Old Mutual On The Money
Old Mutual On The Money
Unpack How Your Credit Profile Is Holding Your Business & Career Back With Ndumiso Zulu
Your personal credit profile could be the reason you’re not getting funded or hired. In this eye-opening clip from the On The Money Podcast, Old Mutual’s Masisizane Fund CEO Ndumiso Zulu chats to Group Head of Financial Education, John Manyike, about why funders and even employers look closely at your financial habits. Your money story speaks louder than your CV.
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John Manyike 00:00
Welcome to Old Mutual’s On The Money show. Today we are talking all things SME’s. When you look at the South African realities when it comes to employment the official rate is about 32.9% but when you look at black Africans in particular we are looking at 36%. When you look at the youth, it’s even worse, we’re talking 66% so the question is, is employment the answer for South Africa when economies around the world have SME’s that are driving employment. So but today we’re going to be joined by somebody who understands this world better than me, we’re joined by a colleague of mine, Ndumiso Zulu who’s a CA and let’s see what he can share with us about the challenges in South Africa and the issues around SME’s. Mfowethu.
Ndumiso Zulu 01:02
Bra John
John Manyike 01:03
Are you well?
Ndumiso Zulu 01:05
I’m good how are you?
John Manyike 01:06
You know those of us that were not fond of mathematics, when we hear CA we think Yoh! This thing is complicated. What does it take to become a CA like yourself?
Ndumiso Zulu 01:20
Sure. A lot of hard work I think is a start but also dedication. It’s not one of the easiest courses you’ll ever do but I think if you really stay the course you will make it and it differs from person to person. Some people do it in the minimum seven years, some people do it in twenty years and what’s interesting is that once you actually qualify it doesn’t matter. It is not a measure of success how soon you get it done, as long as you get it done.
John Manyike 01:57
Ok, so you are the CEO of Social Investments at Old Mutual. What is this Social Investment?
Ndumiso Zulu 02:05
Yeah good question. So Social Investments is a new construct within Old Mutual. What we really did is put together three businesses that have one common thread which is investing in the communities in which we operate with the primary purpose of driving impact, positive social impact in those communities as opposed to doing things in communities with a profit motive. So that’s what differentiates the businesses that fall under Social Investments from the greater Old Mutual. So two of these businesses are focused on SME funding and support solutions that is the Old Mutual Enterprise Supply Development Fund ESD Fund for short and the Msisizane Fund and the other third business is the Corporate Social Investments or CSI for short that most people would be familiar with.
John Manyike 03:03
Ok. Well still on the credentials. Maybe on the benefit of our viewers, give us a bit of your background your professional background in commercial and development funding.
Ndumiso Zulu 03:16
So I started my career out in the IDC, Industrial Development Corporation I did my CA articles there. When I qualified I then took up a role in the technology capital unit within the business. After which I then decided I want to see how the other half lives, in corporate and investment banking but also this was in the back end of 2007 people said there your bonuses are even bigger than your annual salary. I said I’m in the wrong business. I was in corporate and investment banking for over seven years, I can confirm my bonus never reached those levels that’s a story for another day. So I stayed in corporate and investment business for just shy of seven years during which time I did, I consider myself one of those lucky people who have done funding right from the beginning. So Bra John is starting his small coffee shop and needs funding all the way up to working on funding packages for some of the biggest corporates in the world you can think of including countries borrow, so I’ve been very fortunate in my career to be exposed throughout that spectrum. So from then I moved to the DBSA, The Development Bank Of Southern Africa where I was a project development specialist so a little bit similar to what I did at the IDC and then I joined Old Mutual three years ago and that has been a very interesting ride in and of itself.
John Manyike 04:59
So, um you know as you heard from the intro there, today we want to focus on the world of SME’s. how crucial are SME’s in any economy for that matter?
