One of the hardest things you will do when starting a business is raising money. The cold hard truth is that it is almost impossible to get a business loan. Research shows that as few as 3% of applicants worldwide are successful at securing a business loan.
Small businesses, especially those in the early stages struggle to borrow money from banks or to find private investors. Funding institutions are inundated with applications, so a business has to really stand out from the thousands of other applicants, and the business owner needs a good credit record. Your business plan should also be well structured to appeal to investors. One common reason for rejections is when a business does not suit the funding institution’s mandate. Make sure the organisation you are applying to does fund businesses in your industry.
If you are determined to obtain external funding, there are a few avenues you can explore. Funding institutions include banks, government funds, venture capital companies and private equity investors. Entrepreneurs can also turn to angel investors for help, but most will rely on family and friends for help.
Raising finance is tough, but it is not impossible, provided you are willing to do the legwork.
Venture capital (VC) companies usually favour early stage companies that show high growth potential. Venture capital is usually associated with a new business or venture, particularly with new technology projects. VC companies however, fund a minimal percentage of businesses who apply for financing.
When approaching a VC company, it is vital to learn as much as possible about the VC’s investment mandate to be sure that your company and business plan fits within its scope. Most VC companies shy away from start-ups in favour of companies that are able to demonstrate revenue for anything from six months to two years. There are very strict criteria that VC companies use, including a viable current business model, aggressive growth strategy, and international expansion opportunities amongst other things.
How they operate:
Venture capitalists raise funds from external institutions with a mandate to put those funds in relatively high-risk, high-return investments. The life of a venture capital fund is usually 10 years, meaning that they have 10 years to find investments, invest in a new venture, exit from the investment and return the capital and profits to the institutions that provided the initial capital for the fund.
Venture capital partnerships take a percentage of the profits and a management fee for their services. Because of the timeframes under which they operate and the returns they are seeking, venture capitalists typically look to invest in companies that have the potential to get really big, really fast.
What they look for:
1. Value creation
Above and beyond everything else, they want to know that the enterprise they are investing in has a realistic chance of being worth substantially more in five years time than when they invest in it. VCs and angels characteristically invest in technology related businesses which can generate the returns they seek.
They recognise that value within a technology business comes from one of three things:
- Strong cash flow,
- Patented technology
- The development of a very large user base.
A business that has more than one of these three elements will be worth even more. Therefore, if you are preparing a business plan to attract venture capital investment, you would be advised to focus on how you plan to create significant value through these three mechanisms: cash flow, patented technology and/or a large user base.
2. Exit options
Venture capitalists and angels need to know that there is some way they can liquidate their investment in approximately five years time. The two most valuable ways to exit an investment are a listing on the stock exchange or the sale of the company, usually to a larger corporation. If you want to make VCs and angels interested in a business, you need to allude to the likelihood of a valuable exit in approximately five years from the time they invest. You cannot be explicit about the exit in the business plan, but you do need to be aware of this and make passing reference to exit possibilities.
3. Technology versus people
The preference for all VCs is to invest in a business with world-class technology managed by world-class people. But if they can’t have both, different VC firms will have different preferences. Some prefer to invest in strong people, believing they will figure out a good product over time; others opt for investing in strong technology, believing they can hire good people to help manage the business.
It is important for an entrepreneur to find out the investment preferences of a VC and to emphasise the right things in the business plan. The way to find out what these are is to look at the VC firm’s portfolio of investments and how those were managed after they first invested in them. Were new people quickly brought on board or was the entrepreneurial team left alone to figure out a product over time?
Banks are unlikely to finance a start-up or very young firm without collateral due to the high risk involved. They normally prefer to provide expansion capital for a business that has a healthy track record. That being said, banks do provide credit cards, overdrafts and home loan advances which can give you access to finance. Before you apply for any type of funding from banks, make sure you have a good credit history and record. You will also need strong financials that are consistent with your credit history, a verifiable income and profit, and sufficient assets to use as collateral.
