Funding for the business

Small and medium-sized enterprises (SMEs) make up a significant portion of jobs in most developed and developing countries, typically ranging from 60% to 70%. These types of businesses also create a disproportionately large number of new jobs. While younger firms have been shown to create more employment than older ones, less than half of start-ups survive for more than 5 years. One of the key factors that contribute to these failures is the difficulty of getting funding. 

When it comes to funding, there isn’t a one-size-fits-all approach. Aside from every business having unique funding needs, each funding option differs in availability, terms, funding amounts, and eligibility criteria. 

But first, you need to determine how much money you will need for your business

You will need to estimate your startup costs, or if you are an established business determine how much funding your business will really need. Write down a detailed list of all your funding needs, in order of priority. This will focus your mind in assisting you to determine how much money you need and by when. Furthermore, this can immediately give you a jumpstart on your financing search and narrow down potential funding options simply based on the amount the potential lenders offer. 

Additionally, having a cohesive financial plan in place can improve your chances of actually being approved for funding. It showcases forward-thinking on your part and for traditional loans, investors, and any other funds that require a business plan or a formal proposal, and so you will need to be very prepared prior to approaching potential funders of your business. 

Once you’ve planned out how much you’ll need, it’s time to consider the options available to you.

Types of business funding available to startups and small businesses in South Africa

Bootstrapping (aka self-funding)

Bootstrapping your startup means growing your business with little or no outside funding. It means relying on your own savings and business revenue to operate and grow your business. Creating a bootstrapped business challenges you to focus extensively on the business plans and gets you to generate revenue as soon as possible. 

The main advantage of bootstrapping is that you will get a wealth of experience while risking your own money only. It means that if the business fails, you will not be forced to pay off loans or other borrowed funds. If the project is successful, you will get to keep all the proceeds of your hard work, and it will make your business even more attractive to outside investors. 

The main disadvantage is that you may not have all the capital you need to successfully run your business. This will not get you started on your new business (for startups) or will limit your growth (for existing businesses).

Family, Friends and Fools (FFF)

Family, Friends and People close to the entrepreneur. They are, on many occasions, the first resource of the small entrepreneur who wants to make a breakthrough. These are often people who believe in your dream and are potentially the easiest to convince, provided that they do have the capital to lend to you, of course. Family members usually provide non-refundable backing or funding with very loose terms, which often give the entrepreneur the required space to breathe.

The key disadvantage of FFF is the fact that amounts to being lent are usually small. More importantly,  it is an established fact that many friendships, and even families, have broken up because of financial disagreements. If the entrepreneur does not meet his obligations to family and friends within the stipulated period, relationships can sour, and sometimes end entirely.

Bank Finance

Bank loans may be the most obvious solution for business owners looking for funding. While lending standards have become stricter over time, there are often funds set aside strictly for small businesses, depending on the lender.  

Bank finance can take different forms. For example, your business may qualify for an overdraft, provided you can show the bank a viable business plan and supply some form of asset or guarantee. Debtor finance is typically offered for growing businesses that generate a certain turnover, and asset finance is offered for the purchase of moveable assets or equipment, such as computers or vehicles.

Shop around and look for the best deal.

The alternative lending market - SME Funding Sector

The alternative lending market is gathering momentum in South Africa, particularly from a small and medium enterprise (SME) market that often battles to get traditional institution-based financing.

SMEs are inherently riskier as they do not have large cash reserves and certainly do not have significant assets to put up as security against loans. Banks generally prefer to lend to less risky industries and require collateral as security against loans. 

The alternative lending market is made up of a few well-established companies such as Lulalend, Merchant Capital and other similar small lenders, many of which manage their businesses on a digital platform (Fintechs) without the traditional bricks-and-mortar infrastructure. To ensure that borrowers qualify for funding, alternative lenders are leveraging data and technology to create more detailed customer profiles (compared to traditional banks). Through this, they are able to make better credit decisions and effectively manage their risk. Additionally, their speed of approving funding is usually multiples times faster than that for the traditional bank. Some even offer 24-hour approval turnaround times.

Angel Investors

So-called "angel investors" are high net-worth private investors who offer funding to ventures they believe are worthwhile or likely to be successful, usually in exchange for ownership equity or convertible debt. In South Africa, examples of networks for finding such angels include Angel Hub Ventures and the Angel Investment Network. 

Crowdfunding

Crowdfunding involves appealing to the public for funds via virtual networking. Generally, the goal is to secure small contributions from a very large number of people. If you have a business idea that could attract public support, this may be worth taking seriously. Examples of crowdfunding platforms are crowdfunding.co.za, open tenders and IDEATE.

Government Funding options

In addition to other funding sources, there are several government funding options for entrepreneurs and SMEs in South Africa.  The South African government provides several different forms of funding, such as grants, tax incentives, loans, and equity finance options. 

• A Grant is an award of money that is non-repayable, the government lending agency provides for 100% of the financial need. 
• Cost-sharing Grants finance a percentage of the desired investment, while you have to then fund the remainder. So that could mean the government pays 50% of the desired sum, while you have to pay the other 50% - depending on the agreed terms.
• Incentives are similar to Grants, but typically the funding you require will only be paid to you after you’ve completed the contract, service or project that you need the funding for. Essentially you source the funding you need from somewhere else and then claim back from an Incentive after.
• Tax incentives allow a business to pay back a percentage of the money it owes by deducting it from the tax it pays the government. This is generally done to encourage businesses to invest, develop infrastructure, or set up in disadvantaged regions.
• Loans provided by government institutions usually have more favourable terms than those of traditional banks, and their qualifying criteria are usually easier too. However, governement institutions are know for taking a long time to respond favourably to a loan request. Therefore, the long timing of these loans needs to be considered carefully, especially if the funding is requried for an immediate opportunity where timing is of the essence. 

Impact investors

Impact investors invest in companies whose activities are likely to have positive social or environmental, as well as financial, returns. Examples of impact investment funds in South Africa are the Masisizane Fund,  Mango Fund, and Acumen Fund.

Venture capital

Venture capital has capital that is offered to early-stage enterprises, often to those in high-risk, high-tech industries. It is first-stage financing for companies that show potential for growth. This is ideal for start-ups. In exchange for funding, a venture capital firm typically requires certain decision-making powers, as well as an ownership stake in a business. Local examples of companies that offer venture capital are Fireball Capital, I'M IN Accelerator and GroVest Venture Capital Company 

Now that you have been provided with a number of options to fund your business, you need to get to work in trying to get your business the funding boost it needs. There might be some paperwork that you would need to get through, so preparing your business' documentation (such as the business plan, financial statements, etc.) ahead of time will make the process as smooth as possible can. Don't let this inconvenience get in the way of your dreams.

Now, go out there and WIN!!