Ndumiso Zulu 05:06
Yeah, probably far more critical than we give them credit for. I say this, if you look at the S.A context for example, SME’s make up two-thirds of business in South Africa that should tell you, much of the economic activity takes place in that sector as opposed to what we are used to in the formal sector but also I think its commonplace that SME’s are really the engine growth for South Africa if we’re ever going to start growing beyond the 2.2% projected growth for this year that we’re excited about, that fundamental change will need to happen within the SME space because they have the potential to grow exponentially and with that growth unemployment goes the opposite direction. But also people get access to opportunities.
John Manyike 06:01
Ok, so you know often hear people who are trying to start a business say look, “ its very hard to get funding” and this and that, what are the misconceptions when it comes to SME funding?
Ndumiso Zulu 06:25
Sure. So one I often encounter is one that says, ‘If I need money today then I need to start talking about getting money today.’ It’s a process that will never stop. You can do what you can to make the process shorter but you can never completely make it as short as you want and I say this because much of the funding activity takes place in the formal financial sector which is a highly regulated sector. It has to be, because my money, your money is circulating in this formal sector, whether it’s the money in your bank account, it’s the money in the fixed deposit, the regulators has to make sure that money is safe so before you can come and borrow money from me, I need to make sure you are who you say you are, I need to make sure you are not listed for debt elsewhere because if you can’t pay them why are you going to pay me? So my advice to business owners is, if you need money six months from now, start now, not in six months. I often encounter business owners who say, ‘I’ve secured this great opportunity, this particular department has given me a purchase order for five million, I need three million for stock, but I need it tomorrow.’ And I say to them that I won’t even trust my own brother with two mMillion rand within one day. I have a whole bunch of questions I need you to answer before I can get to a level of comfort that I can give you the money. So time and preparedness is important but also that preparedness entails getting your financial affairs in order as a business but also as a business owner because we don’t know each other. I often say that the business of lending is for crazy people because if I walk up to you and you don’t know me from a bar of soap and say Bra John please borrow me five million I’ll you back in five years, you’ll probably laugh me out of the room. How do I know you are going to pay me? But in the business of lending, people actually say, ‘Tell me more!’ and you give them a piece of paper you call a business plan and they cut you a five million cheque. Somehow this system works, so something has to under pin it and that’s really trust or faith in the financial system that the systems that underpin it work that people borrow, people pay and there’s work that has to happen there. And the minute that I find out that your financial affairs are not in order, I get nervous and funding in its very nature, very risky business because if I give you money and you don’t pay then what? So I need to make sure before I give you that money, that I’m comfortable that the chances that you going to pay me back are better than slim. And I find that’s one of the pitfalls or the stumbling blocks that most entrepreneurs struggle with. In fact I have a story that one particular entrepreneur had a great business and we were about to give him funding and then as we so our due diligence check we realise that he is listed for debt in his personal capacity and for the life of him, he didn’t understand why that is an issue because he’s saying you are lending to my business. My business is not listed, I am. Why are you trying to mix this oil and water into one pot. I am saying to him, well you run this business right? So your judgment at the end of the day is what I’m putting my reliance on, so if your judgment in your personal capacity is questionable, why shouldn’t I question it on the business side of things considering maybe the risk is considerably higher here because maybe you are listed here because you did not pay your retail account of five hundred bucks now you say I must lend you fifteen Million. So that’s the difficulty.
John Manyike 10:25
The numbers don’t gel, so that leads me to my next question, what are some of the red flags that funders would look at when assessing a funding application from an entrepreneur?
