What is capital?
Capital is a measure of the accumulated financial strength of an individual or firm to start or buy a business. If you look at most start-ups, very few get start up funding from commercial banks. Many are launched with small amounts of money – Dell Computers started in 1988 with less than $1 000 in the bank. T
he founder of Dell Computers, Michael Del, used “bootstrapping” to get his start up going. He asked his grandparents for a loan and then dropped out of university at the age of 19 to run PC’s Limited, which later became the famous Dell Computer Corporation, then ultimately Dell.
There are two stages of finance for start-up businesses
Stage 1: Start-up Capital
Stage 2: Expansion Capital
Find Money from your own resources, family or friends. Most entrepreneurs face the same problem – finding start-up capital. Banks won’t lend money to a start-up unless the start-up has collateral or has been in operation for a reasonable amount of time. No lender will even consider a loan without a decent business plan.
Bootstrapping is your best chance
Start-ups that “bootstrap” arrange finance they need through small loans from friends and family, take a partner or seek an angel investor to provide start-up capital. Start-ups have to be innovative and can:
- Apply for a micro loan
- Use savings to fund your business
- Keep your day job. You might be able to start your business by working on it during weekends and evenings
- Try shifting from full-time to part-time work when you start your business
- Ask your family for help so you don’t have to go to outside investors
- Approach an angel network
If you are looking for outside investors ask yourself these questions
- How much is your start-up worth?
- How much capital do you really need?
- How much equity are you prepared to give up?
South African entrepreneurs are flocking to social networks such as Facebook and Linkedin as a new way to find the money or partner needed for starting or growing their businesses. Following the recent economic slow down banks have tightened lending policies. This has pushed entrepreneurs to find alternative sources of financing and support.
Becoming Investment Ready
Your business plan markets your business to potential investors. It must be detailed, and you must take time and effort to complete it thoroughly. The plan needs to be an up-to-date, concise, and comprehensive outline of what you intend doing. Remember, a business plan is a living document.
Where to present the proven business concept
When you reach stage two, you will have proven your business concept. This is the stage where you may require additional funding to expand the business. There are different avenues that you can investigate. Banks, private lenders and angel investors are well worth approaching.
Commercial debt funding
Commercial debt funding is only possible once a business has moved out of the high-risk phase and has developed a sustainable and predictable cash flow. Before this point, commercial bank debt funding for a start-up, or early stage business, is probably irresponsible, as you do not have a record of accomplishment of any kind.
You can approach traditional investors such as commercial banks, the Department of Trade and Industry (Dti) or private funders such as Business Partners. Most lenders require that the borrower have at least 10 % if not more, of their own contribution, before they will lend you any money, as they are not prepared to take all the risk.
Once the business is established and it is generating cash from sales, you would be in a better position to find the 10% contribution that is required to loan money. You can also negotiate longer payment terms with creditors and build a debtors’ book that can be used as security for a loan.
Bootstrapping is the act of starting a company with personal finances or small loans from friends and family rather than through traditional means such as a bank or business loan. Starting a business with very little money and even less credit can be difficult but it has its advantages:
- It allows you to retain all or almost all of the equity so you would have total control over the business
- You are not in debt
There are various ways in which start-ups can raise money through bootstrapping
- Use your personal credit card to raise the money to start your business.
- Take out a second bond on your house
- Use your savings to fund your business.
- Keep your day job. You might be able to start your business by working on it during weekends and evenings.
- Work part-time. Try shifting from full-time to part-time work when you start your business
- Ask your family for help so you don’t have to go to outside investors.
- Apply for a grant so you will have the funds to back up your business. Some organisations and governments offer grants to entrepreneurs. You can invest grant money into your company for start-up funding.
Other ways to get a new business financed
If you have a full-time job, keep working at it until you have built up a big enough customer bases to go on your own. Then you can branch out and start developing other areas such as software development.
Find a partner
Finding a partner who has skills that can compliment your business is another route worth thinking about. If you can find a partner who is experienced in sales and marketing, the partner would bring in enough business to sustain both of you and help grow the business to a new level.
Through business networking online you can look for business partners and join like-minded communities to find good corporate links. When you look for a free business-networking website, make sure the one you select is relevant to your business. Look for one with interesting site content, useful tools and a good-sized community.
Consider approaching an existing business that may benefit from the services your company offers and you could form a partnership with them. A joint venture involves two or more businesses pooling their resources and expertise to achieve a particular goal.
Limited Co-operation with another business
One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company’s distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work. It’s worth taking legal advice to help identify your best options and to ensure that you are not being mislead in anyway.
Bid for work
There are excellent internet sites where you can bid for work. Join elance.com and create your own profile where you can bid for work. Elance delivers an immediate, cost-effective and flexible way to find, hire, manage and pay independent professionals and contractors online.
Other options include research grants and funding that is offered by Government and through the private sector. Contact your local Chambers of Commerce who will be able to provide more information with regard to programmes being offered by big businesses and contacts in terms of finding grants.
Think outside the box
There are many options out there. You can earn money by organising events that range from birthdays, weddings, 21st celebrations to company Christmas parties. Another good business idea is the childcare business, dog walking service, or taking something you are passionate about and turning it into a moneymaking opportunity.
You can’t start a business until you have a Business Plan
Once you have settled on an idea, you must prepare a business plan. A business plan is the road-map, so to speak, of your business. It is a living document that changes as the business develops. With out one, you cannot apply for funding or seek partners, as you have to be able to show on paper what your business will entail and how you intend to run it.
More info on starting a business
For more information on how to start a business, read Entrepreneur’s guide: 21 Steps to Start-up.