Starting a business in South Africa begins with a practical question: who will pay for what you offer? This guide covers testing demand, planning costs, finding customers and knowing where to check registration requirements.
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Do you have what it takes to make a success of running your own business? Where do you start and how much capital do you need? We answer these questions and others in this guide to how to start a business in South Africa with almost no money.
Why you should start your own business in South Africa?
Start with a need you understand, a manageable first offer and a realistic budget. Speak to potential customers before committing to stock, premises or equipment. A small test gives you evidence to improve the idea without assuming that demand is guaranteed.
How risky is it to start a business in South Africa?
It’s a bit easier to start a business in South Africa if you’re an overseas investor with a lot of money. It’s a real challenge for locals to start a business in South Africa with little or no money. It’s not impossible if you venture into this space with due care and consideration.
Starting a business carries risk. Test demand, budget for costs and decide in advance how much you can afford to commit. There is no guaranteed route from a good idea to a sustainable business.
Why do some start-up businesses in South Africa keep their doors open and others find themselves out of business? This question has been the basis of hundreds of studies and no-one really has come up with the magic formula. The trick is to do whatever it takes to ensure your business starts on the right footing and continues to grow in the right direction.
There are a few factors to take seriously if you plan to start a new business in South Africa. This includes:
- Carefully select a product or service mix that is needed.
- Carefully select the right location for your business.
- Carefully select a bank that supports small business enterprises
- Ensure you have enough money to start the business and keep it going in tough months
- Have a clear plan of who your customers are and how you are going to attract them
- Adopt a marketing plan that clearly positions your business in the right place and in front of the right people
- Commit 100% to your new business
- Start small and grow your business on a steady but sure basis
Why start-up businesses fail
Learning from common business problems can help you prepare. Review your pricing, customer demand and working capital before you commit.
Here are the top 6 reasons businesses fail and what you can do to avoid falling into that trap:
1. You are not mentally prepared or motivated to run your own business
You need to commit 100% to your new business from the first day. You can’t be a ‘part-time entrepreneur’ with a full-time business. It requires all your energy, self-belief and motivation to make it work and keep your doors open.
Ask yourself… do you have what it takes to be an entrepreneur or do are you better off working for someone else?
2. You don’t have a good understanding of business
Too many people start a new business without really understanding the world of business. They have a great idea but no idea how to bring it to the market, attract customers and grow their business.
It’s worthwhile to find someone who can coach or mentor you through the start-up process. There are also hundreds of books available online and in stores that you can read to improve your business acumen. Read as much as you can on how to run a successful business and if possible, sign up for a part-time business management course.
3. You start your new business too soon
Do thorough research and get the fundamentals in place before taking a new business to market. Start with a manageable test and use the results to improve your offer.
Develop a comprehensive business plan, research your target audience and competitors and build a solid marketing platform f social media and digital marketing. When all the prep work has been done, you can open your doors to business.
4. You start a new business for the wrong reason
A big mistake to make is starting a new business because you “want more freedom and time for your personal interests”. A start-up business will consume all your time if you’re 100% committed so don’t be fooled into thinking working for yourself will be easier than working for someone else.
Other reasons like “I want to be my own boss” or “I don’t want someone telling me what to do” can also come back to haunt you. Running your own business is tough… it can be lonely, isolating and hard work and some days you’ll find the pressure of making decisions solely on your own very daunting.
5. You don’t ask for help
Pride before the fall… as they say. Don’t be afraid to ask for help, preferably from business peers and business coaches. A new business owner has to cover everything from finances, sales, marketing, production, distribution etc. It’s unrealistic to think you have the knowledge and skills for every aspect of your business so ask for support and direction in those areas that you are weakest.
6. You work ‘in your business’ and not ‘on your business’
This means you are too inwardly focused on production, packaging, sales etc. and are not considering what is happening in the market. You need to consistently work on and adjust your business plan and marketing strategy to accommodate changes in the marketplace. Keep up your market research and strategic planning.
Own business or franchise: which is best?
The big question is… do you have what it takes to start your own business in South Africa or is it wiser to take the slightly more safer route and buy a franchise?
When you buy a franchise, the franchisor provides guidelines and business systems that have proven to be a success as well as ongoing mentoring and assistance. In return, you pay a franchise fee.
It’s generally said that franchises have a higher rate of success than start-up businesses, mainly because the franchise owners have done the hard yards and developed a formula for success. It’s also easier to get finance from a bank for a franchise and the cost of setting up a franchise is often less than starting your own business in the same market.
On the other hand, owning a franchise doesn’t give you as much freedom and independence as owning your own business does. And even though a franchise is easier to start up, there is no guarantee it will be successful.