Ndumiso Zulu 10:33
Sure, good question. So the starting point is always the business plan and maybe we need to demystify that, say business plan? Oh big business word, I need to maybe get a consultant. Really in its bare form a business plan is an outline of who you are as a business what are you going to do, how much money are you going to do it and projections in terms of do the numbers actually make sense that you’re going to be able to repay me but also make profit for yourself in other words is the business sustainable as you see it today, because nobody works for free, nobody wants to start a business that’s going to make a loss. So that’s essentially what a business plan is. The better the business plan, the better the chances of actually securing funding and I find that with some business owners a business plan, putting it together is a almost a grudge exercise. Like I’m doing it because they want it as opposed to I’m doing it because its essential for my business. Similar to that its making sure you keep adequate financial records because that’s says to me you understand what’s going on in your business day to day. So if you say to me I’m running a business selling I don’t know, um tables like this one, so I say to you ‘How much does it cost to make this table?’, the minute you say to me, “Yoh I’m going to have to ask my accountant and check”, that means you’re probably not reviewing your financial information as often as you should. So because I don’t know you, I keep coming back to this point, you coming to me looking for money, I don’t know you, so every interaction you and I have, it says something to me about you as an entrepreneur and whether I can trust you or not. So if you’re not keeping adequate accounting records it’s a problem. If your business plan looks like it was put together in a hurry, that’s a red flag. I once had a gentleman very early on in my career, sent me a business plan, handwritten and then basically his proposal was, he wants to buy or supply machines for people who want to wash their hands, so if usemcimbini or something, a mobile hand washer in essence. Writes it out by hand then continues to draw this machine by hand and puts his account number at the bottom saying please deposit five million rand into this account. That’s a non-starter if you’re talking about red flags. So the way you prepare your business plan says something about you as a entrepreneur as much as it says something about the very business you’re trying to present. We’ve spoken about the fact that how you maintain your financial affairs has a big impact on your ability to secure funding as well.
John Manyike 13:47
So you’ve answered the question I was about to ask but I’ll ask the second part of the question that I wanted to ask you about personal financial habits as an entrepreneur whose looking for funding. So to what extent do funders look at you personal profile and link it to the business which is a separate legal entity that’s granted but obviously appreciating the fact you’re the business owner. To what level of detail would funders look at personal financial habits and your credit profile?
Ndumiso Zulu 14:28
Sure. Oh critically! Um we look at that critically but I mean, even if you zoom out of just an entrepreneur trying to secure funding, even you as an individual trying to secure a job, potential employers actually look at your financial conduct in part of making the decision whether to hire you or not. You’ll be amazed at how many people I’ve interviewed, got excited about, right at the end when you do credit checks its red flags all over the place. Now we work in financial services, if you can’t manage your money, how are you going to manage mine? Same principle applies, perhaps even more so in running your own business because maybe if you’re applying for a job we say he’s not really good at managing his personal finances but in my business he’s not going to touch money so its fine. It doesn’t work like that in a business right? So it’s very important that you maintain that. But also it’s an indicator of how you are going to manage these business finances once you have them because often times you will find somebody who’s been funding his businesses maybe out of their own pocket, maybe out of their pension now the are poised for growth. Now all of a sudden the business that ran on maybe a five hundred thousand rand budget now suddenly gets ten million now Bra John thinks he’s a millionaire, you are not a millionaire, your business is, so we tend to mix up the two and almost always get into trouble because of it. Because once you start money that’s earmarked for the business and use it for the personal, we always think we’re going to catch up at some point and never do, not only have you ruined the relationship with this particular lender, because remember they are now also credit bureaus where if you don’t pay you get listed. So if you don’t pay me and then everyone else doesn’t want to touch you because your record is now in trouble, so it is critically important.
John Manyike 16:30
So tell me about the different types of funding available for SME’s?
