In a bold move and probably surprising to most observers of banking policies towards small business owners in South Africa, Nedbank this week announced that they will be offering free loans to small business owners. But how will this work? Is it the usual marketing nonsense with 50 strings attached or has a South African bank finally stepped up to the plate of supporting small business owners.

Bruce Whitfield of radio 702 recently interviewed Mark Rose is the head of Small Business Services at Nedbank

Your feedback and observations welcome

Ben

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Nedbank is offering a tailor-made banking service for small companies. What exactly are the benefits and which transaction fees are free?

Bruce Whitfield:
One of the biggest challenges a small business faces when it starts is the cost of course of starting a business, managing cashflow and for many small companies, banking can be a substantial cost. Well Nedbank is doing something interesting in that it is offering banking services and start up loans to small businesses. The difference here is the banking does not cost anything, not that that is unusual, but banks are not renowned to giving away anything for nothing.

Mark Rose is the head of Small Business Services at Nedbank. And Mark, just judging by the SMEs we have received to the programme this evening, people listening to the programme are saying hold on a second, how can banking be free, how exactly does it work? Do you have to take out a loan in order to get free banking for two years?

Mark Rose:
Bruce thanks very much, yes, the minimum that you need to apply for is R100 000 from Nedbank and that needs to be for the purpose of financing your new or existing start up business or franchise and for the next two years you will get free transactional banking. But I must stress, that is in the form of four areas, that is unlimited cash deposits, unlimited cheques, unlimited debit orders and unlimited internet banking.

Bruce Whitfield:
So it is not really free.

Mark Rose:
Well it is free, it is free to those main items, and we have deduced that those are the main items that make up the cost of banking to a small business owner.

Bruce Whitfield:
But certainly, what would the level of savings be for your average customer in a small company like this?

Mark Rose:
It depends very much on the business transactional volumes that he produces through his account. But we have deduced that for a business that generates small transactions, you are looking at around R500 per month, but this saving could increase to between R3000 and as much as R5 000 per month per year; specifically for those businesses that generate high transactional volumes.

Bruce Whitfield:
I know a guy for example, who runs a business, who has got turnover of about R10-million a year. He claims to spend something like R10 000 or R12 000 on bank charges for his business, because he allows customers to use credit cards and he pays those transactional fees.

Now, for his business, this would not actually help him, because he does not take in much cash and he relies on credit cards and those sorts of electronic transactions based on credit cards, he would not really benefit from this?

Mark Rose:
Bruce, I think the type of company you are referring to there, we classify as a medium term business. Now I must stress that this offer is aimed at the small-sized business and we are either looking at companies as I mentioned, who are starting up or are in an initial start up phase, but are projecting an annual turnover of around R5-million. So the essence is on small businesses.

Bruce Whitfield:
So if you have a remarkably successful business by the end of year, one, has got turnover of R10-million, do you then withdraw the offer or do you just say congratulations you are benefiting from a superior business model?

Mark Rose:
Not at all, the offer is in place for the full 24 months.

Bruce Whitfield:
Who is entitled to this service exactly? Do you need to be empowered? Do you need to have any sort of special tick box issues when you come to make this application?

Mark Rose:
No not at all. The offer, as I mentioned, is available to any small-sized franchisee or start up business.

Bruce Whitfield:
So it is ideal for somebody, for example, who is maybe taking early retirement who has taken their retirement package and put it into a Nandos or Steers franchise for argument sake?

Mark Rose:
Absolutely, that is exactly the target that we are aiming for.

Bruce Whitfield:
And those also generate a lot of cash, those sorts of businesses and especially for small companies. A lot of people complain the cost of depositing cash is something that is quite prohibited.

Mark Rose:
That is quite correct and this becomes very beneficial to those types of companies.

Bruce Whitfield:
And in terms of the attitude that many of our correspondents this evening have got, is that banks don’t give away anything for nothing. When it comes to this start up loan that you are obliged to take up in order to qualify for this loan, will you be charging a higher interest margin on that loan?

Mark Rose:
No, we have had a number of questions on that and we will apply competitive interest rates on that loan. That will be linked to each applicant, based on their credit history and their profile. So from my side, I would just like to reaffirm that no way, do we provide the free transactional banking and subsidise that by applying higher interest rates on the loan.

