General Info on Funding
There are many Entrepreneurs approaching banks everyday for start-up funding so the competition is fierce. Banks and funders are not willing to provide start-up loans unless you have a very good credit record and if you are able to make a reasonable contribution from your own resources.
Before you apply for a loan contact local credit bureaus to check your current credit status is good and that you have not been listed.
Why do lenders require collateral?
Most lenders require that the borrower puts in at least 10% of the capital required themselves, if not more, before a financial loan will be considered. Banks are risk averse – they will take as little of a risk as possible. This means that entrepreneurs need to have some collateral before applying to commercial banks for business finance.
Where to get money to start a business with no own contribution
One of the most common concerns for entrepreneurs is where and how to get funding. You must have a business plan. In the plan, you must consider all the costs and include your goals. Once you have done this, everything else will fall into place.
Where to Start
Getting money to start
Funding money to start any business is one of the most difficult things to do. In order to get going, so that you have something tangible to show potential investors, you may have to go the bootstrapping route. 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
- 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
- Approach an angel network
If you are looking for outside investors ask yourself
- How much is your start-up worth?
- How much capital do you really need?
- How much equity are you prepared to give up?
Once you have the business up and running, it will be easier to find funding from traditional institutions.
What if you don’t meet funding criteria of traditional lending institutions?
The traditional route to raise finance is through a bank or specialist funding agency, however, the reality is that many aspirant entrepreneurs don’t meet funding criteria and have to approach third parties to conclude equity funding deals. Follow these steps if you are borrowing from an equity partner or angel investor.
Protect your idea
If your idea is unique it is best to patent your idea. This way you will stop anyone copying it and you will also find out if it is truly unique. A patent grants you an ‘exclusive right’ so you can protect the concept. The South African Patents Act allows individuals to file their own provisional patent applications, but it’s advisable to seek the assistance of a patent attorney.
Sign a NDA
Ask the parties you are presenting to sign a Non-Disclosure Agreement (NDA’s) to protect the contents of your intellectual property such as the contents of your business plan from being divulged or infringed upon.
If you need to fund your enterprise by taking on an equity partner, conduct a background screening check before you do so. In order to request background screening or a credit report, written permission is required by the party under investigation.
These reports will inform you of any bankruptcy records, lawsuits and court judgments against a company or individual. Companies such as TransUnion, Kroll or Experian specialise in credit and screening reports.
With this information you will be able to make a better informed decision. They will also provide a risk profile of the party in question based on their history of servicing their debts.
Conduct a Reverse Due-Diligence
A due diligence is an information-gathering and assessment process whereby a prospective financer (or buyer) will look at all aspects of your business, from top to bottom. They’ll be checking the financials, profits, tax issues, projections, shareholders, staff issues, property and location, assets, debtors and creditors – all to determine how viable the business is and whether it is worth investing in.
Before getting into bed with an equity partner, compile a list of your own questions you need your own answers to. Make sure your timing is right on this one, asking for this information too early on in the negotiations could put be viewed as intrusive by the other party.
Many business ventures begin small; then grow with time, lots of hard work and patience.
Selling equity in a new “start up”
“Sweat equity” is the term usually given to the time and effort a cash-strapped entrepreneur puts into a business in order to earn his/her ownership share as opposed to contributing money for it.
It’s not a term that you usually associate with an employee. Employees are paid a salary for the work they put in – they generally don’t have any “equity” (ownership) rights in the company.
Certain business start-ups are suited to Bootstrapping
Certain businesses are well-suited to the bootstrapping model, because of their low overheads. Many people are held back from starting a business because they don’t have the money to get it going. Others get the business start up money through the “bootstrapping” route.
Bootstrapping means that you start a business out of very little or virtually nothing. Bootstrappers rely on personal income and savings, sweat equity, lowest possible operating costs and a cash-only approach to selling services.
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. There are avenues you can look to in order to find finance; you just need to think out of the box.