Some of the criteria banks use when evaluating a business plan include a comprehensive breakdown of what needs to be financed, the entrepreneur’s own contribution, evidence that the entrepreneur has done extensive research, the barriers to entry and the target market.
How they operate:
If a bank does get involved with a start-up business, they seek enterprises that adopt a tried and tested approach to doing business, such as a franchise. Banks may however be willing to fund certain assets for a start-up business, such as plant and machinery, and they will also be willing to provide capital to a small business that wants to grow.
When developing a business plan for a bank, the three most important things to focus on are:
1. Risk mitigation
Bankers granting a loan to any organisation want to know that they are minimising their risk. They are not looking for the hefty returns demanded by VCs, but they are looking for assurance that the loan they grant will be paid back with the requisite interest. They also seek to make loans where they will have an opportunity to recover the value of the loan with the sale of assets or surety if the company does fail.
2. Cash flow
For a loan to be repaid, a business needs to generate cash flow. Bankers will therefore pay a great deal of attention to the cash flow forecasts of a business. They will ask themselves these questions:
- Are the assumptions underlying this forecast reasonable?
- What is the probability of this forecast coming true?
- What is the worst-case scenario?
3. Familiarity, understandability and verifiability
To feel comfortable providing a loan to a new business, a banker has to recognise and understand the proposed operation of the new business. The more radical or disruptive your ideas, the less likely they are to look favourably on the venture. In a business plan for loan funding use recognisable examples and familiar language to explain what you are doing.
Bankers also like things that can be verified, such as reference to a commitment for a long-term customer contract – if they can see a signed copy of the contract and corroborate it with the customer, all the better for the entrepreneur seeking the capital.
What they look for:
Personal character is important. The bank’s experience with you is critical. The judgement of the character of an individual is based on past performance. Personal and business credit histories will be reviewed.
This is figured on the amount of debt load your business can support. The debt-to-net-worth (debt/net worth) ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage.
Your business plan can make a difference. Suppose it shows that the loan will increase earnings and lead to a swift reduction in the debt/net worth ratio. Your chances of a positive answer would increase. Keep in mind that a good banker is the ultimate realist. Don’t try to snow your banker with numbers.
Economic conditions have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won’t extend credit easily.
Collateral is a secondary source of loan repayment. They want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your banker sleep better at night.
Do you know your business? Can you be counted on to be level-headed? How credible are your plans? A business plan helps you answer the banker’s questions without hesitation, sending your credibility rating soaring.
6. Contingency plan
A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan is a short worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions.
Private equity is the umbrella term for a broad range of funds that pool investors’ money together to increase their buying power. Unlike most mutual funds, in which fund shares trade on active public securities exchanges, private equity funds attract investors who are willing to hold shares in privately held, non-traded funds (hence the term private equity).
If you choose to go the private equity route, you have to be prepared for the private investor to become a partner or direct owner of your business. Private equity capital is provided to companies for the development of new products or technologies, strengthening the capital base or for acquisitions.
How they operate:
Equity financing is a method of financing in which a company issues shares of its stock and receives money in return. Depending on how you raise equity capital, you may relinquish anywhere from 25 to 75% of the business.
What they look for:
The approval rate for start-ups is fairly low. Investors usually look for business plans that are well thought through and realistic, as well as the contribution an entrepreneur has made to the business from their own money. If a business cannot afford the repayments for the finance, their application will be rejected. Other reasons include a poor credit history, lack of experience in the specialised field and unrealistic financial projections.
What’s most important for business owners to know about private equity investors is that they are financial investors. Unlike corporations that might buy all or part of a business for strategic operating advantages, financial investors make their decisions based solely upon their projected return on invested money. They may be sensitive to a founder’s wishes, but not sentimental in negotiating final deal terms.
