Applying for business finance requires that you prepare a bankable business plan. However you don’t just prepare a business plan before checking out if funders will be interested in funding your business idea. You’ve got to determine if potential funders or investors will be interested. The other time I was working on a business plan for a client in the construction industry. I had identified the Independent Development Corporation (IDC) as a potential funder, I therefore used their business planning guidelines to prepare my client’s business plan. I got the shock of my life halfway into completing the project. In a casual chat with someone from the IDC, I was told that IDC stopped funding this sector.
Standard Bank Africa is piloting a quick loan project for small business loans of average size R50 000 (South African Rand). Normally if you apply for a small business loan of this size banks are reluctant to look at the application. Why? Because they think it’s too small, when they do their calculations to determine what it will cost them to check out your business before they can process the application (called a due diligence), they find that the cost is higher than the profit they will make if they give you the loan. In business lingo, they say it’s not viable. (This is also called a cost – benefit assessment).
The SME Quick Loan uses a psychometric profile of the applicant to assess their willingness to repay the loan. Providing access to small business finance has traditionally been challenging in African markets due to the lack of financial statements, credit history, lack of credit bureau data and collateral among small businesses. This tool, developed at Harvard University, is believed to accurately measure the loan applicant’s knowledge of his business, intelligence, entrepreneurial drive, honesty and willingness to repay loans.
My opinion is that this would help a lot in speeding loan applications. A loan application usually requires a bankable business plan and the business plan has to provide historical and projected financial statements. It must also provide options for securing the required loan. These requirements are steep for emerging micro and small businesses that I work with and a tool like this that replaces the need for financial statements and collateral is very welcome.
The tool is aimed at helping micro and small businesses largely in the informal sector to quickly get loans. The turnaround time for a loan application is 3 days. This sounds unbelievable for some of us who have to wait anything up to 6 months for loan approvals. Infact, in most instances, by the time the bank pays out, the window of opportunity will have long disappeared. I can only hope this product is brought to market soon.
The pilot project was successful in Kenya and Nigeria, the equivalent of R290 million was disbursed in TOTALLY UNSECURED small loans to 5 300 small businesses.
If you are in the continent, talk to your Relationship Manager at your local branch of Standard Bank Africa.
Big up to Standard Bank Africa, well done.
The bad news is that Standard Bank South Africa still has to make the decision to use the tool in South Africa.
Big up in advance to Standard Bank South Africa, we trust you to take care of our interests.
Mobile: 2772 087 8510
Office: 2743 722 6661
Kayakazi has an impersonal dream.
Michael Gerber, the world renowned small business consultant of the E-Myth fame, makes a distinct distinction between a personal dream and an impersonal dream. While a personal dream focuses on the needs of the dreamer and is short-lived, the impersonal dream is about making a difference in other people’s lives and is the ultimate force that drives the creation of world class companies like Apple, Microsoft, Coca Cola, DHL, McDonald’s.
Kayakazi Hanise, a well-qualified and highly experienced pharmacist with more than 10 years retail pharmaceutical experience under her belt, set out to build a world class retail pharmacy in East London. Driven by her dream of providing low to middle income communities in East London access to affordable, over the counter and prescription medicines, Kayakazi roped in consultants to help her put together her business plan. She submitted the completed document in the first half of 2009 to the Eastern Cape Development Corporation (ECDC) to apply for start-up small business finance. The application was rejected because the business plan was supposedly not addressing their requirements.
While waiting for ECDC’s response to the second submission, she found premises next to 3 major taxi ranks. She decided she was going to sign a lease agreement to secure the premises for her business and hoped approval for her business loan application would come soon. Unfortunately for the entrepreneur and her dream, the loan application was rejected again because they said the business plan was inadequate. The entrepreneur in her took over and decided to take the all-important leap of faith, with or without the loan. If she carried on waiting for external finance, she reasoned, she would one day wake up to find all her savings gone with no loan on the horizon. Already R50,000 had been spent on consultants and rentals for the vacant premises. And lots of valuable time, just over a year, had been lost while waiting for the rain that never came.
Kaya brought in carpenters to fit her new shop with the necessary store shelving. She bought stock from suppliers for cash and acquired a POS system to help her manage her sales, stock and procurement from suppliers. She then hired an assistant and opened for business in early January this year. In all she had spent close to R300, 000 of her hard earned savings. Business was slow in picking up because the outlet lacked visibility. She approached medical practitioners in her vicinity to ask them to refer their clients to her for prescription medicines. In no time she had 15 doctors referring their clients to her pharmacy to buy their prescription medicines. In addition, visibility was growing and foot traffic was slowly building.
Things seemed to be going well. Sales were growing albeit slowly. Customers were trickling in to buy, however, half the time they were not getting what they wanted because stock was not adequate. The sales were not enough to replenish supplies (costs were growing faster than income) and suppliers were not willing to provide credit because the business was new.
It is at this point that I was introduced to Kaya. She made an impression on me from the word go. Here was a professional woman who was giving up her career with all its goodies to pursue an entrepreneurial dream. Not that there are no others like her, surely there are, but what really made an impression on me was the equity, financial and otherwise, that she was putting into her business idea. As small business development practitioners we, as my collegues will agree, meet a lot of aspiring entrepreneurs some with great ideas who have no resources to back up their ideas. This is a problem to funders because they read lack of commitment when an entrepreneur says they have no financial contribution to make. And they read high risk too because if you cannot risk your own money it might mean your belief in your business idea is not rock solid. Any sign of doubt on your part no matter how small makes funders reluctant to open their wallets. To me, Kaya was the ideal funding prospect: she had invested her own savings in starting the business, the business had premises and a lease agreement was in place, it was generating sales, however small, the market was responding positively, Kaya had more than adequate technical skills required for a retail pharmacy, and she owns property in Gonubie, an upmarket suburb, which we thought would suffice to serve as as security for the loan. All she needed now was R150,000 working capital to buy stock. Surely, what bank would not see such an opportunity, I asked myself. To me, it was a given her application would be considered favourably.
