The Truth about Funding

The Truth about Funding

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Funding is a highly contentious issue, both in South Africa and around the world. Start-ups want it, and more often than not funders won’t give it. They want to see established businesses with a track record — and start-ups have neither. That’s reality, and no amount of begging and pleading will change the rules. According to Lebo Gunguluza, self-made millionaire, entrepreneur and founder of the South African Black Entrepreneurs Forum (SABEF), perhaps it isn’t the system that needs to change, but rather the mindset of young entrepreneurs.

Funding isn’t free

“There are three big funding misconceptions that entrepreneurs need to address in order to successfully launch a business without a loan,” says Gunguluza. “The first is the perception that ‘funding’, particularly government funding, is the same as grants. Grants you do not need to pay back. Loans you do. This means you need to show revenue — you need to prove you can pay the loan back. Too many young entrepreneurs do not understand this. They think funding is for free. They do not put a proper business plan together that shows where their revenue will come from because they do not take into account that they need to pay that money back.”

This leads directly to Gunguluza’s second point — if funding is not ‘free’, and it needs to be paid back – with interest – then do you really want it?

Generate your own funds

“Businesses entering a stage of expansion need funding to facilitate growth,” says Gunguluza. “The same is not always true of start-ups. Loans need to be paid back, and this can actually be crippling for a start-up,
especially if the entrepreneur has focused on securing money to facilitate a perceived lifestyle rather than to pour into the business. Those loans will need to be paid back, and if the business is not performing well and generating revenue, this might prove to be incredibly difficult for the start-up that is only breaking even.”

Gunguluza’s advice? Why pay for something you can get paid for? “If you can pre-sell a service or product, and get a deposit to help you deliver on it, why secure a loan? Loans cost you money because you are also paying interest on them. Why not rather use your skills to make sales and generate your start-up funds yourself? If you apply your mind on your trade — and business is a trade — you shouldn’t need funding, particularly if you are in the services industry.”

Gunguluza shares a valuable example of a woman who applied for funding to produce matric jackets, but actually secured orders and deposits for the jackets before her funding came through. The deposits were enough to produce the jackets, and they were made, delivered and paid for in full before the funding cleared. “She didn’t need the funding. She thought she did, but simply through applying her trade and pre-selling her product, she was able to launch her business herself.”

Lifestyle vs business

Finally, Gunguluza warns entrepreneurs to start a business and apply for funding for the right reasons. “I have met many entrepreneurs who are not passionate about business, but see funding for a business as a means to a particular lifestyle. They manage to secure funding and instead of pouring it into their business, they spend it on houses and cars and maintaining an image. If you aren’t producing anything with that money, it will come to an end — and how will you pay it back? Similarly, if you don’t want it to grow a real, sustainable business, don’t even try to secure it.
“You will end up in a worse position than you started in. If you want to make a success of a business — with or without funding — you have to really want that business to succeed. It shouldn’t only be about the money.”

Nadine Todd
Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.