You have earmarked 2018 as the year of starting your own business. Congratulations!
With a solid business plan, achieving this challenging New Year’s resolution may be easier than you think. Dennis Isaacs, Head Enterprise Banking at Standard Bank, shares some valuable advice on starting your own business.
“During the early stages, a new business needs funds for start-up costs and working capital. A detailed business plan will give you an idea of how much you need and in which areas. The business plan will also assist you to understand your cash flows over time,” explains Isaacs.
Typical start-up costs include registration and legal fees, office stationery, design and printing of corporate identity such as business cards and letterheads, registration of a domain name and website creation, installations and utility connections.
If you’re a sales based business, you’ll need start-up inventory. You’ll also need some assets such as furniture, fixtures, signage and vehicles as well as property and equipment. “Finally, don’t forget cash reserves which can be used to support the company during the early months to pay for rent, utility bills, salaries and wages to name a few things,” he says.
“Beware of hidden costs,” adds Isaacs. “These seldom feature in a business plan but can cripple your business in times of crisis.” Some costs relate to interest payments on overdrafts and charges by suppliers for late payments. In addition, take into account other costs such as depreciation of property and equipment, maintenance, commissions and administration fees and employee turnover. The latter can become a substantial hidden cost.
Now that you’ve detailed your costs, the challenge is to secure funding for your business. Where do you look and what options are available?
“Your first port of call is your bank,” says Isaacs. “Prepare yourself by taking time to understand the criteria banks will use to judge your business before providing you with finance.”
Banks offer some of these loan options:
- An overdraft is also simple and easy to arrange and helps cash flow management because the cash is immediately available when you need it. You can draw on the funds in your current account up to an agreed limit and only pay interest of the portion that is used. Bear in mind, however, the interest rate on an overdraft is higher than for other types of loans.
2. A term loan has flexible repayment options (from one to eight years) and is structured in line with your cash flow. This type of loan is ideal if you have big capital expenses and is usually linked to the prime rate. The size of the loan you get depends on how much collateral you have and the repayments can be structures to according to your business’ projected cash flows.
Many Small and Medium Enterprises import goods or assets. Trade Finance offer businesses greater immediate cash flow whilst minimizing the risks associated with international trade. The exporter is assured of guaranteed payment and the importer is protected against delays in the receipt of goods or assets. Both parties’ interests are protected through a formal agreement. Trade finance facilities are usually secured and are available for short and long term transactions.
Vehicle and Asset Finance offer loans to buy vehicles or movable assets such as generators or other business equipment. As a business owner you obtain use of the goods without affecting your cash flow and the ownership of the asset or vehicle automatically pass to you once the final loan repayment has been made. Using vehicle and asset finance to purchase vehicles and assets hold two major benefits to business owners. Firstly, the business can claim depreciation on its taxable income in the fiscal year and secondly, rather than saving to buy the vehicle or asset cash sometime in the future, the business can hedge against inflation by acquiring the asset immediately.
Commercial Property Loan offers long-term finance to purchase or build commercial or industrial premises such as a shop, offices or warehouses. The building owner must own both the property and the trading entity which operates from the property.
It is best to speak to your business relationship manager at your local branch regarding the requirements and process to apply for finance. In certain cases, financial statements (historic and/or projected), cash flow projections, collateral, invoices, personal asset and liability statements, amongst other documentation may be required.
“Standard Bank understands that cash flow is critical and gives you access to working capital. So whatever your business needs, we’ll help you choose the most suitable finance,” Isaacs says.