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Starting a Business in South Africa

4th ,Apr, 2022
Programs
Overview

There are many reasons why entrepreneurs start businesses in South Africa – from wanting to bring an innovation to life, wanting to create jobs or to earn a living.

Establishing a business also contributes to economic development and helps to alleviate poverty and unemployment. The contribution of SMEs to the economy is explained in the Small Business Institute (SBI) report, ‘Tackling the “Disabling Environment” to boost Economic Growth, Small Business and Jobs’.

“Under the right conditions, a vigorous and thriving SME community can enhance competition, entrepreneurship, job growth and spur economy-wide efficiency and innovation.”

Small business challenges

Despite this, starting a business in South Africa is not without its challenges. South African entrepreneurs are having to start up new businesses during a period of poor economic growth and low business confidence which has been made worse by the COVID-19 pandemic.

Additional challenges that first-time entrepreneurs face are the high cost of business compliance and limited access to startup capital.

There are many regulatory and legal frameworks that new businesses have to comply with. These are outlined in the SME South Africa report, ‘An Assessment of South Africa’s SME Landscape: Challenges, Opportunities, Risks & Next Steps’.

“South Africa’s highly regulated business environment includes extensive red tape surrounding labour laws, tax, annual registration and sector specific regulations, widely regarded as an impediment to small business development.

Access to capital poses a similar challenge to the growth of small businesses. Many entrepreneurs struggle to get funding. This is predicted to become even more difficult as the majority of funding institutions become more risk-averse as a result of COVID-19.

With that said, there are still some opportunities for entrepreneurs willing to embrace these challenges. Below are important considerations for entrepreneurs looking to start a business in South Africa. Find out how to access funding, the legal requirements and business ideas to launch.

Preparing A Business Plan

A business plan is essential for all enterprises, whether your business is starting up or already established and provides a roadmap for future development. It can also help you evaluate the viability of your business and attract potential investors.

Some of the necessary factors a typical business plan should have, according to the SME Toolkit website, are a vision statement; your team; business profile; economic assessment; cash flow assessment; marketing plan, expansion plans and a damage control plan.

Business Plan Template For Small Businesses

Download the Business Plan Template

  • Test out a new idea to see if it holds real promise of success.
  • Help you obtain financing and attract potential investors.
  • Identify and arrange strategic alliances.
How To Register A New Business

An essential part of running a compliant business is ensuring your business is registered with the Companies and Intellectual Property Commission (CIPC). 

Some of the benefits of registering your business in South Africa are business name protection, business compliance and access to government tax incentives and financial assistance. 

It’s reasonably simple to register your business. Entrepreneurs can register a new company online on the Companies and Intellectual Property Commission (CIPC) website, or on the Bizportal.gov.za website. An alternative way to register your company is through any of the big banks such as First National Bank and Nedbank.

Business ownership structure

An important consideration when registering your business is selecting the right business ownership structure. 

There are 5 currently legal entities that entrepreneurs can choose from, including:

  • Sole proprietorship
  • Partnership
  • Private company
  • Business trust
  • Personal liability company (for members of professions such as attorneys, medical practitioners, accountants or quantity surveyors)
  • Combinations of legal entities

There are implications for the various types of entities that entrepreneurs should be aware of such as “varying degrees of responsibilities such as reporting, compliance, tax positions or exposure to liability in personal capacity”.

The legal structure you choose should also fit your growth strategy, growth potential, nature, the complexity of your business model and planned exit. 

Read the full article:  What To Consider When Choosing A Structure For Your New Business

See also: For guidance on choosing the right ownership structure READ: Choose The Right Type Of Ownership For Your SME 

Raising Capital For Your Start Up

For entrepreneurs looking to launch businesses there are a number of funding options available, including business loans, venture capital investors and alternative lenders that back startups.

To determine which funding option is right for your business it’s important to consider factors such as the terms of funding, dilution of ownership, risk versus return and impact on cash flow in future. 

Government funding

The South African government offers a range of funding instruments for small businesses. They are: 

  • Full or cost-sharing grants: Government funding or support that does not have to be repaid. 
  • Incentives: Assistance programs to encourage small businesses
  • Equity funding: Funding offered in exchange for equity in the business 
Investors

Investment companies or venture capital (VC) firms will only put money into businesses that already have some traction. In return, investors will require an equity stake in the business. 

Business loans

Debt financing from a traditional bank or an alternative lender.

Alternative lenders

Funders who provide small businesses with a variety of financing products, usually over a short period. 

Read more: Top Business Loans For Small Businesses In South Africa

We compare some of South Africa’s best business loans. Get info on how to get a business loan in South Africa, the loan terms, repayment periods and how to choose the best option for your small business. 

Starting A Business Without Startup Capital

Most South African businesses are self funded with only a small minority managing to get funded by private investors or development finance institutions. There are, however, options available for entrepreneurs. 

Bootstrapping

Bootstrapping is an option for businesses that cannot access funding from formal lenders such as banks and venture capitalists. 

Some of the ways of bootstrapping a business include: “using personal income and savings, sweat equity, as well as having a fast inventory turnaround, and a cash-only approach to selling as well as keeping their operating costs low.” 

Mushambi Mutuma, author of Tech Adjacent and entrepreneur, in the article ‘Difficult Truths That No One Tells Entrepreneurs About Getting Funded’ advises entrepreneurs to sell their way to the funds they need.

“As entrepreneurs we really need to stop asking for money or expecting it. Firstly, it’s not actually what your business needs today. Funding with no consumer base, no brand trust, no plans for scale, is all pointless.

“Secondly, you probably won’t be able to give it back in the time period & multiple return an investor would want. It isn’t cheap. But most importantly, it’s not coming. Particularly for businesses without solid business plans, without real traction & a path of exit lined up.”

Crowdfunding

A second option available to business owners without access to capital is crowdfunding, an alternative funding mechanism that allows business owners to raise funds from family, friends and individual investors. The most widely known models are equity, donation and rewards based.

Access the Guide to Crowdfunding In South Africa

Must-have Documents For Small Businesses

Despite being underestimated by many business owners, proper small business record keeping is key to running a compliant business. It can also inform planning, help promote operational efficiency, and is critical when applying for funding.

Below is a list of common business documents that new businesses will need:

  • Tax clearance certificate
  • National identification card
  • Company registration documents
  • Latest business/personal bank statements (six months)
  • Lease agreement of where you are doing your business
  • A loan breakdown of how much you need and what you intend to use it for
  • Proof of residence
  • One-year financial statements
  • ID documents of owners, marriage certificates of owners, company registration documents
  • Lease or mortgage agreement
  • Existing shareholder agreements, share register, proof of address and any relevant business licences, accreditations or registrations required
  • Broad Based Black Economic Empowerment (B-BBEE) certificate

Investors may require additional documentation to assess whether you can afford the funding, this includes:

  • The SMEs business plan/project plans, income/cash flow projections,
  • Outstanding debtors, signed customer contracts, the latest annual financial, statements, latest VAT statements, management accounts and latest bank statements.

Read the full article: The Top Documents All Entrepreneurs Need When Launching a Business