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No easing a rough start

BENEDICT KELLY | JOHANNESBURG, SOUTH AFRICA - Nov 23 2009 14:45

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Business owners face the greatest challenges in the first 18 months in the life of a business.

Typically those businesses that are not going to prove viable will fail during this start-up period. South Africa is a country where it is difficult to establish a business for a variety of reasons.

Michael Vacy-Lyle, head of sales and client relationships at FNB Commercial Bank, says the amount of red tape that start-up businesses have to deal with only increases this burden.

“New businesses typically have to register as a company, register for VAT and with Sars [South African Revenue Service] as well as appoint an accounting officer and open a bank account.

“Some of these steps are interdependent and, because of this, small businesses often fall into a maze of bureaucracy, with little assistance available. For those who have not done this before it can be daunting,” says Vacy-Lyle.

The issue of support for small businesses is something lacking in South Africa. This support would typically come in two forms, financial and business experience.

Readily available experience, especially, is hard to find. It could take the form of advice on how to deal with labour issues or how to safeguard intellectual property.

“On the whole, initiatives by the various arms of government have not done enough to stimulate entrepreneurship and more work needs to be done in this area,” he says.

“Coupled with the unfriendly business environment, it is no surprise that accessing business support rates higher on the needs of new businesses than accessing financing.”

CONTINUES BELOW

Vacy-Lyle says most new ventures struggle to find a mentor system to see them through their first year. Part of the problem is that South Africa lacks a strong culture of entrepreneurship.

Despite there being a strong informal economy, people still view formal employment with an established company as the preferred method of finding a job.

This, in addition to the failure of the education system to instil a culture of entrepreneurship in learners, has resulted in fewer companies starting up in South Africa.

Even when companies do approach banks and other financial institutions to raise funds for the business, it is still difficult to get funding.

Vacy-Lyle says there is an active early-stage funding market in both the United States and the United Kingdom, which makes it easier for people with bright ideas to access start-up capital.

“In the US and UK early-stage capital is an asset class on its own and even formal investment schemes such as pension funds actively invest in these opportunities. This is not the case in South Africa, unfortunately.”

He adds that even tax relief given to venture capital funds has not had the desired effect of increasing the flow of capital to new businesses.

Banks are hesitant to lend money to companies without a proven track record because of their conservative attitude towards lending, and this limits the ability of start-up businesses to go this route.

The easiest way to raise finance is from friends and family, but this is equally fraught with difficulties.

Tips for the small business

Write out your business plan: Know exactly what it is that you do and how you are going to make money out of it.

Do your research: Know what you are selling, who your customers are and who your competitors are. The more information you have, the more likely you are to succeed.

Understand what it is you need to do to execute your plan: Ensure you have a clear understanding of exactly how much capital you will need. Rather revise your business plan so that it aligns with your capital reserves than embark on a venture that is doomed to fail because of inadequate capital.

Only go to the bank once you have done all of the steps above: Banks are conservative organisations and won’t part with their funds unless they are sure that you are not a risk. Although you may want to play your cards close to your chest, it is better to disclose as much as possible to the bank.

Run your small business like a big business. Take the strategies that big businesses follow and adapt them to suit your business. For example, follow proper human resources procedures, don’t take too much money out of the business and follow proper accounting procedures.

Helpful links
www.smallcapital.co.za
www.biznetwork.co.za
southafrica.smetoolkit.org
www.bizassist.co.za
www.thevirtualconsultancy.com

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