Angel investors are wealthy individuals who invest their own money into start-ups. Angels come in two varieties, those you know and those you don’t know. Unlike venture capitalists and bankers, many angels are not motivated only by profit.
When seeking angel investors, look to your networks and the people you know. Your network includes professionals like doctors, dentists, lawyers and accountants; business associates who are people you come in contact with during the normal course of your business day.
How they operate:
Angels vary quite significantly, but they are usually willing to accept risk and demand little or no control in return for owning a piece of a business they consider to be valuable some day. There are two categories of angel investors: affiliated and non-affiliated. An affiliated angel is some who has some sort of connection to you or your business. It makes sense to start your investor search by seeking an affiliated angel since they will already be familiar with you or your business.
To look for non-affiliated angels, try these proven methods:
- Business brokers
- Intermediaries (Firms that find angels for entrepreneurial companies.)
Angels tend to find most of their investment opportunities through friends and business associates, so whatever method you use to search for angels, it’s also important to spread the word. Tell your advisors and people you meet at networking events, or anyone who could be a good source of referrals.
What they look for:
Here’s what you need to know to increase your chances of securing angel funding:
- Not only tech companies get funding, and not all tech companies do either – most entrepreneurs tend to focus on technology, but in truth angels simply look for high-growth businesses in any industry.
- Get your elevator pitch right – one way of gauging this is to try and fit it into a tweet (140 characters). Make it understandable (would anyone re-tweet it?); many angels do not know that much about the industry they invest in.
- Avoid targeting advertising as your primary revenue model. At best, advertising must be an additional income.
- Be selective about your management team – if you’re a technology company, you need technologists as founders. Having skills in-house is preferable to engaging external consultants at market-related rates.
- Be flexible and approachable – many investors want to be hands-on. If this means relocating to Cape Town to invest in a better relationship, you may have to suck it up.
- It’s not just about ‘idea meets money’ – you need to form a genuine relationship and regard the investor as a team member. Investors often place more faith in the individual than the idea (although the idea is crucially important); they may back someone through a few failures if they believe in them.
- Don’t expect unrealistic amounts – look within the range of R1 million to R10 million. Anything less than that and investors will consider the barrier to entry too low. Anything higher and you may need a VC.
- The business model must accommodate a viable revenue projection for the angel – angels target a return of roughly 10 times their investment within five years, because of the high likelihood of failure (perhaps one in 10 succeeds). It’s an aggressive investment path – ideas must be able to get to prototype quickly and have high growth potential.
- Don’t hide your ideas until they’re perfect. Act quickly.
- Don’t annoy investors with unnecessary non-disclosure agreements. Unless something is absolutely unique, like a formula or some other intellectual property, don’t bother. Most investors see many different start-ups in a day, and forcing them to do too much leaves a bad impression. Don’t leave out ideas that are crucial to the venture’s success either, for fear of it being copied. That is prohibitive to getting funding.
Family and Friends
Many businesses obtain funding from more than one source. The most popular source after self-financing is friends and family. The people you have relationships with know what your strengths are, so it is a little easier to ask for help than approaching a bank. However, one thing to keep in mind is when you bring money into a personal relationship, it can harm the relationship if not handled properly. Specifically if the business fails, the issue of paying the money back can be a problem.
The first step in getting financing from friends or family is finding the right person to borrow money from. Once you determine who this is, approach the person initially in an informal situation. Tell them a little about your business, and if they show interest requesting more information set up a more professional meeting with them. You need to present your business plan to them and get the other person as excited as you are about the possibilities of your business.
You must be prepared to accept rejection gracefully, don’t put emotional pressure on the person. If they agree to contribute to your business, you must state how much money you need, what you’ll use it for and how you’ll pay it back. Then you need to draw up the legal papers, which is an agreement stating that the person will put the money into the business. The agreement should also contain the terms of the loan – including what the role of the investor will be in your company.
