financing. However, while venture capital may be overflowing for the Internet start-ups, the real scenario for small businesses (and worse, home-based businesses) is far different.

Then again, business means risk, and success comes to those who focus on their goals and actually do something. You first step should be to start making phone calls -- talking to people, and making appointments to discuss your plans with the people who have money to invest. When you're looking for money, it's essential that you get the word out to as many potential investors as possible.

There are several sources to consider when looking for financing. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Explore all of your options before making a decision. These include –


Personal Savings.

The first place to look for financing is right at home and personal savings and assets are the easiest source of capital. If you have money set aside, you use it instead of borrowing or rounding up investors. Or, you can take an inventory of items you do not need and have a garage sale. Most people are pleasantly surprised how much cash they can raise in a single weekend. You can also use your stocks, bonds, pension plans, life insurance policies and real estate to raise the needed capital. Those who own homes oftentimes secure equity loans and use the proceeds to start a business.

However, most beginning entrepreneurs don’t have adequate personal savings to fund a business start-up. Others, on the other hand, have savings but refuse to dip into their piggy bank for a variety of reasons. It may be their retirement money or for emergencies; while others would rather use their savings as collateral and borrow against it at a low interest rate.


Family Members and Friends.

Next, turn to members of your family or close friends who have faith in you and want to see you succeed. Borrowing from a friend or relative is generally the most readily available source, especially when the capital requirement is smaller. Relatives and people you know need fewer assurances and are more open to your ideas than professional investors. They are also more patient if your business takes longer than expected to get off the ground. Offer to repay them through profit sharing.

If you are borrowing from family members instead of asking them to invest, maintain a very businesslike and impersonal procedure. To avoid putting strain on the relationship, it is better to draw up a formal agreement in order to put the terms of the loan in writing. It is important to view the participants as business associates.


Venture Capitalists.

Venture capitalists are professional investors who may be in charge of a large pool of capital gathered from a range of sources. These firms invest in new, even high-risk or speculative businesses without a proven track record, with the potential for rapid growth and high returns in a short time. They generally want equity or part ownership of a business in exchange for substantial returns (25 to 40 percent or more) when they exit typically in three to seven years. Particularly in the Internet sector, several venture capital firms have achieved capital gains of 300 to 500 percent, which are used to offset by a wide margin any losing ventures. These firms are mostly interested in potential projects that require R500,000 or more because of the high cost of investigation, evaluation and administration. While a venture capital firm may receive as many as 1,000 business proposals a year, it will typically investigate less than 10 percent and may actually invest in only 3 or 4 percent.


Angel Investors.

Angels are private investors interested in making more on their capital than they can make through traditional markets such as mutual funds or publicly traded stocks. These “angels” can be your accountant, attorney, doctors or other individuals who seek out new businesses to invest in return for equity ownership. Usually providing additional capital in the range of R25,000 to R500,000, expect angel investors to demand high returns for their investments. Relative to venture capitalists, though, angel investors are less demanding and can also be expected to provide expert guidance and mentor the start-up.

As you explain your plan to them, and ask for their advice, casually ask them if they'd mind letting you know of, or steer your way any potential investor they might happen to meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he'd look it over and offer any suggestion for improving it, and of course, let you know of any potential investors. In either case, it's always a good idea to let them know you're willing to pay a "finder 's fee" if you can be directed to the right investor.

Professional people such as doctors and dentists are known to have a tendency to join occupational investment groups. The next time you talk with your doctor or dentist, give him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an appointment for you to talk with the manager of his investment group

Note, however, that most angels and venture capitalists do not invest in home businesses.

One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. Remember, it takes money to make more money.

Flip open trade publications and business newspapers, and you will be bombarded by reports of abundance of available capital for entrepreneurial start-ups, particularly for the dot.coms. The financial news would have you believe that more money is available for new business ventures than there are good business ideas.

However, while venture capital may be overflowing for the Internet start-ups, the real scenario for small businesses (and worse, home-based businesses) is far different. Capital is hard to come-by, especially if: (a) you do not have a good business idea or business plan that will make rich backers run to you in the hope of multiplying their savings exponentially; and (b) you may have a good business idea, but you do not know anyone who matters. The problem is that most beginning "business builders” doesn’t know what to believe or which way to turn for help.