We quickly put together a business plan and presented it to Business Partners, ECDC, Standard Bank and Nedbank. Business Partners quickly responded and told us the retail pharmacy market was not doing well and add to that Kaya did not have enough security to cover her R150,000 loan request. Maybe a word about this can paint a clear picture of the security issue. Kaya has a house in Gonubie, an upmarket suburb in East London. She bought the house in 2005 for R700,000. In December, 2010 she had the property evaluated. The market value was estimated at R900,000. This means the equity she had in the house was R200,000. However the banks calculate what they call the forced sale value, which is what the property would likely realise if it was auctioned. According to this calculation, the security cover was not enough. And when we suggested getting security from the Khula Guarantee Scheme, we were politely told that Khula seemingly does not honour its commitments and therefore was not an option.
Standard Bank was very disappointing, not because they turned us down but because they were not responsive. Kaya has her business bank account with Standard Bank and we assumed that there were our first logical point of call. The property had also been bought through Standard Bank. We assumed the bank had a relationship with her considering her excellent repayment record. We submitted the business plan on April 13, 2011 and were referred to a business banker who would assist. We tried to get an appointment with the banker a number of times and we were told different stories every time. We eventually gave up and started looking elsewhere. The business banker only started showing interest in mid July 2011 and by then, disappointed and dejected, Kaya was closing shop hoping that she would live to fight another fight in another day. As they say, we spend so much time waiting for the doctor by the time they arrive we are dead. PS. They also wanted additional security that she did not have, oomph, there is no winning.
Nedbank was very promising but were discouraged by the late payment of accounts record that was beginning to show as the cash flow distress intensified. I would have thought it was easy to understand that Kaya was falling behind on account payments because the business was not generating enough cash flows on time. This, after all was the reason why she wanted to get finance: to buy stock so as to build sustainable cash flows. Nedbank could not have any of that. Someone said banks are the biggest obstacle to small businesses, their clients are micro and small businesses but their processes are bureaucratic’. And he went further to demand that there be special rules for banking, tax and registration for small businesses. You said it all Bruce Wade, thank you.
By the beginning of June, the pharmacy was only selling what was in store. Basic essential items were out of stock. Kaya’s reserves were drying and the sales that were coming from the pharmacy were hardly enough to replenish stock, pay the rentals and other accounts.
Yola, Kaya’s first son is studying sports medicine at the University of Johannesburg while Vuyo , her second boy is doing standard 9 at Selborne College in East London. Up to last year, the boys had the best of everything for a middle income family. They were happy when their mother told them she was going into business. Little did they realise the magnitude of the sacrifices they were going to have to make in the short to medium term. By June Kaya’s reserves were drying and the lifestyle that the family used to enjoy was quickly slipping away. Tensions were building in the family. True to Michael Gerber’s words, her frustrations grew and the only way she could deal with them was to remember the thought that one day when everything is working well she will … then will she be able to do the good things a business of your own is supposed to make possible. Meanwhile the good things never materialised, instead she was behind with her bond instalments, her credit cards were exhausted and instalments were outstanding, Vuyo and Yola were, as all boys their age do, demanding their life back, a life that was taken away by this business. Family pharmacy eventually closed its doors for business on July, 31 2011,7 months into its life.
I believe very strongly that, like in other developing and even in developed countries, micro and small businesses need accessible financial support from dedicated state funded financial institutions. The small business financing landscape in the Eastern Cape is particularly bad. While the NYDA (formely Umsobonvu), and other developmental agencies in Gauteng, KwaZulu Natal and in the Western Cape are more responsive to the financing needs of micro and small businesses in those regions. I still have to see an Umsobomvu (now NYDA) funded small business enterprise in East london and Mthatha. Not all micro and small business initiatives have the potential to grow into viable and sustainable businesses that serve the interests of communities, however for those that can demonstrate that potential, let them be given the chance.
This story is told to give a face to the countless impersonal great dreams that are not allowed to grow beyond infancy. It is a great cause of concern to waste away people who are demonstrating commitment by investing financial and sweat equity into their business ideas.
Can all honourable citizens stand up and be counted, Kayakazi is waiting for your call.
Mobile 076 202 7932
Are you a South African small business looking for finance for your business?
Or do you have a business idea that you want to build into a business?
Have you heard of the Seda Stars Business Plan Competition?
Or better still, are you registered for the competition?
Right, this is an opportunity you cannot afford to miss. There is R4 million of prizes to be won. However, everyone who takes part comes out a winner in more ways than one.
What is the next step?
Call us today, we will help you to enter the competition.
We will email you the forms that you can download from your local internet café (you can ask the café assistants to help you download the forms). If you have no access to the internet café, we will put it on post by Fastmail (you pay the costs)
We will hold you by the hand every step of the way as you write your own business plan.
You don’t have to come to our offices, we use modern communication technologies to deliver our services to you. You are however welcome to visit us if you have the time, anytime.
We will send you tips about how to fill the business plan template. If you have email, you will get daily tips on your email. If you are on Facebook, connect with us and we will give you tips and answer all your questions. Whichever way of communication you prefer, we will try our best to make a way so that you can get assistance with your business plan. For those who do not have all these modern forms of communication, don’t worry, we will sms you the daily tips. We are also a phone call away if you need to hear a voice.
What do you pay for all this?
Zilch. Zero. Nothing.
Closing Date for the Competition
28 February 2012
Contact us in any one of the following ways:
Mobile: 2772 087 8510
Office: 2743 722 6661