Ndumiso Zulu 16:38
Yeah, so that is a very critical question. It’s not only just the different types of funding that are available which I’m going to go into right now it’s also the important to look at your business and the stage it is in and then access what is the applicable type of funding that you need because you hear people time and time talking about I always look for funding, I always get rejected and I ask are you knocking at the right door for what you need, now that’s very important, I’ll come back to that point. Now the different types of funding available to businesses are driven by and large by what you’re trying to do with the money. So for example there’s long term funding which is funding you’re going to keep for five ten years whatever the case is, there’s short term funding that you need to pay for example salaries and things like that, so there’s things where you have like capital facilities so you need money so you can acquire stock so you can sell that stock and you pay your employees so they tend to be recurring in nature, that’s one part. You have things like asset finance, if you’re in the trucking business for example a good truck will set you back a few million rands I don’t know if you have that money, I don’t. So typically you go to a funder and say, I have secured a contract I need this type of truck to be able to deliver. Then a funder or a bank is going to say Bra John, I like your business case here is two, three million or however much the truck costs I’ll buy it on your behalf. So in other words the lender owns the truck but you keep and use the truck as if it’s your own and only when you finish paying the truck does it become your property so instalment sale agreement. So you see a lot of those structures inside that asset finance space and then you get secured funding, so you’re looking at things where you essentially say, let’s say you’re buying a house right? When you buy a house that’s a type of secured financial funding because you get the house but the bank says that if ever you don’t pay me I take the house sell it, so I can recover my money. The basic principle is, the more secure the funding is, the cheaper the interest rate you get charged because the risk is lower. On the other side of the scale, you get unsecured funding. So things like you personal credit card for example are unsecured and because of it they tend to be more expensive. So to my original point you need to be clear on what you want to do with the money so you know the type of funding that is applicable to it. So don’t buy a car with your credit card, you’re going to be in trouble. So those are the type of funding that are available, but also then, when you are a business depending at what stage you are at, if you want to start a franchise where your store is branded as one of the big retailers in this country, in the township , because you see people have to travel for an hour to go to the nearest town you can’t then go knocking on the door of a venture capitalist for funding because there’s a reason venture capitalists tend to play in the technology space opportunities of exponential growth are there. The risk is very high but also if you make it, you really make it. Whereas in retail, the margins or the profits are not that big but the business is a lot safer. If you sell food at some point somebody is going to buy. So if you’re knocking on the venture capitals door they going to say no, not because your business is not good enough or it doesn't have a business case, but because you knocking on the wrong door. Similarly, most people who want to start a business talk about how banks reject them. Go to the bank, they are too risk adverse, they don’t want to fund me, and I ‘m saying you are still conceptualising a business. Banks are not the right people you want to go to. They talk about angel investors and friends, family. A colleague of mine says it’s friends family and fools that give you that start-up funding and that’s because that person by and large is investing in you, as a person, as an entrepreneur than they are in the business, because a business is not fully formed yet. A bank is not going to take that kind of risk on you. It’s just not structured that way, because banks don’t have money. You and I have as the banks customer have money. Imagine one day you go to the bank, you try to and withdraw and nothing comes. It says sorry Bra John, I thought Siyabonga over there had a good business idea and he didn’t pay us. So there’s always a that delicate balance, behind providing the funding required but also making sure that as a lender yourself, you don’t put your business at risk. So understand where you are as a business. Understand the funding sources available to you and which one is applicable to you given where you are because it’ll change over time. So you can start off as somebody who has a great idea and you need grant funding, your prove the concept, the business starts selling then the development funding institutions start getting interested because they see the concept. Now that you are developed and a fully-fledged business, now all of a sudden the banks are interested because you are a more acceptable risk based on their appetite because your business is established, your cash flows are more predictable and the like. I find that there’s always that mismatch between what the entrepreneur needs and where they go looking for it from a funding perspective.
John Manyike 22:22
So what should an entrepreneur consider in deciding whether they should go the loan route or a shareholder investor to fund the business?