Then again, business means risk, and success comes to those who focus on their goals and actually do something. Who knows, you may be lucky and dispel stories of “tight money.” You first step should be to start making phone calls -- talking to people, and making appointments to discuss your plans with the people who have money to invest. When you're looking for money, it's essential that you get the word out to as many potential investors as possible.

There are several sources to consider when looking for financing. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Explore all of your options before making a decision. These include –


Personal Savings.

The first place to look for financing is right at home and personal savings and assets are the easiest source of capital. If you have money set aside, you use it instead of borrowing or rounding up investors. Or, you can take an inventory of items you do not need and have a garage sale. Most people are pleasantly surprised how much cash they can raise in a single weekend. You can also use your stocks, bonds, pension plans, life insurance policies and real estate to raise the needed capital. Those who own homes oftentimes secure equity loans and use the proceeds to start a business.

However, most beginning entrepreneurs don’t have adequate personal savings to fund a business start-up. Others, on the other hand, have savings but refuse to dip into their piggy bank for a variety of reasons. It may be their retirement money or for emergencies; while others would rather use their savings as collateral and borrow against it at a low interest rate.


Family Members and Friends.

Next, turn to members of your family or close friends who have faith in you and want to see you succeed. Borrowing from a friend or relative is generally the most readily available source, especially when the capital requirement is smaller. Relatives and people you know need fewer assurances and are more open to your ideas than professional investors. They are also more patient if your business takes longer than expected to get off the ground. Offer to repay them through profit sharing.

If you are borrowing from family members instead of asking them to invest, maintain a very businesslike and impersonal procedure. To avoid putting strain on the relationship, it is better to draw up a formal agreement in order to put the terms of the loan in writing. It is important to view the participants as business associates.


Venture Capitalists.

Venture capitalists are professional investors who may be in charge of a large pool of capital gathered from a range of sources. These firms invest in new, even high-risk or speculative businesses without a proven track record, with the potential for rapid growth and high returns in a short time. They generally want equity or part ownership of a business in exchange for substantial returns (25 to 40 percent or more) when they exit typically in three to seven years. Particularly in the Internet sector, several venture capital firms have achieved capital gains of 300 to 500 percent, which are used to offset by a wide margin any losing ventures. These firms are mostly interested in potential projects that require R500,000 or more because of the high cost of investigation, evaluation and administration. While a venture capital firm may receive as many as 1,000 business proposals a year, it will typically investigate less than 10 percent and may actually invest in only 3 or 4 percent.


Credit Cards

Some entrepreneurs use several credit cards to provide a substantial cash bankroll for the business start-up. In fact, credit cards are used by nearly one-third of start-ups. It is relatively easy to obtain, and eases the bookkeeping systems. However, using credit cards to launch a business is the least wise, since credit card money is the most expensive money that you can borrow. If you intend to carry a balance, the annual interest charges (12 to 21 percent) are quite steep. While credit card advances is one of the most commonly used sources for start-up financing, it is dangerously close to gambling.


Small Business Investment Companies

Don't overlook the possibilities of the Small Business Investment Companies in your area. Look them up in your telephone book under "Investment Services." These companies exist for the sole purpose of lending money to businesses that they feel have a good chance of making money. In many instances, they trade their help for a small interest in your company.


Business Development Commissions

Many states have Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Not only do they offer favorable taxes and businesses expertise, most also offer money or facilities to help a new business get started. Your Chamber of Commerce is the place to check for further information on this idea.



Money Broker or Finder

Organiations such as these normally take your prospectus and circulate it with various known lenders or investors. They always require an up-front or retainer fee, and often may nor be able to guarantee getting you the loan or the money you want. There are many very good money brokers, and there are some that are not so good. They all take a percentage of the gross amount that's finally procured for your needs. The important thing is to check them out fully; find out about the successful loans or investment plans they've arranged, and what kind of investor contacts they have all of this before you put up any front money or pay any retainer fees.