How to approach friends and family:
Friends and family remain the best shot that many entrepreneurs have to raise outside money to launch a business, here are five tips for approaching friends and family properly.
1. Choose a strategy
Do you want to solicit large chunks of money from a few investors, or small amounts from many?
There’s less pressure associated with small sums.
You’re less likely to ruin a relationship over R100. Many fundraisers target a few dozen people for sums between R400 and R2000 apiece. But typically only 10% to 20% percent people asked will contribute. So if you want to raise, say, R20 000 at R400 per backer, you’ll need to woo 50 people. This means reaching out to 250 to 500 people. Contacting a smaller, more targeted group for larger sums may require more gumption and planning upfront, it could be easier for the time-strapped.
2. Choose an investment type
When you accept money from others, strings will be attached, no matter how you structure the transaction. Consider whether you want to accept and pay back loans, have your friends and family own an equity stake, or offer up a token of thanks e.g. some amount of free access to your product or service in exchange for a gift.
If you take on investors, you may have to give up a portion of your company, and perhaps make one or more board members. Even friends and family will want a return, which can mean eventually selling the company, buying back shares or paying dividends. Loans have to be paid back on schedule, which can have an impact on cash flow and profitability. If you go the micro-funding route, you could be juggling 50 of them.
Even gifts aren’t free of strings. If you do accept them, thank the giver profusely in writing and acknowledge that the money is a gift rather than an investment or promissory note.
3. Write down your pitch
Unless your friends and family are professional investors, they probably don’t want to read a 50-page business plan. More likely, they’ll prefer to sit down with you over coffee and hear you explain your idea. To avoid being too informal, draw up a five to ten page document that sums up what you want to do, how you’ll do it and what you’ll apply the money toward. Such a summary ensures you’ve made important disclosures, such as the key challenges, risks and competition the business faces, and that your backers understand what their money is going toward.
4. Keep your documents and communications business-like
When you’re dealing with people you know well, it’s easy to want to keep agreements informal out of concern that official documents might make things feel less friendly. But don’t be too casual.
5. Manage expectations
Another upside of bringing in friends and family is that they are typically more patient than professional investors. It’s a good idea to send a monthly email update to your backers, even if they’ve given money as a gift. Be honest about what’s going well and what could be better. You might want to raise more money later, and it can be easier if your backers have been able to watch your progress.
If things aren’t going well, friends who have a stake in your success are more likely than others to provide the advice, contacts or referrals you need to turn things around.
What You Should Include In The Partnership Agreement
How to create a formal written partnership agreement.
When taking on a business partner, it is critical to have a formal, written partnership agreement. While this is not a legal requirement, it does provide a framework for the partnership in terms of everyone’s obligations, settling conflicts, disagreements and other issues that could occur. The agreement is needed for the wellbeing of the business.
Create your written partnership agreement with the assumption that anything that can go wrong with your partnership will. Friction between partners over things such as money, power or ego frequently undoes business relationships.
Your partnership agreement should prepare you for all possible “what-if” situations, and set methods for resolving them.
You can save money by drafting your own version of the key parts of your agreement, then taking it to your firm’s attorney to be reviewed, clarified, modified and finalised. It is important to have an attorney review the contract.
These are some of the key areas you should include in your written partnership agreement:
1Partnership Agreement Basics
- What is the name of the partnership?
- What is the purpose of the partnership?
- What is the duration of the partnership?
2Responsibilities, performance and remuneration
- What is each partner’s role?
- What are each partner’s responsibilities within the company, and what level of performance is expected?
- Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
- What will be the income of each partner, and how will profits or losses be distributed?
- What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
- If a partner loans the company money, what will be the terms or repayment?
- Will the business partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
- Withdrawal of partners/admission of new partners
- What guidelines should be followed if one partner wants to leave the partnership?
- Will partners be allowed to sell their interests in the business to outsiders?
- On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
- How will new partners be admitted to the partnership?
