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.”
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.
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.
Download the Business Plan Template
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.
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:
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
As a business owner you will have legal obligations that you should be aware of. The three main legal issues most business owners will have to deal with are business compliance, protection of intellectual property, contracts and tax.
Get Access to the Legal Guide for Entrepreneurs
It’s a legal requirement to produce annual financial statements within a certain period. There are additional regulations and legislations that business need to adhere to like: industry registration (depending on the industry that you operate in); zoning laws; licensing and permits and labour law for employers.
All businesses are required to maintain accurate financial records throughout each year of assessment to ensure the accuracy of taxes declared and paid by your company.
See Also: Tax Guide: Tax Filing For Entrepreneurs
Businesses that expect to generate turnover that exceeds R1 million in a 12-month period need to register as a VAT vendor. Small businesses that have a turnover of less than R1 million per annum qualify for turnover tax. This is a simplified tax system aimed at making it easier for micro business to meet their tax obligations
Contracts are important as they not only “govern the relationship between parties at various stages of the relationship, but they also provide a degree of protection should things not go according to plan” explains attorney and CEO of Britain Renecke, Cézanne Britain in the article Legal Advice For Handling Contracts.
Renecke continues, “A contract sets the ground rules for entrepreneurs doing business with others – and vice versa. A contract is clear in specifying the terms of engagement between the parties involved when it comes to what’s expected (the responsibilities and duties for each party), and it also sets out the consequences that may occur should your dealings (or relationship) go awry.”
Business owners are advised to put all dealings with third parties into writing, whether they rendering a service or providing a service or are on the receiving end of a service or a product.
Find out more about the ins and outs of contracts and the types of contracts you should know about.
The CIPC defines intellectual property as “a term that describes the application of the mind to develop something new or original”.
There are three ways business owners can protect their intellectual property – copyright, patent or a trademark.
Copyright protection gives the owner of an the original work exclusive right to copy and distribute a creative work; patents protect inventions and trade marks protects marks (e.g. names, logos, slogans, etc) that are used to identify and distinguish the products or services of business.
Patents and trade marks have to be registered with CIPC to take effect. Copyright is secured automatically with the creation of an original work.
Read the full article: How to Protect Your Intellectual Property
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.
The South African government offers a range of funding instruments for small businesses. They are:
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.
Debt financing from a traditional bank or an alternative lender.
Funders who provide small businesses with a variety of financing products, usually over a short period.
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.
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 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.”
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.
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:
If your are seeking funding, investors may also require additional documentation to assess whether you can afford the funding, this includes:
Read the full article: The Top Documents All Entrepreneurs Need When Launching a Business
Looking for a fresh and unique business idea? Below is a list of business ideas for all types of entrepreneurs.