Ndumiso Zulu 22:36
Great question! As a start and it’s a fundamental question you’re asking, there’s only two main sources of funding for any business. You either go to somebody, you borrow money which means you have to pay them back at some point or you raise your own money, or get a partner to put their own money into the business alongside you. Both have trade offs both have advantages. If you invest in equity, or rather if you raise money through equity, it’s either you have to find that money yourself or you need to get somebody else to be a co-shareholder but by virtue of doing that, you’re losing some of the control of your business now, because it’s no longer your business, it’s my business. It means that the decision making has to happen here and not at your house so you’ve got to make that decision that am I willing to give control in order to get funding or not. If you don’t want to give control of your business, then you want to go the debt route but remember, if you raise debt, the person you owe money to doesn’t care how your business is doing. If I’m supposed to get paid at the end of the month, you pay me at the end of the month and if you don’t pay me, there’s a whole litany of consequences that follow that, so it’s important to bear that in mind but also by its very nature, equity investors are long term investors so if you don’t have patient capital then don’t invest in equity. I always make this example, that for the first twelve to fourteen years Microsoft didn’t pay any dividends to its shareholders. So that means you would’ve invested money when your child was born and they go all the way to high school and you still haven’t see a single cent coming from this investment. If you don’t have that kind of patience, equity is not for you whereas on the other end of the spectrum, if you give somebody debt today, they start paying you at the end of the month. But because you get the money a lot quicker the return on debt tends to be a lot lower than the return on equity because the risk on equity is higher. The other challenge is, if the business fails and businesses fail a lot, you as the equity owner, equity holder or owner of this business, you get paid right at the end right? So your employees are going to get paid, your secured creditors are going to get paid, SARS gets paid and when all of that is done, there’s usually nothing left for you. So you need to decide upfront where you invest, whether that level of risk is acceptable for you. But also time is a factor, it’s a lot easier to raise debt finance that it is to raise equity so if you need money in three months, you’re probably not going to get there when you raise equity, you’ll easily get there if you’re raising debt. So these are some of the considerations as a business owner you need to bear in mind, but the one about control is very important, people go and secure equity partners and then you hear they are now fighting, they’re taking each other to court because it’s not just about the ability of your partner to bring the money, it’s whether you have a shared vision for this business. So again, if I’m investing in your business because I’m thinking in three years my daughter is going to university, I need money to be able to pay for her fees, we get to three years’ time and the business is not at the point where it can pay dividends we’re going to have a problem so you’re going to say either you pay me or I’m going to sell this to someone else. But now you are worried because you don’t know who that someone else is, and whether you’re going to gel as business partners.
John Manyike 26:46
So can you unpack the concept of surety? Now that we’re talking about different sources of funding, how does surety work for someone who is raising funding through maybe getting a loan?
Ndumiso Zulu 27:08
Yeah that’s a great question Bra John. I also find that especially for small business owners or emerging businesses, the process for securing funding is so daunting and you get rejected so many times that eventually when you find somebody who says yes I will give you the money, you’ll sign just about anything they put in front of you. You are asking me what surety is, which is good because you’re asking now. I get people who ask how does this surety thing work when they’ve already signed right? In it’s bare form, surety is if person A incurs a debt and fails to pay it then I, person B will repay that debt. So for example if you go to the bank and try to get a loan and they say Bra John we are not sure if you can pay it, then you then say my friend Ndumiso has a lot of money can he stand surety for me? If I agree to stand surety, I’m saying that if Bra John doesn’t pay, I will. And it becomes a problem when that surety becomes due because now I may not necessarily appreciate where Bra John is or how he’s running his business but because I’ve agreed to sign on his surety, I’m on the hook now for whatever he doesn’t pay. So it’s an instrument that helps particularly in instances where people are trying to raise finance but they don’t have any security to back it up. Whether it’s a car, whether it's your investments. Then they say, get someone in a better financial position than you. But really what you’re doing when you’re signing on as a surety is you’re saying that if the other person doesn’t pay, I will.
John Manyike 29:00
Ok, so can I use my property as surety?
Ndumiso Zulu 29:10
So, strictly speaking if you use property to secure a loan, that’s a mortgage but indirectly you can say these are the assets I have, maybe I have a house worth a million, I have I don’t know, I have investments worth two million rand so I am good to stand surety for something up to three million rand. So yes the house forms part of the assets, but its not the main security instrument if that makes sense. Then that house can’t be bonded elsewhere, because then if I try and take that house when the security or the surety comes due, the bank is going to come back and say chief, I have first mortgage on that house so you can’t take it.
John Manyike 29:58
Yeah. So ok, some of the small to medium business struggle with record keeping when they apply for funding, how crucial is record keeping for an entrepreneur?