Advantages of buying a franchise
- you have the independence of working for yourself but the support of a proven and successful business entity
- you receive ongoing training and administrative support which means you don’t have to have extensive experience in the business before starting up
- it’s easier to get finance for a franchise and the finance offered tends to be less expensive than if you borrow for a start-up business
- you have access to regional and national advertising and digital marketing support
Disadvantages of buying a franchise
- you are bound by a formal business agreement with your franchisor which dictate how you must run your business
- your creativity and authority is limited because you are restricted to the franchise’s strict way of doing business
- your reputation can be badly damaged by other franchises who offer bad service
- you have to share your profit with the franchisor
- there is no guarantee the franchisor will renew your franchise agreement at the end of the franchise term
Is it safer to buy an existing business?
Going into business on your own is daunting, particularly if you start a new business with little or no money. If the franchise option doesn’t appeal to you, you could consider buying an established business.
A business that has been operational for a while and by all accounts is successful should offer an existing customer base that you can start trading with straight away. On the other hand, you might inherit hidden problems.
When looking at an established business, you need to know exactly how the business has been run and how profitable it is. It’s a complex and time-consuming process to investigate the ins and outs of an established business and you should get professional help to make the final decision.
Advantages of buying an established business
- the hard work of starting a business has already been done
- an established business should generate immediate cash flow which is a better option if you’re taking over the business with no money
- it is easier to secure finance if the business has a proven financial history that shows it is profitable
- you don’t have to start from scratch: you take over an existing customer base, contracts, suppliers, staff, stock and equipment
- the managers and staff in the business have the knowledge and experience needed to keep the business running smoothly until you have got up to speed with how things work
Disadvantages of buying an established business
- there is no way of knowing whether the current owner has ‘crooked the books’ or is hiding something that could potentially derail the business once you take it over
- the equipment you take over may be old and in need of repairs or to be replaced
- staff morale may be low which often happens if they’ve been poorly treated by the current owner or are feeling insecure about the business buy-out
- it’s very difficult to measure goodwill and there’s a risk that damaged customer relations cannot be fixed by a new owner
- customers may not ‘click with you’; the success of many independent businesses is based on personal relationships with customers that have been with the owner from the start and there’s no guarantee they’ll automatically accept you and your style of running a business
Take a leap of faith and start your own business in South Africa
If you have considered all the options and are still sure that starting your own business is the right way to go, then welcome to the world of entrepreneurship. As they say… with great risk often comes great rewards.
You will no doubt experience some failures and setbacks and there will be days when you wonder why you started your own business in the first place. If you take the risk and make a success of your new business, the rewards are worth it.
What is an entrepreneur?
An entrepreneur is someone with a thought, idea or concept for a business that turns it into reality. It’s the process of creating a business and (hopefully) making money from something that is either a unique and novel concept or something that is done by others but you firmly believe you could do better.
An entrepreneur is different to someone who is self-employed such as a freelancer. An entrepreneur takes on greater than normal financial risks to run his or her business where a person who is self-employed generally makes money for a set of skills and there’s typically less risk to their business.
Advantages of being an entrepreneur
- you have more flexibility; you can work from home or an office and can determine your own working schedule
- you learn a lot about business which you might not have learnt working for a boss, from finances and project management to marketing and sales
- it’s more fulfilling to work for yourself because you have your independence, it’s never boring and you are rewarded for your own hard work
- you can potentially earn more money
Disadvantages of being an entrepreneur
- you are often ‘jack of all trades and master of none’ because you are responsible for everything until you can afford to employ staff
- it can be difficult to switch off and leave your work behind at the office; entrepreneurs usually work long hours and on weekends to grow their business
- you don’t receive a regular monthly salary
- you don’t receive company benefits such as a medical aid, pension fund or car allowance
- the pressure and stress can be overwhelming in tough economic times
What are the characteristics of a successful entrepreneur?
Some people are born entrepreneurs, while others take to entrepreneurship more slowly. Entrepreneurs have what it takes to handle the risks and pressure of starting a new business and are often seen as confident, self-assured and courageous people. However, there’s more to being an entrepreneur than meets the eye, especially someone who starts a business from scratch.
Here’s a list of some of the characteristics of a successful entrepreneur:
Self-belief
Have a solid belief in your knowledge, experience and skills which gives you the confidence to tackle whatever comes your way.
Common Sense
An ability to make sound judgements on issues you encounter every day, using good judgement gained from past experience and a good understanding of the business.
Conscientious
Hardworking, thorough and diligent; putting in the hard yards to make something a success.
Tenacious
The ability to persevere even in the most challenging times.
Passionate
A deep-seated desire to succeed at something, not just for the money but because it’s something that you are passionate about.
