Dos and don’ts of financing gov’t tender purchase orders
During his delivery of the State of the Nation Address (SONA) late last year, President Mokgweetsi Masisi proclaimed that “Entrepreneurship is one of the key approaches for empowering young Batswana. Government has spent over P334 million since 2019, by procuring services from 2,053 youth-owned businesses. This is in line with our policy of youth affirmative action which includes among others, 15% preference margin on general tenders and 20% in micro procurement”. Despite efforts by government to make the business environment conducive, it remains unforgiving and an uphill challenge and far worse for young people from disadvantaged backgrounds. The only way one is to survive is through sheer will and tempting fate with your purpose in the face of insurmountable odds.
Getting a piece of government business involves a competitive bidding process against hundreds of other bidders. And the focus is so much on coming out on top as the successful bidder that most young and inexperienced entrepreneurs do not factor in the cost of financing the tender should they succeed in their bid. To meet the delivery timelines, desperation finds habitation and the following are the mistakes made by most youths in an effort to fulfil the obligation of the tender:
● Trying to raise the funds yourself: Unprepared and buckling under pressure, most young people will try to raise the funds necessary to fund the purchase order. They will at the nearest opportunity exhaust their savings in a bid to service the purchase order. While this may seem like a wise decision, in retrospect it involves a lot of risks as it will inadvertently mean that you have committed the little savings or working capital towards a purchase order that can take long to be settled by the procuring entity especially if its government. The time between the commission of funds and the settling of the invoice by the procuring entity can be extended by extenuating circumstances including the instability of the Government Accounting and Budgeting System (GABS) if you are doing business with government or the incompetence of officers in the accounting department. As a consequence, you will be without your working capital or savings longer than expected while your financial obligations and pressures are unrelenting.
● Borrowing from friends and family: While the cause for borrowing is valid, the source through which the funds are to be facilitated is once again wrong. And just as it is wrong to commit your personal funds towards financing the purchase order, it is equally or more erroneous to borrow from friends and family. The risk includes fracturing relationships in the event there is a delay in the payback period from the procuring. Your phone will become a hotline as those owed will always find the means to call in a bid to collect and if they don’t get what is owed, their patience will soon run out. And what was once a cordial relationship sustained over the years will disintegrate into chaos on account of delays in the payback period.
● Borrowing from loan sharks: In the quest to deliver within the set timelines and if the above mentioned have failed, the next alternative is to solicit help from loan sharks. While their service is convenient and reliable, the true cost lies in the finance cost or the interest payable back along with the principle amount. Loan sharks charge as high as 30% of the principal amount and this will effectively erode most if not all of the little margins that you stand to make from the business transaction.
● Purchase Order Financing Institutions: There are several purchase order financing companies in Botswana and these include but are not limited to TICANO, Top Market Capital, Letshego and Citizen Entrepreneurial Development Agency (CEDA). They all represent a means to finance the purchase order but the question is who among them offers the best deal on the table? For purposes of this article, the best deal on the table is the lowest finance cost borne by the entrepreneur while carrying out the delivery of the goods and services. An attempt was made to approach each of these entities in an effort to determine which among them would be best suited to approach to get the best deal on the table. Without wasting any time it was found that the Citizen Enterpreneurial Development Agency (CEDA) is the best place to approach in order to access finance for purchase order financing and this is why.
CEDA offers the lowest cost of financing as low as 3.75 percent per annum and the interest is charged on a pro rata basis. What this simply means is that the interest on the principal amount borrowed will be charged relative to the time taken to pay back the loan and therefore you may not have to pay the 3.75 percent.
In addition, CEDA will avail three months in terms of the repayment period, which means you will only get a phone call from them after three months and the interest will still be charged on a pro-rata basis. Other purchase order institutions do not only charge the full five percent on the principal amount but it is compounded every month.
In order to be eligible for a line of credit from CEDA, one will need to fulfil their exhaustive list of requirements, which include but are not limited to, an original copy of the purchase order to confirm its veracity, quotation from your preferred supplier, working capital breakdown, resolution to borrow, Companies and Intellectual Property Authority (CIPA) documents, copy of ID and others.
CEDA’s mitigating factor against the risk of repayment is that the procuring entity will pay them directly. To ensure that this effectively takes place they use a legal document known as a deed of cession. It is an agreement between the successful bidder, procuring entity and Ministry of Finance and Economic Development on behalf of the government of Botswana that payment be ceded directly to CEDA for goods delivered or services tendered. After payment has been made by the procuring entity, proof of payment will be sent to CEDA and the difference will be paid to the successful bidder.
Another mitigating factor that CEDA has in place to guard against the risk of default on repayment is a legal document known as a deed of surety. This document is intended to pierce through the veil of incorporation that protects shareholders in the event the company is not able to fulfil the terms of liabilities. Company law states that the liabilities of the shareholders are limited to the amount of money invested by the shareholders but once the deed of personal surety is signed, then the shareholders will become personally liable in the event the company is unable to meet the terms of repayment. Another critical issue CEDA is going to check before they even receive your application is your credit status. This will include running your name through the credit bureau and ITC just to be sure that you have not been flagged by other institutions for failure to pay back your credit before. Therefore, your credit status is very important, guard it at any cost.
In conclusion, if you are a young entrepreneur that does business with government or intends to start, my advice is stay away from the banks, stay away from private purchase order institutions and avoid at any cost borrowing money from individuals and family members. And whatever you decide to pursue as a path to financing your purchase order, always ensure that you aim for the lowest finance cost to ensure that you protect the margins you have worked many attempts to get through a competitive bidding process.