The pandemic continues to have far-reaching negative consequences on the economy and on the livelihood of millions of South Africans. Some very successful business owners and professionals too have experienced unforeseen setbacks in the face of rising living expenses and growing household debt.
The South African Reserve Bank (SARB) states South Africans are spending 75% of their take-home pay on debt, but what are South Africans borrowing money for?
While many loans are being sought merely to make ends meet, studies and recent polls also indicate that large numbers of South Africans are finding alternative solutions to supplement their income – namely, resorting to new ventures to build new dreams.
Kerry King, Advisory Partner at wealth management experts, Citadel, contends that many South Africans have seen opportunity within the current economic landscape and hope to take their hobbies to the next level, but they should keep their financial fundamentals in place as they go through career transition and diversification.
PARADIGM SHIFT MADE WAY FOR OPPPORTUNITY
The restrictions imposed by the pandemic have greatly accelerated online activity, and there has been a paradigm shift in the workplace, with huge percentages of people now working from home. With much more time spent in front of computers, many have tried their hand at online trading. Others have dedicated more time to developing new skills and revenue streams.
A recent Quarterly Labour Force Survey (QLFS) reported that between April 2020 and April 2021, the informal sector increased by 18% and now makes up 18% of the total employed work force in South Africa, and some studies indicate that as many as 40% of middle-class South Africans have started some form of side business to offer their services and products online.
“The rise of social media, particularly the role of Instagram, has greatly facilitated the process of getting products to market and all over the country, there has been a notable rise in the number of markets which provide an outlet for small businesses to showcase and sell their products,” says King.
AVOID FINANCIALLY OVERCOMMITING
One of the biggest temptations when starting a new venture could be to raise a loan or use personal finances to fund such a business, when that should be dedicated to covering essential living expenses. “Unless you have absolute certainty of the sustainability and growth potential of your new side venture into a formal business, this would be an unwise decision,” says King.
With the failure rate of start-ups being notoriously high, King strongly advises against using retirement funds to start a business. According to recent statistics, only about 10% of start-up businesses succeeded in 2019. Research concludes that 21.5% of start-ups fail in the first year, 30% in the second year, 50% in the fifth year and 70% in their tenth year. “If you intend to leave your formal employment and cash out of your retirement fund, please consider the risk you are taking. When cashing out, you are also forfeiting on the opportunity to grow those funds through compound interest. Even if the business is successful in future and you decide to start a new retirement fund, you will likely be starting from scratch,” says King.
Despite this, the enterprising individual should not be deterred from starting small and self-funding the business as and when it grows. “Loans are difficult to obtain and generally, loans for a new business are extremely costly. It is always advisable to consult a trusted financial advisor if you are considering giving up your full-time job to develop a new business and that advisor will likely encourage you to keep your retirement funds separate to the business,” says King.
CAN YOU ALWAYS SELL?
In some cases, people have developed successful small businesses and now seek buyers. King stresses that in such cases, it is important for the business to be able to function completely independently of the owner, which will go a long way in maximising the valuation of the business.
“We often see small businesses where the owner holds all the client relationships or is the expert in one particular aspect of the business, such as the production line. This does not make it an attractive proposition, unless they are prepared to stay in the business for an extended period.”
She concludes by saying that founding, managing and growing any business takes a great deal of hard work, discipline and dedication.
“Do your research thoroughly before you make decisions. Take an honest and realistic look at yourself, your resources, your capabilities and your market. Make a clear distinction between your retirement savings and capital available to start and grow your business,” says King.
While our country would significantly benefit from more successful entrepreneurs, it’s important that those individuals minimise start-up risks for themselves as much as possible, so that they are not left stranded should things not work out.
Written by: Kerry King, Advisory Partner and wealth management specialist at Citadel