Risk taker
Willing to take risks for something you believe in, where the reward is worth the risk.
Visionary
The ability to see what others don’t see and the ability to turn a vision into reality.
Creative thinker
Someone who thinks out of the box and finds new ways to solve old problems.
Strong communication skills
Able to communicate clearly and effectively with people so everyone is on board and on the same page with you.
Step-by-step guide on how to start a business in South Africa
Slow and steady wins the race. Start slowly with a thorough understanding of your market and a strong grip on reality; is this really what you want to do and do you have what it takes to make the business a success. Let the business grow organically using common sense to make sound judgements on everyday business decisions.
Step 1 – Thoroughly research the market
Once you’ve identified a business idea, take time to research the market and determine if it’s needed, what other companies offer the same product or service and how hard it would be to break into the market.
Step 2 – Develop a comprehensive business plan
A good business plan has a lot of detail and includes information on all aspects of the business. This includes information on which market you will operate in, which customers you will target, how you will communicate with potential customers and how much capital you need to start your business and keep it running until you start making a profit.
If you have never written a business plan and don’t know where to start, there are experienced people who will create one for you. Find freelance business plan writers on Fiverr.
Step 3 – Plan your finances
It’s possible to start a business in South Africa without money but you still need to plan your finances. You may need to borrow money for the initial investment and to cover expenses before you start making a profit.
Step 4 – Choose your business structure and check registration
Company registration and tax obligations depend on how you operate. CIPC provides company registration and related services through BizPortal. Use the official service for current requirements rather than an old advertised fee.
Step 5 – Find the right location for your business
Finding the right location for your start-up business is one of the most important things you can do. It may be a home office, shared office space, a shop in a busy shopping mall or factory in an industrial area.
Step 6 – Promote your business
As you know, you can’t sit back and wait for business to come to you. You have to be active in the right marketing space and saying the right things to your customers.
If you are starting a business in South Africa with no money, you won’t be able to afford the services of a professional marketing agency. This is not a problem because there is a wealth of information online that you can use as a valuable business resource.
Some ideas to get started… attend free business seminars, join a business chat group, follow your competitors on social media to see what they’re doing and call a friend. Don’t be shy to ask for help from friends and business associates who know how to market a business online.
Visit these top 5 sites for online marketing tactics for small business with no money:
How to start a business in South Africa with no money
How do you start a business with no money in South Africa? Is it even possible? The good news is, yes it is possible.
It won’t be easy but hundreds of people do it every year in South Africa and are successful. Remember… Apple, Disney, Google, Harley Davidson and Hewlett-Packard all started in someone’s garage.
One of the biggest challenges of starting a business without capital is borrowing from the banks. If you do secure funding from a bank, it’s usually at a high interest rate. This is because business start-ups are considered high risk.
To get funding from a bank to start a business, you generally have to meet the following criteria (called the 4 C’s of Credit):
Capital
Startup capital is sometimes referred to as ‘seed money’. This is the money you need to start a new business and cover your daily expenses until the business starts to make profits.
Collateral
Collateral is an additional form of security that can be used to assure a financial lender that you have a second source to fall back on to repay a loan. Collateral provides lenders with some assurance that they can recoup the money owed in another way, which usually includes selling off or liquidating an asset (for example, a property).
Capacity
Capacity is the ability of a business to generate money to pay back a loan. Established businesses have the benefit of their financial track record but a start-up business will find it hard to prove it has capacity.
Character
Character refers to your credit rating. A good credit rating will stand you in good stead for a business loan; a poor rating will mean banks will turn you away before they even consider your application. It’s important that you build up a good credit rating before starting a new business in South Africa.
Check your credit score here for free:
Credit Bureau
How to get capital to start a business in South Africa
There are a few ways you can finance your new business in South Africa through government-supported entities. These include:
Industrial Development Corporation (IDC)
IDC is a national development finance institution set up to promote economic growth and industrial development. It is owned by the South African government under the supervision of the Economic Development ministry.
Government Investment Incentives (GII)
Government departments offer an array of incentive schemes to stimulate and facilitate the development of sustainable, competitive enterprises by providing accessible incentives that effectively support national priorities.
A variety of incentive schemes seek to support the development or growth of commercially viable and sustainable enterprises through the provision of either funding or tax relief, thereby ensuring the creation of new and sustainable jobs.
The intention is to increase participation in various areas of development. Most of the incentives are housed within the Department of Trade and Industry, with a few others in other government departments.