Ndumiso Zulu 30:10
Record keeping is arguably the single most important thing that lenders look at. We spoke about the business plan, but you write the business plan, you can say whatever you want to say in the business plan, you can promise me the world. You cant do that with credible financial records. If you have fifty cents in the bank, your bank statements going to say you have fifty cents right? Similarly, financial statements are the things that entrepreneurs struggle with the most to produce. Its even worse after you’ve given them money and the reason that is important is it gives me comfort as a lender it gives me a line of sight into how your business is doing so that we can identify problems upfront. I think probably the why financial records are important is what’s lost on some business owners. It’s important for you because how else do you manage your business if you don’t know how your business is doing right so that’s the one part. Also myself the lender you send me financial records, I’ll say Bra John if you only have a cash balance of maybe five hundred thousand but on average you use three million to pay your staff, to pay your suppliers how are you bridging this funding gap? We might actually have to have a conversation around raising additional funds for you so you don’t run short of money halfway through the cycle. I don’t have a line of sight if you don’t keep adequate financial records right? So that’s why that is important, but also the fact that you keep financial records says to me this is a person that is proactively managing their business this is the person who’s planning ahead, because if you don’t have records then how do you know how your business is doing? And its part of the reasons why people look at the cash balance and say Oh! I have money, I can afford to go buy a car now and then two weeks later you can’t pay your employees.
John Manyike 32:29
So you head up Masisizane Fund, how does Masisizane structure the funding, how different is it from commercial banks?
Ndumiso Zulu 32:39
Sure. So as a start, you’ll have to look at Masisizane’s whole mandate and why it exists and it was really aimed at addressing a gap in the market that says if you are young, if you are black, if you are female, if you live in the township, if you’re from a rural area, all other things being equal, you will struggle the most to secure funding particularly from entities like banks. And the reasons for that are known, it’s the usual suspects; you might not have enough security you might not have your own contribution because you can never run a business with hundred percent other people’s money because there’s no skin in the game for you. As soon as this thing goes belly up, you say I’m going to go ask Bra John for a job now because this thing is not working and who loses? The lender. You lose nothing but then now the knowing the way South Africa is structured, that’s a lived reality. Not a lot of people have excess funds that they can use to invest in a business. So Masisizane went into business explicitly to saying these are the people we want to support and some of them are probably not going to be able to provide a lot of own financial contribution so maybe you contribute what we say is sweat capital so your own efforts into the business. We can actually consider that being your contribution to the business you’ll dedicate your resources to running this business effectively, you’ll obviously draw a salary because you must survive but oftentimes, usually at the beginning its not the kind of salary you would have made at Old Mutual right, so that sacrifice is your contribution but the idea is, as the business grows it also then can afford to pay you closer to what you actually deserve. That’s the one element, but the other part of it is recognising that funding is just one aspect of what a business needs another is the support structure, it’s the infrastructure, it’s the know how to run a business. If you picture how a company like Old Mutual is structured you have a chief of everything, Chief of Marketing, Chief of Finance, usually in a small business the owner is all of those things you are CEO but you are also the guy who makes coffee and sometimes you’re even the guy that sweeps the floors so capacity is a challenge, how do we then at Masisizane support you with resources to help you run your business better whether that talks about the provision of funds that you can’t afford, whether that talks about saying Bra John is very good at making whatever the product is, but he’s not very good at selling it, can we pair him with a mentor who’s very experienced in the sector that can guide him through this process and is part of it you know, ensure that there’s skills transfer over time mentors don’t do it for free, your business can’t probably afford to pay a mentor at the moment business support funding can help bridge that gap. But also over and above that its partnership right? So we don’t give you money today and say Bra John see you at the end of the month when you pay us, post investments stays in touch with you all the way and says how are you doing? Is your business hitting the targets? Do you have enough cash in the balance, in the bank and things like that. And we find when business owners reciprocate sort of partnership mentality, the businesses are far more likely to succeed than people who tend to go, you’ve given me your money now leave me alone I’ll pay you back at the end of the month. It works if it works, but if it doesn’t, and oftentimes it doesn't, that’s when we run into trouble because at the end of the day the name is Masisizane we are here to help but that is not same as we’re giving you this money for you to do whatever you want to do with it. But yeah I’d say those are the fundamental differentiators how we approach funding as opposed to say a commercial bank of say a commercial entity that is doing it for profit purposes.
John Manyike 37:05
You spoke about cash it the bank, why do a lot of SME’s struggle with cashflow management?
