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How Alternative Funders Enable Small Biz Success

Alternative lenders are starting to play an important role in small business survival. Marilynn Leonard, co-founder of FundingHub, says matching the business with the right lender will depend on their specific finance requirements.

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Up to 75% of South African small businesses fail within the first year. One of the biggest causes being a lack of funding, or poor financial management. Yet, many small businesses struggle to secure funding, either because they haven’t been in business long enough, or because they don’t understand the intricacies of the lending market.

Alternative lenders are starting to play an important role in small business survival. Marilynn Leonard, co-founder of FundingHub, says matching the business with the right lender will depend on their specific finance requirements.

Speaking in a recent episode of the Sage #SmallBizAfrica podcast, Leonard said some reasons SMEs fail to secure funding include:

  • Not having a compelling reason to borrow money;
  • Applying for a loan and the value is too high for the business to be able to repay; and
  • Not being in business for at least a year with revenue less than R1 million.

“Many small business owners don’t understand that they can only borrow a percentage of their turnover. No lender – whether a bank or an alternative lender – will advance a loan equal to their entire turnover.”

Alternative lenders are not registered with the National Credit Regulator (NCR) and cannot loan money to businesses that don’t meet the one year / R1 million minimum requirement. These businesses are considered start-ups and would have a better chance securing funding through an equity partner or personal finance, says Leonard.

Research has shown that around 40% of small businesses struggle to access funding because they don’t meet traditional lending criteria, which are not small business friendly.

Viresh Harduth, Vice President: New Customer Acquisition (Start-up and Small Business) at Sage Africa & Middle East says: “Small businesses have a better chance of accessing funding if they already have all their finances in order. Cloud-based accounting solutions can help them pull any finance report they need for their loan application.”

Related: How This Alternative Funding Solution Can Solve Your Business Growth Problems

Banks vs alternative lenders

Banks should be a small business’ first choice for funding, says Leonard, because they’re the cheapest. But they’re often slow to grant funding because of the checks and balances they must complete.

In cases where these businesses need money fast – for example, to pay invoices or salaries, or to fulfill a purchase order – alternative lenders are a good supplementary option.

However, the downside of accessing money within a day or two, she says, is the cost of alternative lending. This is why the benefits of accessing funding should outweigh the cost of acquiring it.

Tips for lending success

Before business owners apply for funding, they need to know why they need the capital. “Lenders won’t just hand over money,” says Leonard. “They’ll want to know the purpose of the loan, like expanding into new markets or paying salaries.”

Once they know why the business needs funding, they can decide what funding product is right for them.

“There’s been an uprising of alternative lenders in South Africa. It can be confusing, overwhelming, and time-consuming to find the right one,” she says. “That’s where credit marketplaces like FundingHub come in. We can guide you towards the right lender without you needing to know the intricacies of the available products.”

Credit marketplaces can also help small businesses avoid unsecured lending, or “loan sharks”, says Leonard. “Small businesses might get excited at the prospect of same-day loans, but they’re often ripped off by high interest rates and undisclosed costs.”

This happens because alternative lenders are not regulated by the National Credit Act (NCA). This makes it even more important to find a lender that realises the importance of self-regulation. She advises partnering with a lender registered with the South African SME Finance Association (SASFA), which encourages transparent and responsible lending. This is a relatively new association and is gaining momentum amongst the alternative business lenders.

Banks and responsible alternative lenders are also more understanding and accommodating with loan repayment terms, if the business runs into financial problems, she says. “Lenders are in business because you’re in business. They want to see you succeed. As soon as you have a problem repaying your loan, talk to them about renegotiating your repayment terms.”

Related: Marnus Broodryk Shares Alternative Funding Solutions And How You Can Finance Your Growth

Enabling success

Starting a business in South Africa is not easy, says Leonard. One of the biggest challenges facing small businesses is cash flow caused by slow or late payers. State-owned enterprises (SOEs) and large corporates tend to be the worst offenders.

“When a small business has to wait between 30 and 90 days for payment, they run into cash flow problems and also incur finance charges. At the end of the day, that big order they secured is not as profitable as it could have been. As a result, we’ve seen a surge in products like invoice and purchase order funding.

“Small businesses are starting to realise that alternative funding can be an enabler of their success. It might be expensive but it’s better than losing out on a big deal or not being able to fill a large order.”

