Bizempire newsletter - Series 2 - Number 02
Subject: Risks in starting your new business
If you are starting out or planning to start your new business venture, we would like you to keep the following risks in mind. This is important because most new businesses don't survive very long and no matter how confident you are now, you really should have a plan in case it doesn't work out.
The most common risks are:
- Leases and rentals.
- Bad debts.
Leases and rentals:
In particular here we are referring to landlord contracts for the premises you might want to use, but security contracts, cell phone contracts and in fact anything with the word "contract" in it can become a serious problem if your business fails.
Often a rental agreement will be for a period of say 5 years. That is great as it gives you the stability of knowing the premises is yours for that period of time. However if you run into financial trouble and your business stops trading, you are still expected to pay that rent for the 5 year period, even if you don't use the premises any longer. Sure you can try renegotiate, but you will hardly be in a strong position with a failing business.
Some contracts allow you to terminate the agreement giving 30 days notice, and although this is better its still not ideal
This sneaky word is for an agreement some suppliers (including landlords and especially banks) will try to get you to sign which is effectively a promise that you will personally pay any debts that the company cannot. Can you really afford to pay for those premises for 5 years from your personal savings? Can you really afford to pay the bank loan back from your private savings? Read the contracts carefully and think very seriously about signing them if they contain a surety section.
South African law puts a lot of responsibility on employers. Not only is there a huge administration burden as soon as you employ anyone, there are also significant costs involved when the employee stops working. Just think paid leave, maternity leave, CCMA, retrenchment packages, etc. Yes these all become your problem as soon as you employ someone.
SARS has special powers in getting taxes due to them paid. It doesn't matter if the company goes broke, SARS can usually go after the directors a swell. They can also take funds out of bank accounts without the owners permission and they have the ability to charge large penalties and interest. The moral of the story is to keep your taxes paid on time and up to date. Prioritise this so that you don't end up in endless trouble.
Here we refer mainly to customers who don't end up paying you. With the modern payment mechanisms of credit cards and EFTs, there isn't really a good reason to have 30 day accounts. The moment you provide your customers with credit, your risk jumps up and so does the admin effort behind managing these accounts. Larger customers perhaps have a reason to request accounts as it does help with their systems and controls. Smaller guys are simply using you to finance their own businesses. Provide credit at your own risk.
I hope the above has not scared you off your business start up journey, but its important to be aware of possible problems so that you can better deal with them.
The content is set at a level that should be comfortable for those who are new to the business environment, but if something seems to be too complex or poorly explained, please let us know. Feedback, both good and bad is always welcome as we strive to give you more useful information.
We hope you find the format to be informal and informative.
The Bizempire Team
Helping you start and build your small business empire.
Previous email in series: Small business structures in South Africa