Small Enterprise Finance Agency (SEFA)
The Small Enterprise Finance Agency (SOC) Limited (SEFA) provides financial products and services to qualifying SMMEs and Co-operatives through a hybrid of wholesale and direct lending channels within the following sectors:
- services (including retail & wholesale trades and tourism)
- manufacturing (including agro-processing)
- agriculture (specifically land reform beneficiaries and contract-farming activities)
- construction (small construction contractors)
- mining (specifically small scale miners)
- green industries (renewable energy, waste and recycling management)
SEFA is a wholly-owned subsidiary of the Industrial Development Corporation Limited (IDC).
National Youth Development Agency (NYDA)
The National Youth Development Agency (NYDA) was established to address youth development issues at National, Provincial and Local government level.
NYDA designs and implements programmes that are aimed at improving the lives of young people, as well as avail opportunities to youth. These programmes could be clustered as follows:
Individual (Micro) level
The NYDA provides direct services to youth in the form of information provision, career guidance services, mentorship, skills development and training, entrepreneurial development and support, health awareness programmes and involvement in sport.
Community (Meso) level
The NYDA encourages young people to be catalysts for change in their communities through involvement in community development activities, social cohesion initiatives, National Youth Service programmes and social dialogues.
Provincial and National (Macro) level
Through its policy development, partnerships and research programmes, the NYDA facilitates the participation of youth in developing key policy inputs, which shape the socio-economic landscape of South Africa.
Companies in South Africa that lend money to small businesses in South Africa
BusinessTech published an article in July 2019 which provides a list of 8 companies in South Africa that lend money to small businesses in South Africa.
Be wary of borrowing money from micro-lenders because their interest rates are very high and the cost can be crippling over the long run.
How to start a business through crowdfunding
Crowdfunding is a method of raising money through the collective effort of friends, family, customers and individual investors. Most crowdfunding initiatives are done online and the benefit is people from all over the world can contribute. A fundraising campaign can help you get the finance you need to start a new business and spread the word about your business.
With crowdfunding, entrepreneurs can tap into the power of Internet to raise money for their small businesses. It’s an inexpensive way to bankroll a new project and build a base of supportive customers.
If you want to use crowdfunding to raise money for your new business, you need to have an engaging story to tell. Crowdfunding relies on appealing to a large pool of people to contribute small or large donations to raise money in situations where that kind of money couldn’t be accessed from a traditional source such as a bank.
List of Crowdfunding websites in South Africa
How Crowdfunding works
Crowdfunding is a new way to raise money online for a not-for-profit, charity, social enterprise, community project or person in need.
Crowdfunding works in 3 easy steps:
Step 1: Register and set up your Crowdfunding page. Customise the content, images and video and set your target and timeframe.
Step 2: Promote your crowdfunding campaign via email, Facebook and Twitter.
Step 3:Get paid. As funds come into your crowdfunding account, they are transferred directly to your bank or PayPal account. You get 100% of what you raise. The crowdfunding platform generally takes a 5% fee if you reach your target.
4 types of crowdfunding for business
Crowdfunding has been used in the past to raise money for a not-for-profit initiative, charity or person in need. The fund-raising platform has evolved and crowdfunding is now used to find financial backers for a wide variety of projects and campaigns.
There a 4 basic forms of crowdfunding for business:
Reward-based crowdfunding
Reward-based crowdfunding is where you offer financial backers a reward for their investment. This could be a discount, sponsorship rights or free products.
Equity-based crowdfunding
Equity-based crowdfunding is where you offer financial backers an equity stake in your business. This is an online version of venture capital. It’s a complicated option fraught with legal issues so do your homework carefully before considering equity-based crowdfunding.
Lending-based crowdfunding
Lending-based crowdfunding is where you seek financial backing from investors for a fixed return on the shares they are given in the business. It’s different from equity-based crowdfunding where the value of shares owned by an investor grows as the business grows.
Donation-based crowdfunding
Donation-based crowdfunding applies to businesses registered as ‘not-for-profit’ (NGOs). This is usually a charity organisation. Tax treatment depends on the organisation and applicable rules; check with a registered tax practitioner. Projects that elicit the most support usually have a humanitarian angle.
Documents needed to start a business in South Africa
Keep identification, business records and supporting documents organised from the start. Requirements depend on your business structure, activities and whether you employ people.
Company registration
Check the current document requirements and registration services on CIPC’s BizPortal.
Tax and employer responsibilities
Use SARS guidance for starting a business to establish your obligations. VAT, payroll and other registrations have separate rules. Check the current thresholds and qualifying conditions with SARS or a registered tax practitioner before relying on them in your budget.
Considering a water resale business?
Explore the Waterpreneur programme to see the current stock packs, collection process and support. Work out your transport and selling costs before deciding which pack fits your budget. Income is not guaranteed and depends on sales, costs and individual effort.