Ndumiso Zulu 37:16
I think it’s a planning challenge. Cash by its very nature is liquid, which means it can move very quickly. You see that even in your own life. One minute you think you have money, next minute its gone so if you don’t plan, I have this one million rand in the bank right now, how am I going to use it? Because remember there are debit orders you probably don’t know about so when you say I have a million, really you have maybe eight hundred thousand because tomorrow two debit orders are going to hit. So if you don’t plan, you going to go spend this million today, and then tomorrow when the debit order comes, you are in trouble. We experience that a lot in some of the businesses we’ve funded in the retail service stations industry or petrol stations so chances are where you fill up on your way home we funded that business. So what happens is the oil company will supply you the diesel, they’ll supply you the petrol that you sell. The big truck comes empty the load onto your tanks, tomorrow the debit order goes off your bank account. If you don’t have enough funds in that account you are in trouble because you are not getting the next load. But because you are not getting the next load, I, as your customer come here and say the Bra John never has fuel from now on I’m never going to fill up. That’s one problem. The second problem is that oil company that supplies you with the oil, you carry their brand, they don’t say Bra Johns business never has fuel, they say this particular oil company doesn’t. So they have to protect their brand and one way of doing that is saying, if you ever run dry we’re going to pull the right we’ve given you to sell under our name. so that’s what happens when you don’t manage your cashflow effectively. Its important to know what do I need to pay when and do I have enough funds to be able to do that but also do I maintain a particular buffer over above that so that if there are things that come that I didn’t expect, I don’t run into trouble. And that happens all the time, sometimes problems can be precipitated by your suppliers inadvertently debiting you on the wrong day. So you thought your debit order is going off the first of the month and by then you will have enough money and then somehow you get debited on a Friday because the next three days are a holiday. The debit order comes on that day, the money is already gone you re in trouble. So that’s why financial planning is critical in managing cash flows.
John Manyike 40:05
So a trust is a different legal arrangement, would you consider an application for funding from a trust?
Ndumiso Zulu 40:16
Not typically, I’ll tell you why. Because trusts, unlike companies are highly restrictive and regulated businesses. So for example, a business when it needs to borrow money, it just goes to a bank and borrows money. A trust needs to authorised by its trust deed to be able to be able to borrow money. It’s not a natural sort of ability to be able to do it. I think at their core, trusts were conceptualized to house assets as opposed to necessarily operating businesses. What we typically see though, is that the businesses, the companies or the PTY’s are then owned by Trusts. So instead of Bra John being a shareholder in company X, Bra Johns family Trust will own the operating company. Which means in effect the person who owns the company is not Bra John, even though I’m dealing with you as a lender because obviously a trust is not a person.
John Manyike 41:31
Okay, so I guess maybe the last question I would want to put to you is, for somebody who’s listening or watching this podcast, and want to start a business, what are the key, three things maybe that they should have in place before they even engage any potential funder.
Ndumiso Zulu 41:56
Sure. I think one of the biggest mistakes business owners or people who want to start a business make, is thinking every good idea equates to a business. It doesn’t work that way. And I’m saying this because I had this incident early on in my career, this guy came with a business plan and he said, you’ve seen people driving around, this was in lead up to the World Cup and everyone had a flag of their favourite country covering rearview mirrors, and he said that’s what I want to do, did you see the buzz it generated for the World Cup? I want to sell that and I said to him it was a great idea because there was a world cup coming. The World Cup has come and gone. Phillip is gone. So now who are you going to sell this to because the World Cup came and went, the buzz and the demand for that particular product went with it. So it’s important to establish whether there is a market for a product or your idea, one. Two, even if you’ve established that there is a market for your product, how are you going to capture that market? Because there’s somebody already servicing it. If you want to start a book publishing business, there’s already somebody who’ll publish this book, they are not opening their gates wide open that Bra John come sell alongside us, it’s competition so how are you going to convince the customer to not go to the existing businesses and come to you. So you marketing strategy need to be very clear. So those to me are some of the things I find that trip up business owners down the road, but also your business is not your baby so don’t personalise it. When somebody tells you that I don’t actually see a business here, it’s not personal, it’s an objective assessment so go back to the drawing board maybe there isn’t a business or maybe you haven’t presented your business case very well. So if you want to own or start a business be very open to doing things differently, to going back to the drawing board because you’re going to be operating in a very dynamic and fast changing environment so if you are married to you ideas you’re going to struggle.