Leonard says everyone has a role to play in enabling small business success. Government should enact policies that establish reasonable payment terms and create funding vehicles that help start-ups through the first tough year. They can then approach alternative lenders for the next round of funding.

The private sector should change their payment terms, especially as they diversify their supply chains to include more small businesses and meet B-BBEE requirements. “It has to be a collaborative effort. We have to work together to empower the SME space and micro enterprises if we want to grow the economy.”

“Small businesses should keep in mind that a loan is technically a business expense – and capital alone doesn’t guarantee their success. They should also focus on better managing their cash flow through regular forecasts and negotiating payment terms with clients, hiring and outsourcing to the best people, and having a business plan with clearly defined goals and steps to achieve them,” concludes, Harduth.

To listen to the Sage #SmallBizAfrica podcast featuring Marilynn Leonard, click here.

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Entrepreneur Today

3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of

By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa

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“Dammed if you do and dammed if you don’t.” 

The adage summarises the difficult decisions government and the Finance Minister faced when balancing the country’s books, rescuing state-owned enterprises, and reviving the growth of our economy. Given the economic pressure that most taxpayers are facing, government ideally needed to achieve all of that without direct increases to personal income tax in the most recent Budget Speech.

Personal income tax has comprised at least a third of South Africa’s total tax revenue in recent tax years, despite growing unemployment. The 2019 Budget, presented in February, forecasts that personal income tax will account for nearly 39% of tax collected during the upcoming (2019/20) tax year. Given that we are in an election year and that the tax base is fragile, it’s not surprising that the Finance Minister and the National Treasury avoided direct increases to the statutory tax tables used to calculate PAYE for employees in the budget.

Nonetheless, government has made inflation work in its favour to impose some tax increases by stealth. Here are three ways government is raising more revenue without direct tax increases:

1. Bracket creep

The statutory tax tables used by payrolls and employers have not been changed for 2019/20, nor have the brackets been adjusted for inflation. This effectively amounts to an indirect tax increase that will yield a revenue saving of approximately R12.8 billion for government’s coffers.

It is not unusual for government to use ‘bracket creep’ to effectively raise more revenue. But unlike previous tax years, even low- and middle-income earners are not getting much relief. Rebates and the tax threshold are being increased by small amounts to allow some relief, but many people this year will feel the pain as inflationary salary increases push them into a higher tax bracket.

2. Medical aid credit not adjusted for inflation 

As proposed in the 2018 Budget, the Finance Minister did not apply an inflationary increase to the Medical Tax Credit, which allowed him to raise an extra R1 billion in revenue for the year. Surprisingly, these funds will be allocated to general tax revenue rather than ring-fenced for healthcare. In previous tax years, revenue generated from below-inflation increases on medical scheme credits was used to fund National Health Insurance (NHI) pilot projects.

There is still no clarity on how the NHI is going to be funded except for a general statement that the funding model is a problem for the National Treasury to solve, and that the principles of cross-subsidisation will apply. One wonders if any real progress will be made soon, given the fiscal constraints government faces.

3. Business travel deduction left untouched

The Budget leaves the per-kilometre cost rates used to determine tax deductions for business travel untouched. By not increasing travel rates to account for inflation, government effectively increases income tax collection at the cost of the taxpayer. This will be a blow for people who need to claim from their employers for business travel in their personal vehicles. This change has slipped through largely unnoticed and the budget does not provide numbers for the expected increase in tax revenue.

Closing words

Amid political turmoil and uncertainty, the Finance Minister presented a balanced budget for 2019/20 that offers hope for the future along with some tough love. With government taking steps to accelerate economic growth and improve revenue collection, we should hopefully see a steady improvement in government finances, which will translate into less pressure on the taxpayer in future years.

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Entrepreneur Today

SMEs: Staying On The Right Side Of The Taxman

Remaining SARS compliant can be a constant challenge for small- to medium-enterprises (SMEs), especially when they are trying to focus on growing their businesses and streamlining their operations.

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EasyBiz Managing Director, Gary Epstein, says submitting taxes can be a seamless process that does not have to take up more time than is necessary. “If business owners understand what is required of them and they put a few processes into place to deal with their tax submissions properly, their lives will be so much easier.”

What are the top three considerations for SMEs when submitting tax returns?

“Firstly,” says Epstein, “SARS returns must be accurate and submitted in terms of the relevant Act. Secondly, returns should be submitted and paid on time to avoid unnecessary penalties and interest, and thirdly, business owners must follow up on queries issued by SARS. “Do not ignore these queries, act on them as soon as possible”.