- What guidelines should be followed if one partner wants to retire or leave the business partnership?
- What happens if a partner is incapacitated or dies?
- Will the partnership take out “key man” life insurance to ensure the surviving partner is able to buy the deceased partner’s shares from his/her heirs?
- Will partners who leave have to sign a non-compete agreement?
- What methods will be used to settle disputes that can’t be otherwise resolved?
- What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
- Will you use mediation or binding arbitration?
- If disputes can’t be resolved, is there a mechanism in place for dissolving the business partnership?
- What banking arrangements will be made for the partnership?
- Which partners will have check signing privileges?
- Who will be authorised to draw on the partnership’s accounts?
- How will the books be kept?
7Method for dissolving the partnership
- When can the partnership be dissolved?
- What happens to the partnership if the partners decide they can’t work together?
- What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?
- FreeLegalDocs: www.freelegaldocs.co.za
- LegalWise: http://www.legalwise.co.za/index.php/downloads/free-contracts.html
Do You Speak Start-up?
The start-up dictionary for every budding entrepreneur.
Venture capital in South Africa is starting to take hold. With a host of venture funds, section 12J companies, incubators and start-up clubs being launched, start-ups are becoming more popular and investors are encouraged to consider these new opportunities.
Chris Ball, an investment analyst at AlphaWealth and a co-founder of Fincheck.co.za, a financial comparison fintech start-up, explains the colloquial jargon of venture investors and start-up entrepreneurs.
Chris wrote this ‘dictionary’ initially to educate AlphaWealth’s high net worth clients about the start up world so that they could consider becoming investors.
An angel investor is generally someone who provides seed capital to a start-up in its infancy. In South Africa, there are a few well known angel investors. However, most entrepreneur’s first funds are generally received from family and friends who believe in the idea.
B2B, B2C, P2P
Business to business – This describes a business that is targeting another business with its product or services. This type of service is also known as enterprise technology. Salesforce would be a great example of this technology.
Business to consumer – describes a start-up that sells directly to consumer.
Peer to peer – is a platform concept, where the technology matches buyers and sellers. One of the earlier peer to peer technologies was Ebay. Today, the peer to peer platform has evolved to incorporate finance institutions such as Lendico.
This is a concept where founders pool their own capital resources to get the start up as far as possible before looking for external funding.
The term comes from “pulling oneself up by one’s bootstraps”. This mindset links directly into the lean start up methodology.
Related: 6 Tips For Bootstrapping
Both technology and business models can be disruptive and is defined when a start-up disrupts the current market place by displacing old businesses and winning market share. Outsurance and Uber have disrupted the insurance and personal transport businesses.
This is someone who starts a business or venture, assuming all potential risk and reward for his or herself.
This is the start of a venture where a founding team have enough to illustrate the concept but are yet to execute the initial steps of their plan.
Lean start-up methodology
The lean start-up methodology, is a business thesis that was founded by Eric Reis. The business methodology is based on the practice of testing multiple small iterations in an effort to find the product, design or user experience or even business model that is best adopted by the end consumer.
Read more on the Lean start-up methodology here.
An organisation that helps develop early stage companies. Generally this help is offered in exchange for equity. The Israeli start-up ecosystem has some of the best incubators where they offer workspace, networks and guidance.
‘Go big or go home’ – this is the impossible idea that a team wants to accomplish. The term was originally coined when John F Kennedy challenged American scientists to get a human to the moon.
A company that changes its business direction as a result of a dead end or the ability to use their technology in a more significant way. Instagram was originally a location check in service before pivoting to become a photo sharing application.
Pre-money and post-money
Post-money = Pre-money valuation + new funding.
Valuing a start-up has become a bit of an art, but more and more funds are starting to adopt a common methodology as the industry matures. In essence, the pre-money value is the monetary value of the company before a new investment is made.