John Manyike 44:22
So for someone who wants to apply for funding because they want to buy into a franchise, what sort of risks should they consider or what sort of risks would a funder look at if somebody says look, I want to buy into this particular franchise?
Ndumiso Zulu 44:44
Fantastic question. First off, you want to understand for yourself the potential business owner and I would want to understand the same thing as the potential funder into this business of yours, what kind of support if any does the franchisor provide to its franchisees? Or is it one of those things where we say here’s a licensing agreement, you pay us a percentage of your revenues, good luck see you at the end of the month. Or they actually walk the journey with you and say if you run into trouble, this is how support you here is an accounting system for example so you are able to track your orders, track your sales and produce financial records. But also is there a meeting of the minds in terms of objectives what you trying to do and what the franchisor wants to achieve? So is your vision aligned? But also what I said about control, when we’re talking about shareholders versus debt, versus debt finance, the same principle applies on franchising versus running your own business. You can run your business how ever you want, but if you want to run a business carrying someone else’s brand they going to tell you how to run that business right down to what uniform you must wear on site if you are not willing to give up that kind of control, franchising is not going to work for you. If you’re running a franchise and I’m selling the same product as your franchisor, you can’t say Ndumiso’s product is cheaper so I’m going to buy there, you are bound to buy from the franchisor. If you don’t do that you are in breach of contract and there is a whole course of consequences that from that so that’s very important. But also, another thing you want to understand is or asses the experience of the franchisor in the market because if they are starting out, it means they probably don’t understand the market very well yet and now you are tethering your business to this so if they got it wrong so do you.
John Manyike 47:03
So if an entrepreneur wants to look at a list of potential funding is there a portal? Where would I fund that information.
Ndumiso Zulu 47:19
I suppose one of the downsides of living in the information age, there is such a things as there too much information. You don’t even know where to start looking, that’s probably where we start to find ourselves as a generation, but I think by and large, I mean for example, if you look at Old Mutual we have a platform called, can I say the name? SME Go for example, it has a list of different funders that you can then be linked to, Masisizane by the way is one of the funders on that platform. And it depends on the type of funding you’re looking for in terms of where your business is and that’s aimed at making it a lot easier for potential business owners to access funding. I suppose there’s Google now, if you’re looking development funding you type that on Google, they’re going to give you a whole list then, in South African and abroad. So I think more than anything, it’s not so much about where do I find them it’s about are they looking to fund the kind of business that I am running or for the stage that I am currently at. But I will emphasis as a final point, planning ahead of time. The worst thing you can ever do as a business is go secure an opportunity and go and look for funding after the fact, and I’ve seen a lot that. Because now you’ve said to me, Ndumiso supply me a million of these books because I want to supply them to schools all over S.A but I need this book in three weeks before the schools close. And only then do I start running around trying to raise funding. I’m not going to get there, which means as a business, I’ve lost on the opportunity, but it also means as a business lost the credibility to you as a client that actually I can’t rely on this guy. I gave him an opportunity, he didn’t supply and the reason he didn’t supply is because he didn’t have access to funding and because he didn't have access to funding because he didn’t plan for it ahead of time. So plan as if you’ve already arrived. So seek funding as if you’ve already secured the opportunity. Otherwise if you try to do it the other way round you’re going to lose the opportunity because you didn’t get the funding right.
John Manyike 49:45
Wow! That was a mouthful, thank you very much for your time. I’m sure that our viewers and followers will certainly enjoy this particular podcast. I mean, I think we’ve covered as much as people can imagine as far as it relates to SME and SME funding. Thank you very much.
Ndumiso Zulu 50:00
Thank you for having me Bra John it was fantastic.
John Manyike 50:08
Awesome, awesome.