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Finance and money

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Finance and money

Options on financing your business.

Getting finance for a new business has got to be one of the biggest problems a new start-up will face. A good business plan will give you a fair idea if how much money you will need to run the business before it generates sufficient income to pay for itself. The only problem with this is that we tend to be too enthusiastic and confident in the early days and are too close to the product to see potential pitfalls when planning our finance requirements.

In addition there are almost always the unpredictable events that can have a huge impact on sales and costs (legislation changes, crime, death, new inventions, etc.). There are also all those hidden expenses that only experienced entrepreneurs seem able to cater for and include in business plans. How easy is it to forget "minor" expenses such as ISP costs, government levies, stationery, etc. The common result is that many businesses run out of cash before they ever reach their break even point. Try and be as honest and thorough as possible when planning how much finance you will need and if you're going to err, do so on the higher costs side.

Small businesses often start up using the owner's money - either their savings or retrenchment pay outs. Be careful here that you have enough to last until your business can make profits. Some will borrow from family members, just make sure that you have an agreement in writing so that there are no disagreements later on.

Companies (such as a cc or pty) offer the chance for several persons to have a share in the company and this normally means that they will each put in money to get it going which can result in a bigger pool of cash. There are "venture capital" companies that will "lend" money in exchange for a share in the company. In order to get them to do this you are going to have to convince them that you have a good product or service and the necessary skills to make money out of it.

Loans from banks have been a common and traditional way of raising money to build companies. They have many types of products available to suit a variety of needs, but you will almost always be required to put up some form of collateral in case you can't repay the loan. Life assurance policies and homes are the most common forms of security that the bank will want. Please also make sure that you understand what you are doing when you sign the document that means you are standing personal surety for the loan, if not have a look at for some information on protecting yourself personally from financial ruin..

Try to avoid using the small loan institutions as they tend to charge very high interest rates that will in all likelihood be higher than the returns you'll achieve from your business, well in the first few years anyway.

There are a few loans available to new businesses from the government, but they generally have some strict criteria. Have a look at the DTI site anyway just in case you fall into a category:

Bizempire also runs an email course guiding new entrepreneurs on how to start up a business with the least risk and cost. The downside of this of course is that it may take a while for things to get going, but perhaps take a look anyway..

Further links can be found on our resources page

Finance and money

Pitfalls and hurdles facing the cash flow of a new business.

The sad reality of doing business is that there will always be those customers who do not pay you on time. This will likely put your cash flow under extreme pressure. It is most important that you monitor who owes you, when the amounts are due and how much is due. This should become an everyday task in which you phone and follow up on due and late payments.

The first few months are also the time when you begin to discover all those costs that you forgot about when budgeting in your business plan. Suddenly you need a digital camera for site photographs or that cell phone contract so that customers can get hold of you on the move. Try your utmost to keep these item expenses to an absolute minimum, this is not the time to be putting yourself in to debt - when you do not have a strong sales base.

During this early period you may be convinced to apply for a bank overdraft. This can be an effective business tool, but you need to be aware of the risks involved if the bank decides to recall the loan (i) They can recall at any time and they can recall the entire loan with immediate effect (ii) You as the owner will in all likelihood have to stand personal surety on any overdraft facility.

Similarly you should be careful of entering in to long term contracts (of several years) for property rental, switchboards leases, and cell phone contracts for example. These are early days and you have little idea of how or even if your business will be performing in three years time, so try not to commit to these contracts so early on.

Finance and money

Options on financing the expansion of your business.

Assuming the first few years have gone well, you may now be interested in expansion. More product lines, new more efficient machinery, extra delivery vehicles, more factory and office space - whatever happens to be your current priority. You are now in a position where finance is a little easier to get: you have a track record, a credit history, assets for collateral and probably a decent relationship with your bank manager. Use all of this to your advantage and shop around for the best deal. Take the time to chat to a qualified accountant for some good professional advice as your banker will probably put his interests above yours in some situations.

An alternative to banking options is venture capital or the silent (partner) investor. This is where someone else will provide your company with capital for expansion in exchange for shares in your company. The up side is that your personal risk is minimised, but the downside is that you now have a partner checking up on you and demanding results, they may have differing views on how to run the business and of course you have to share profits with them. Keep in mind that unless you are a limited company (not a pty ltd) and you follow some specific rules, you cannot advertise shares in your company to the general public.

There are also some incentive loan schemes with little to no interest available from the government for companies who wish to expand and invest in new machinery and people. Of course these loans have certain criteria which need to be met.

If you've reached the stage where you are expanding and providing more jobs - we salute you. Congratulations and we would really like to hear of your success stories so that we can encourage others to grow our economy in South Africa.

Some links to banking sites that could provide you with expansion finance:


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