Proof of concept
After the idea comes the execution. One of the first hurdles entrepreneurs need to clear is the proof of concept. This is a point where the start-up proves that the business model is feasible.
Software as a service. These businesses are hosted in the cloud and the software can be rented out as a service.
Seed, A Round, B Round…
Start-ups raise capital in several tranches because raising it all at once would dilute the founder’s share before they have even had a chance to build the business. The seed round is done to prove proof of concept. The A round is raised once proof of concept has taken place. There can be several rounds before an exit or IPO is achieved. Some of these companies have grown so large through several rounds of investment that they are termed a unicorn business.
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations. The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
Related: 5 Factors That Make a Great Boss
Employers may only deduct money from a worker’s salary if the worker agrees or if they are required to do so. The provisions for deductions do not apply to workers who work less than 24 hours a month.
Employers may not deduct money from a worker’s pay unless –
- the worker agrees in writing to the deduction of a debt, or
- the deduction is made in terms of a collective agreement, law (e.g. UIF contributions), court order or arbitration award.
Deductions for damage or loss caused by the worker may only be made if –
- the employer has followed a fair procedure and given the worker a chance to show why the deduction should not be made,
- the worker agrees in writing, and
- the total deduction is not more than 25% of the worker’s net pay.
Employers must pay deductions and employer contributions to benefit funds (pension, provident, retirement, medical aid, etc.) to the fund within 7 days.
What is UIF
UIF stands for Unemployment Insurance Fund and you need to register for it, whether or not you employ staff. It applies to all employers and workers (except those working less than 24 hours a month), learners, public servants, foreigners working on contract, workers who get a monthly State (old age) pension and workers who only earn commission. The fund makes short-term provision for individuals who become unemployed, or are unable to work because of illness, maternity or adoption leave. It also provides financial relief to the dependants of deceased contributors.
As an employer it is your responsibility to register with UIF and make the monthly payments. These include a 1% payment from you (based on your employees’ individual salaries).
Each individual employee needs to make a further 1% payment, but it is your duty to deduct this amount from their salary and pay it to UIF, together with your contribution, on a monthly basis to SARS if you are registered for PAYE or directly to the UIF if you are not.
You can register your business by completing a UF8 form and each new employee needs to be registered using a UI-19 form. These can be obtained from the Department of Labour.
What is COIDA
COIDA stands for the Compensation for Occupational Injuries and Diseases Act and being registered for it works in your favour. It is based on a no-fault system which means employees are entitled to compensation regardless of who caused the injury or illness.
But it also exempts you from liability for injuries or diseases contracted by your employees in the course of their work. In other words, employees can’t claim damages from you in those events. Instead, COIDA allows them to claim compensation for total or permanent disablement and death as well as reasonable medical expenses arising out of injury for two years.
You are required to pay the employee 75% of their normal salary for three months during the time that they are injured or ill but the fund pays you back this entire amount and covers all the relevant medical expenses.
If you are not registered, however, you are not indemnified. Getting registered involves submitting a WAs2 form, together with a copy of the registration certificate from the Registrar of Companies, or your ID document, if you are a sole proprietor. Every year before 31 March you will need to submit a statement of earnings paid to your employees. You will also be required to pay an assessment tariff, which is fixed according to your class of industry.
If an employee gets injured during the course of their work or falls ill as a result of their work, they can claim from the Worker’s Compensation fund. Dependants of employees can claim if a family member dies from an accident or disease. Employees wishing to claim will need to be furnished with one of the WG30, WAs2 or WAc1(E) forms, which they need to submit to the Compensation Commissioner for compensation.
How Does Maternity Leave Work?
The law protects women against unfair discrimination arising from any form of prejudice. An employer may not ask a candidate who applies for a job if she is pregnant, nor if she is planning to start a family at any stage.
If you do, she could argue that you are discriminating against her. Equally, she is in no way obliged to disclose her pregnancy when applying for a position. The bottom line is that it has nothing to do with the candidate’s ability to meet the requirements of the position. And nothing stops her from resigning once she has returned to work after taking maternity leave. She has rights regardless.
