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Thursday, January 1, 2009

Banks are notoriously incompetent at making the right lending decisions. Have problems with a R100m debt? No problem, here’s another R20m. Need R5 000 for a new business idea? You must be joking; come back when you have guaranteed customers. That’s about the size of it. And nothing’s changed in hundreds of years. Yet it is also amazing at just how much bad debt banks keep writing off – money that could otherwise be used to fund 1 000s of prospective entrepreneurs.

There are ‘non-bank’ and pseudo banking operations that can help, however, even a prospective customer – see case below.
While Government is counting on small businesses to be the driving factor for economic and GDP growth in South Africa, this is being hampered by the difficulties that many would-be entrepreneurs encounter when it comes to raising finance to start and grow their ventures. But according to the Global Entrepreneurship Monitor report, South Africa is rated 25 out of 37 countries in terms of entrepreneurship development.
Gianmarco Lorenzi, Managing Director of Cleardata, which is South Africa’s first nationwide provider of secure, onsite document destruction services, believes that this relatively poor showing is largely due to the inability of small businesses to raise sufficient financing.
Lorenzi experienced firsthand the difficulty of raising financing, when he launched his new, now successful, business just under 20 months ago.
“Launching a small business in South Africa is no small feat. The official message from banks and financiers is that if you have a strong idea, go to them and they will help you to make it a reality.  However, in reality, this is often not the case.”
In 2006 Lorenzi returned from a secondment in Australia with a big idea – but a smaller budget. The idea was to create a mobile document shredding enterprise, but at R1.5 million for a single shredding truck, he needed some serious financial backing to get his idea off the ground.
The concept of document destruction is fairly new in South Africa.  However, it has had resounding success in the rest of the world and is a billion dollar industry.  After extensive research, Lorenzi found that there was a strong need for a safe and secure document destruction service in this country, as most of our confidential legal, financial and other information walks out the back door of companies with the trash.
However, the banks didn’t see it this way.  “The general response was that the idea was too new for them to see it as viable without me being able to provide substantial collateral or prove serviceability.  While I had some assets, including a share in a residential property, using these as collateral was not an ideal option for me.
“On the other hand, in order to prove serviceability, I had to produce signed contracts from clients to guarantee the banks that I would be able to service the loan.  Unfortunately, convincing clients to sign up for a business that didn’t exist yet was also impossible.  Clients don’t sign contracts unless you have a guarantee that you can provide the service,” he says.
So what does a qualified chartered accountant with a well developed business idea and enough collateral to service a sizeable loan do?
Eventually, Lorenzi cobbled together enough collateral to convince Wesbank to provide  financing for the first truck.  Within six months, he had a viable business, despite initial scepticism from financiers.  After a year he had clients clamouring for the service in Gauteng and KZN - and he needed a further 8 to 10 million Rand for additional vehicles.
Once again Lorenzi approached banks and financiers for funding and was met with the same stone walls.
Ironically, it was actually one of Cleardata’s clients that provided the financing it needed. JSE listed investment holding company, Brimstone Investment Corporation, realised the potential for the business and in exchange for a minority equity stake, agreed to supply Cleardata with the necessary working capital and guarantees.
“While this meant that I had to dilute ownership somewhat, it enabled me to take the business to a whole new level,” says Lorenzi.  Cleardata now has operations in SA’s three major centres.
Benney Chabalala, head of the Small Enterprise Development Agency (SEDA) in the Western Cape, has some important advice for young entrepreneurs.  “Many people think that the National Credit Act (NCA) has been one of the major factors contributing to the problems that entrepreneurs face in funding their businesses.  However, the NCA is a relatively new plan and financing problems have been around a lot longer.
“What is particularly problematic in South Africa is that most new business owners don’t know what their financing options are.  Many ideas fail before they get off the ground simply because the wrong financiers are being approached.”
Chabalala says it is therefore vital that entrepreneurs do their research into available and appropriate financing options based on industry, location and even age.  For example, if you are going into agriculture, you can approach the Land Bank.  Or if you are under 35, you can approach Umsobomvu Youth Fund.  Each province also has its own entities that provide funding options for businesses in their region.”
He says it is also a good idea to approach a business advisor, such as SEDA to help you understand what is going on in the market that you wish to enter, give you advice and point you in the right direction for funding.
“South Africa is an emerging economy with many entrepreneurs and visionaries who have the ideas and the plans, but just need the resources and a bit of guidance,” says Chabalala. “They simply need someone to believe in them.”

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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