Bruce Whitfield:
Why is this aimed at small business, a call has just come through to Laura saying, I have been a client with Nedbank for 30 years, why not for individuals? Don’t you open up a potential can of worms there?

Mark Rose:
No, I think the emphasis on where we see the future growth of this economy certainly is coming out of the small business sector and a lot of the insights and research that we have done into this market has indicated that they really need support during the first two years of their lives. Because it is such an important sector to the economy and the future growth of South Africa, we have aimed this offer specifically to them initially.

Bruce Whitfield:
The risk for so many start-ups is that the majority of them do go bust. If you look at reports and something like 80 percent of companies don’t make it past ten years. If so many companies that start up go bust, and if they borrowed money from you, and you have given them free banking during that time, how do you gage that, how do you measure that?

Mark Rose:
Let me answer that in two ways. I think the offer is aimed at both new companies that want to start up, but also to the franchising sector. And the franchising sector has relatively much lower failure rates, because they have a stronger corporate franchise or backing and have a lot of support systems around them.

But let’s just put the failure rate into context. Yes there are a number of companies, small businesses that do go belly up, but there are also a number of people that get out of the corporate sector and go and start up a business and after a year or two, realise that it is just too damn hard and the risk is too high and rather than continue on that basis, they would rather just discontinue with the operation and run it down and get back into the corporate sector where there is a sense of more stability.

So it is not just about companies that are going bankrupt, there are a lot of individuals or entrepreneurs that exit the market just because of their own will.

Bruce Whitfield:
Now how much money do you anticipate making from this? Is this a huge project for Nedbank? I mean, yes, the SME sector is the future of the South African economy and helping them is a very noble task. But is this a big money spinner potentially for them?

Mark Rose:
Well, it certainly is something that we have looked at over the longer term and we do believe that the attractiveness of this offer will allow a certain level of increased volume of applications coming our way and we are relying on that to generate the fall for it.

Bruce Whitfield:
And also, Raymond Ackerman, at some stage, would have required financing for his little company when he started his grocery stores and ideally, you would want to get the next Raymond Ackerman and keep him as a client for ever which would be the ideal sort of result of this; a small business grows into a large business eventually, and if you can keep them.

Mark Rose:
That is 100 percent correct.

Bruce Whitfield:
Is that part of the thinking here as well?

Mark Rose:
Absolutely. We believe that if we start looking at this part of the market now, it is certainly going to pay its dividend rewards off in the longer term.

Bruce Whitfield:
In terms of small business banking, Nedbank is known for Nedbank Corporate which has been a very successful corporate banking operation, there is Nedbank Capital as well of course, and the retail part of Nedbank is growing as well. Small business services, has it been in Nedbank for a long time?

Mark Rose:
Yes it has, it certainly has been around for a while now and it is showing significant growth at the moment.

Bruce Whitfield:
And when you talk about significant growth, what sort of figures are you talking about?

Mark Rose:
Good estimates, I would not like to mention exact numbers right now, but we have seen some nice growth numbers coming through, particularly in the last two years.

Bruce Whitfield:
And is this coming through the franchise sector? When you look at people, who want to start up businesses, for many, it is much easier to go into the franchise sector rather than actually develop your own business structure.

Mark Rose:
We certainly have seen a fundamental increase in the growth of franchising, particularly over the last five years and the indications that I have got right now, is that it is growing 20 percent year-on-year. So franchising is certainly a sector that is showing significant growth.

Bruce Whitfield:
Mark Rose thanks for talking to us this evening. It is interesting indeed, yes you do need to take out a loan for at least R100 000 for this particular offer, but you can get your transactional fees thrown in, a limited number, but for so many small businesses, people complain hugely about cash deposit fees and if you are somebody that operates a Nandos or a Debonairs or whatever franchise it might be, you take in cash in order to get that process.

But then again, a lot of those small businesses accept credit cards and that does not fall into this. So before you get too excited about it, go and read the small print as always in banking, small print is very important.

source: http://business.iafrica.com/transcripts/236524.htm