The Basic Conditions of Employment Act stipulates that an employee is entitled to four months unpaid maternity leave. All that is required is a notification by the employee that she is pregnant, accompanied by a doctor’s certificate. This leave should start four weeks before the expected date of birth, or when a doctor or midwife certifies that leave is necessary for the health of the mother or child. An employee must notify her employer in writing of the date on which she wants to start maternity leave. She may not work for six weeks after delivery, unless she is declared fit to do so.
An employee who has a miscarriage during the last three months of pregnancy or who bears a stillborn child is also entitled to six weeks maternity leave, whether or not she has started maternity leave at the time. Companies in South Africa are not obliged by law to provide paid maternity leave. A female employee who works for a company that does not offer maternity benefits can claim from the Maternity Benefit Fund if she has been contributing to the Unemployment Insurance Fund (UIF).
An employer who pays maternity leave does have some rights, however. Paid maternity leave is a benefit, and the company is within its rights to conclude a contract with the employee stating that if she does not return to work for at least one year following her confinement, she will be obliged to return the salary she earned during her maternity leave.
South Africa has no paternity leave provisions in place, but workers who have been employed at a company for longer than four months may take three days’ paid family responsibility leave during each year of employment.
Family Responsibility Leave
Workers may take up to three days of paid leave a year to attend to certain family responsibilities. The provisions for family responsibility leave do not apply to workers who work less than:
- Four months for their employer
- Four days a week for one employer
- 24 hours a month.
Family responsibility leave expires at the end of the annual cycle. Employees may take family responsibility leave:
- when their child is born
- when their child is sick
- in the event of the death of a:
- spouse or life partner
- parent or adoptive parent
- child or adopted child
Employers may require reasonable proof of the birth, illness or death for which a worker requests leave.
Related: What Young People Want From Work
The amount of overtime a worker may work is limited. Workers must get 1,5 times their normal hourly pay or paid time off in exchange for overtime. Alternatively, a worker may agree to receive paid time off or a combination of pay and time off.
The section of the Basic Conditions of Employment Act that regulate working hours does not apply to:
- workers in senior management
- sales staff who travel and regulate their own working hours
- workers who work less than 24 hours in a month
- workers who earn more than R115 572 per year
- workers engaged in emergency work are excluded from certain provisions.
Workers may not work:
- overtime, unless by agreement
- more than 10 hours’ overtime a week (collective agreement may increase this to 15 hours per week for up to two months a year)
- more than 12 hours on any day.
Employee Pay Slips
Each time workers are paid, employers must give them a pay slip containing certain details. Employers must give workers the following information in writing when they are paid:
- Employer’s name and address
- Worker’s name and occupation
- Period for which payment is made
- Total salary or wages
- Any deductions
- The actual amount paid
- If relevant to the calculation of pay:
- Employee’s pay and overtime rates
- Number of ordinary and overtime hours worked
- Number of hours worked on a Sunday or public holiday
The total number of ordinary and overtime hours worked in the period of averaging, if a collective agreement to average working time has been concluded
Workers must get paid time off for public holidays, but if they agree to work, they must be paid double their normal daily wage. The provisions for public holidays do not apply to –
- senior management
- sales staff who travel
- workers who work less than 24 hours a month
Workers must get paid time off for any public holiday that falls on a working day. Working on a public holiday is by agreement only. A public holiday can be exchanged with another day by agreement. A public holiday cannot be counted as annual leave.
Employee Sick Leave
Workers may take the number of days they would normally work in a six-week period for sick leave on full pay in a three-year period. Employers may insist on proof of illness before paying a worker for sick leave. The provisions for sick leave do not apply to:
- workers who work less than 24 hours a month
- workers who receive compensation for an occupational injury or disease
- leave over and above that provided for by the Act.