Start thinking about the idea of inviting investors to share in your business as silent partners. Think about the idea of obtaining financing for a primary business by arranging financing for another business that will support the start-up, establishment and development of the primary business. Consider the feasibility of merging with a company that's already organized, and with facilities that are compatible or related to your needs. Give some thought to the possibilities of getting the people supplying your production equipment to co-sign the loan you need for start-up capital. This is truly the age of creative financing.

The truth is this: Now is the time to make your move. Now is the time to act. The person with a truly viable business plan, and determination to succeed will make use of every possible idea that can be imagined. And the ideas I've suggested here should serve as just a few of the unlimited sources of monetary help available and waiting for you!

Investment Rands are not out of the question for a home business, but it isn’t a likely situation unless your business has the potential to gain significant stock value. This also means that your company will need to be larger than just an extension of yourself. To attract investors, you will have to make the case that the business could be sold at some point to another person or company that could pick up where you left off and continue to grow the business. If this is the case with your enterprise, you might consider going through the pain to gain investors, but be prepared to learn how the system works before you send off proposals.

Business Finance in Difficult Times

Although many small firms have been experiencing difficulties in the current economic climate, both with trade and accessing
business finance  , many smaller businesses are booming. So what does the future hold for small businesses in South Africa?

Both entrepreneurs and small business experts have said that we are through the worst, while other believe it may be that a W shaped, basically a short but unsustainable recovery. Trading conditions may continue to be challenging. Business finance from risk-averse lenders may continue to be an issue and as the case currently, Angel finance together with other types of funding may be the only option available to business looking to start or grow.

Given that small business account for 60% of all businesses in the South Africa, it will be this sector which will help lead the country out of recession. But is the SME sector currently in a fit enough state to effectively kick-start the economy? Many SMEs outside the financial, property and transportation sectors have not felt the same pain as larger businesses. Many continue to have good orders, profitable work and, if finances were pre-arranged before the clampdown by the banks, many have little difficulty in continuing financial arrangements.

The outlook is difficult but workable. Strangely, where the greatest challenge to SMEs lies is when the economy begins to recover.

The climb out of recession is the time when the greatest number of businesses fail. Those failures are not caused by poor sales or losses – many of those businesses that fail are profitable and expanding.

Rather, the reason is simple: a growing business needs increased working capital – it needs cold, hard cash. Cash to fund the next sale, cash to fund the next increase in turnover.

A lack of working capital can lead to over-trading. Despite increased turnover and profits a business may not generate enough cash to cover its daily needs. It’s a risk all companies face. If a business has a conflict between profitability and cash flow, it must choose cash flow every time.

Being a profitable growing company also means a business has greater need for finance. As turnover grows, so stock grows along with the money owed to suppliers, tying up increasing amounts of cash in these areas.

So where can businesses get the finance they need to survive the upturn?

Banks are being tougher on businesses – reviews are more common, renewals tougher and banks are demanding increased security or other guarantees, suggesting shorter repayment terms or alternative finance options.

Banks want more information, projections and plans and on a more regular basis. If they don’t like what they see, or don’t see what they expect, they are increasingly likely to withdraw facilities. Despite that, the South African banking figures show that bank lending to non-financial businesses increasing by R100 million in May, but that was after the slump in April of R2.3 billion.

Business finance is out there. Businesses needing extra capital can look to peer groups or to venture capital. This venture capital comes from two major sources – either business angels or Venture Capital funds.

These individuals or funds put up money for shares – and they risk losing the money if the project fails. Demand for funding is increasing and there is less money available, but people still want good businesses to invest in.

Given the current recession, what do small businesses need to think about, and what should they do differently?

The simple answer is that nothing should be fundamentally different – the basics always apply in good and bad times: you need to be providing the products or services that customers want. Look at those organisations that managed to thrive despite the economic slow down. When times are tough you need to be selling the product or service that customers think of first when there is a specific need. Solid client relationships are also key. The relationships you have with your clients will help them to not only trust your product or service but also refer you to their friends and colleagues. Last but not least, ongoing market research to understand the needs and situations of your clients are essential. The better you understand your customers, the better you can provide them with the product or service that they require, at the price they are willing to pay.