South Africa has a population of roughly over 60 million people and high mobile phone usage; therefore, this article is just the guide you need for those wondering how to start a money-lending business in South Africa.
However, before we explore the steps needed to start a money lending business in South Africa, it’s essential to understand the financial lending terrain as it currently stands. South Africa’s fintech market has experienced tremendous growth over the last five years. Statista, a German consumer data company, projected that the country’s largest volume of money lending business would be conducted digitally.
Financial inclusion remains a challenge in the country, with 32% of the population needing access to financial services, including bank accounts. The country’s banking sector has primarily been dominated by four major bank accounts enjoying over 80% of the market share. Despite this, digital lenders are gaining fast on the traditional lending systems and becoming increasingly popular.
Consequently, the remaining 20% of the population ignored by banks is the prime target market for the rapidly increasing microlenders. These primarily conduct their business via mobile phones and often loan out small amounts to the country’s low-income earners.
With this brief background, we can now dive into the steps you need to take to start a money-lending business in South Africa.
Business plan
A business plan is a document that lays out a company’s objectives and strategies to accomplish its goals. This document describes different business functions in detail and what role each will play in the business’s success. The plan outlines the business’s name, startup costs, operational costs, target market, and the price a business will charge for its products/ services.
Additionally, a clear business plan will help you develop a realistic idea of what resources you’ll need to establish your money-lending business successfully. Although money lenders don’t typically have huge overheads, you will likely need to hire a loan processor, a collector, and a bookkeeper.
Questions to answer in your business plan
- Who is your target market?
- What costs are involved in establishing a money lending business?
- How does a money-lending business make money?
- What rate of interest will you pay?
- What will you name your business?
- How will you market your business to potential customers?
- What business structure and hierarchy will your business follow?
Register your business
The next step after writing a business plan is registering your business as a separate legal entity. The company formed must comply with the National Credit Regulator (NCR), the South African regulatory body for the country’s lending market.
The most popular business structure types are sole proprietorship, limited liability company (LLC), partnership, and corporation. Although this part might seem complex, it’s crucial to determine how much liability your business will take on. For instance, registering your business as an LLC or corporation protects you from being held liable if your money-lending business is sued.
Tax registration
South African law stipulates that a new company must register for state and federal taxes within 60 days of its establishment. The application form can be retrieved from the local South African Revenue Service (SARS) office or online.
Open a business account
Before officially conducting business in South Africa, you need to open a bank account. A dedicated business bank account will help you track your finances and keep up with your tax obligations. This is especially true for certain business structures that can apply for certain tax exemptions.
Get necessary permits and licenses
This is important because failure to get the correct permits and licenses can result in huge fines for your money-lending business. To successfully register your money lending business, you must pay a non-refundable fee of R500 and a R250 branch fee for each location.
Here’s a list of documents and information you will need to successfully apply for registration as a credit provider in accordance with sections 40 and 41 of the National Credit Act;
- Completed and signed application of form 2.
- Copy of companies and Intellectual Property Commission (CIPC) registration document or other proof of legal registration.
- Copy of the share certificate (if applying as a company).
- Certified copies of ID/ Passports of all partners.
- Resolution (in case the applicant is a juristic person).
- A criminal name clearance certificate for all partners.
- Proof of payment of registration fees.
- Letter from the bank confirming banking information.
- Proof that you’re registered with the South African Receiver of Revenue Services (SARS)
Maintain business records
One of the most critical tasks to accomplish when running a business is bookkeeping and accounting. You must keep track of every income and expenditure. This is so you have a clear picture of your company’s financial well-being at all times. Businesses that maintain updated business records find it easier to attract outside capital.
Insure your business
Money lending can be precarious, especially if your customers fall within the lower income bracket. Insuring your business is a great way to take the fear of loss off your shoulders. The most common form of business insurance is general liability insurance.
Additionally, you might also get workers’ compensation insurance. This is because it might be a state requirement for you to have workers’ compensation coverage.
Get online
In this modern day and age, having an online presence is an essential component of business success. An active online presence lends credibility to your business and assures people that you can be trusted. For a money-lending business, unique content crafted to answer or guide your customers on issues pertaining to their finances would be a unique way to grow an audience.
Summary
Starting a money lending business in South Africa is a viable and profitable venture. Before taking the plunge, it’s important to understand the financial terrain in the country and the relevant regulations. To get started, you’ll need to develop a business plan, pay the registration fees, have a bank letter confirming banking information, register with the South African Receiver of Revenue Services, maintain accurate business records, insure the business, and have an online presence. Following these steps will help you get your money lending business started.
What is the current state of South Africa's fintech market?
South Africa’s fintech market has experienced tremendous growth over the last five years and digital lenders are gaining fast on the traditional lending systems and becoming increasingly popular. With a population of roughly over 60 million people and high mobile phone usage, the remaining 20% of the population ignored by banks is the prime target market for the rapidly increasing microlenders, who primarily conduct their business via mobile phones and often loan out small amounts to the country low-income earners.
What is required to start a money-lending business in South Africa?
The key requirements to start a money-lending business in South Africa are having a business plan, proof of payment of registration fees, a letter from the bank confirming banking information, proof of being registered with SARS, maintaining business records, insuring the business and getting online. Following these steps will help you create a successful and legally compliant money-lending business.
What are the benefits of insuring a money-lending business?
The benefits of insuring a money-lending business are numerous. Insuring your business will provide protection from financial losses due to unexpected circumstances, such as theft, accidents or natural disasters. Financial protection also offers peace of mind and can make it easier to attract outside capital. Additionally, insuring your money-lending business may also be required by law, depending on the state. Furthermore, insurance can help to increase customer trust, which is essential for any business.
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