During the first 6 months of employment, workers are only entitled to one day of paid sick leave for every 26 days worked. An employer may require a medical certificate before paying workers who are absent for more than two consecutive days, or who are often absent (more than twice in an eight-week period).
Staff Working Hours
Basic Conditions of Employment laws set maximum working hours and minimum rest and break periods for workers. The section of the Act that regulate working hours does not apply to:
- workers in senior management
- sales staff who travel and regulate their own working hours
- workers who work less than 24 hours in a month
- workers who earn more than R115 572 per year
- workers engaged in emergency work are excluded from certain provisions.
The maximum ordinary hours per day for someone who works one to five days per week is nine, the maximum amount of hours per week is 45. For those who work more than five day per week should work a maximum of eight hours per day and 45 hours per week. Workers may agree, in writing, to work up to 12 hours a day without getting overtime pay. However, these workers may not work more than:
- 45 ordinary hours a week
- 10 hours’ overtime a week
- five days a week
Workers must have a meal break of 60 minutes after five hours’ work. A written agreement may:
- reduce meal intervals to 30 minutes
- eliminate meal intervals for workers who work less than 6 hours a day
Workers must have a rest period of 12 hours each day; and 36 consecutive hours each week (must include Sunday, unless otherwise agreed).
Workers working between 18h00 and 06h00 must:
- get an allowance, or
- work reduced hours, and
- have transport available to them.
Skills Development Levies
Employers must pay 1% of their workers’ pay to the skills development levy. The money goes to Sector Education and Training Authorities (SETAs) and the Skills Development Fund to pay for training. The Skills Development Levies Act applies to all employers except–
- the public service;
- religious or charity organisations;
- public entities that get more than 80% of their money from Parliament; and
- whose total pay to all its workers is less than R 250 000 per year; and
- who do not have to register according to the Income Tax Act
Employers who are required to pay the skills development levy must register with the South African Revenue Services (SARS). Employers must pay 1% of all their workers’ pay to the skills development levy every month. Employers must pay the levy to the South African Revenue Services (SARS) by the seventh day of each month. Employers who do not pay will have to pay interest on the money they owe and may also have to pay a penalty.
What is PAYE
All employers are required to deduct Employees’ Tax from their salaries. The amounts deducted must be paid by the employer to SARS on a monthly basis. The process of deducting or withholding tax from remuneration as it is earned by an employee is referred to as Pay-As-You-Earn (PAYE).
Employers are required to:
- Deduct the correct amount of tax from employees’ remuneration.
- Pay this amount to SARS monthly, ensuring SARS receives a Monthly Employer Declaration (EMP201).
- Reconcile these deductions and payments with the completion of the interim and annual Employer Reconciliation Declarations. During the reconciliation periods, employers are required to submit an Employer Reconciliation Declaration (EMP501) confirming or correcting the PAYE, SDL and UIF declarations per EMP201s submitted, the payments made and the tax values of the Employee Tax Certificates [IRP5/IT3(a)].
- Issue tax certificates to employees
- An employer must issue an employee with an IRP5/IT3(a) where remuneration is paid or has become payable and from which Employees’ Tax was deducted. The IRP5/IT3(a) discloses the total employment remuneration earned for the year of assessment and the total deductions. IRP5/IT3(a) certificates must be issued to employees during the annual Employers tax season.
Seek professional advice
There is a lot to keep track of once you become and employer. It is advisable to call in an expert. You can use the services of a suitable experienced and qualified HR consultant who can help to set up the principles and processes of the above, and then work on an ad hoc basis only as and when needed reducing the cost of a full-time HR manager.
- The Department of Labour: www.labour.gov.za
- SARS: www.sars.gov.za
- uFiling: www.ufiling.co.za
- Commission for Conciliation, Mediation and Arbitration (CCMA): www.ccma.org.za
- The South African Labour Guide: www.labourguide.co.za
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