Ticking boxes for future business

2017-08-18 14:11

Each new and existing business that seeks funding from the Industrial Development Corporation (IDC) for the first time has to prove that it qualifies for funding and has the capacity to repay the loan once it starts its operation.

This means that all applications have to go through the IDC’s Pre-Investment Business Centre, headed by Naomi Mtshali. The centre was established in 2011 and has a walk-in centre based at the IDC headquarters in Sandton where trained consultants help candidates. It also has regional offices to screen business plans from those whose operations are located outside Gauteng.

Mtshali says once a business plan is received, it is checked to determine if it meets the IDC’s manufacturing-focused mandate. A business plan that doesn’t is rejected on the spot. Those that meet the mandate are then taken through a basic assessment stage.

“We will read the business plan, determine what is contained therein and establish what is needed to do a basic assessment. This is a desktop assessment of the client’s business, or what they want to enter into,”
she said.

Using the hypothetical example of a start-up business that applies for funding to set up a factory that manufactures gearboxes for motor vehicles, Mtshali says such an application would undergo rigorous examination during the basic assessment process.

If the applicants are asking for around R10 million to set up this plant, the IDC would want to know what the basis for such a projection is and whether the aspiring industrialists have letters of intent, which are pre-contracts with potential clients.

“If there are letters of intent, we ask which market are they servicing? Who are the products intended for? What are their technical requirements?

“Where will they be operating from? Are the premises suitable? Do they have sufficient electricity? Do they have sufficient labour? What skills do they need?”

If the client meets these requirements, their financial and marketing plans are then interrogated.

The assessor investigates if they will make enough money to cover operational costs, what their distribution plans are and what their marketing plan is for the products and the cost of such a campaign. The shareholders are also investigated to determine their levels of skill and qualifications to run such an operation.

“Do they have the technical ability?

“If they don’t have technical capability, we ask whether they have a technical partner – someone who has been in the industry, who is going to take them through perhaps the first two or three years of the operation and help them through the process.”

Once all these questions have been answered to the IDC’s satisfaction, Mtshali signs off on the assessment and the application is taken through to the relevant business unit.

This unit, after assessing the application, will conduct a deeper due diligence process that includes physical visits to the premises where the operations will take place, and a more intense scrutiny of the books to determine that what is contained in the business plan corresponds with reality.

Mtshali advises entrepreneurs to keep their business plan focused on what the business is all about, what it intends to do and who the potential clients are. It must also be realistic about the business’ financial prospects.

“There’s a misconception by entrepreneurs that funders want to see a rosy picture all the time. Realistic means you are saying I have five letters of intent, but out of these five I think maybe two will pan out.

“Also, [you should have] a business plan focused on what you want to do. This is what I want to manufacture, this is my target market, this is why my customers are going to walk through the door and buy my product. What makes you stand out?”

She also advises those seeking funding for the first time to be truthful about the short-term profitability of the operation. The IDC does not expect a start-up operation to make profits in the first year, and will not reject a business that has a promising future simply because it cannot generate short-term profits.

“There are entrepreneurs who think if they show losses in the first two to three years, the IDC is going to say no. We actually want to budget for that.

“What we want to determine is, if you don’t make those profits in year one, is your business still fundable?”

In the case where a business cannot generate enough profits to repay the capital amount immediately, it receives a capital moratorium, which is a payment reprieve for up to six months, while it builds up enough cash reserves to be in a position to start serving its primary debt.

Ideally, the Pre-Investment Business Centre would take around seven days to completely assess a business plan and move it to the next stage, but this process is often delayed because more information is requested from applicants.

Mtshali says given the size of the amounts requested from the IDC, it makes business sense to wait for all the relevant information before a final decision can be taken.

“We are making serious decisions about whether to fund serious amounts. We need to take into account all risks and mitigate them.”

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May 19 2019