What are the major SARS submission deadlines for SMEs?

Epstein points out that small business owners need to adhere to various tax deadlines, each with their own particular dates for submission. “It is important that business owners diarise the dates (and set advance reminders for themselves) and/or enlist the services of an accountant or financial adviser to help them keep abreast of requirements.”

Value-added tax (VAT)

VAT payments need to be submitted in the VAT period allocated to the business, according to various categories and ending on the last day of a calendar month. This may mean making payments once a month, once every two months, once every six months or annually, depending on the category.

Provisional taxes

Provisional tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.

Employee taxes

In addition to submitting an annual reconciliation (EMP501) for the period 1 March to end of February for Pay-As-You-Earn (PAYE), Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), employee tax, in the form of an EMP201 return, needs to be submitted by the seventh of every month.

When can SMEs get extensions and is it worth it?

Epstein says SMEs can apply for various extensions, but these are subject to the Income Tax Act and Tax Administration Act.

“It is best for SMEs to consult their tax professionals to get advice regarding extensions for their businesses.”

What is SARS not flexible about?

SARS is not flexible when it comes to late returns and late payments.

“I cannot stress enough how important it is for SME owners to ensure their tax returns are submitted on time. In this way, they will avoid the inconvenience and expense of additional fines and interest,” notes Epstein.

What skills do SMEs need in their organisations to be able to submit to SARS efficiently?

Business owners often don’t have the time or expertise to deal with tax submissions throughout the year. If the business cannot afford to employ a full-time accountant or financial services expert, it would do well to outsource its tax requirements to a registered tax practitioner.

“I would recommend that even if they are not submitting the tax returns themselves, business owners should have a broad understanding of the tax regulations and what is expected of them. There is a lot of helpful information on the various Acts and tax requirements on SARS’ website,” says Epstein.

How does the right software help SMEs remain SARS compliant?

SME’s (and their accountants’) jobs can be made easier by using reliable accounting software to calculate accurate VAT reports. These reports are only as accurate as the data entered into them, which means care needs to be taken when inputting data into the accounting programme. Epstein says a good accounting software package must be reliable, easy to use and functional.

“SMEs need to check that the software has thorough reporting capabilities and can interface with other software solutions. Of course, it is also important to find out whether the software is locally supported by the vendor or not.”

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Entrepreneur Today

4 Dangers Of Business Under-insurance

A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured.

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Malesela Maupa, Head of Products and Insurer Relationships at FNB Insurance Brokers says, many small business owners mistakenly believe that by merely having a short-term insurance policy in place they are adequately protected against unforeseen events.

“This is technically correct provided that the business is covered for the full replacement value of the items insured. However, in circumstances where the sum insured does not cover the full replacement value or material loss of the item insured, the business is underinsured,” explains Maupa, as he unpacks the dangers of business underinsurance:

1. Financial loss

The most common risk is financial loss on the part of the business. If the business is underinsured or the indemnity period understated, the short-term insurance policy will only pay out the sum insured for the stated indemnity period as stated in the schedule, with the business owner having to provide for the shortfall. This often leads to cash flow challenges, impacting profit margins or rendering it difficult for the business to recover following the financial loss.

2. Reputational damage

Should an underinsured business not have sufficient funds to replace a key business activity or critical component following a loss, this may impact its ability to fulfil its contractual obligations, leading to a loss of business or market share, and irreparable reputational damage in the worst-case scenario.

3. Legal action

A small business also faces the risk of customers or clients taking legal action against it, should it fail to deliver on goods and services following a loss or be unable to honour its financial commitments that they committed to prior to the loss.

4. Survival of the business

A catastrophic event such as fire, which could result in the loss of stock or company equipment and documentation, could threaten the survival of a small business that is not yet fully established, if the business assets are not adequately insured.

Working with an experienced short-term insurance broker or insurer is essential when taking up short-term insurance to ensure that business contents are covered for their full replacement value.

Furthermore, depending on the nature of the business or item insured, the policy should be reviewed on a regular basis to avoid underinsurance as the value of items often change overtime due to fluctuations in economic activity. Where it’s necessary, evaluation certificates need to be kept up to date.

“Lastly, SMEs should ensure that the sum insured does not exceed the replacement value, which would lead to over insurance. Should a business submit a claim following a loss, the insurer would only pay out the replacement value, regardless of the higher sum insured,” concludes Maupa.

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