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How to Win Funders Over

It’s the most common question in the entrepreneurial world. Whether you are a start-up or an established business that needs funding for growth, the ever-present dilemma remains: How do I access funding?

Nadine Todd

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So, you have an idea for a business.

Congratulations.

Business ideas are not only cheap, they’re a dime a dozen. That said, you believe that you don’t only have an idea, but a viable business plan. So where can you access funding? According to Pavlo Phitidis, the assumption that someone else should give you money is your first big mistake. He is a firm believer that funding should start at home, at least in the start-up phase. “The bootstrapping phase is an essential ingredient to the overall success of a business,” he insists. “If you put everything you own into a business, and then proceed to ask friends, family, your book club and everyone else you know for additional funding, you will think very carefully about how you spend those resources. This will make you a better business owner, running a business that is already more likely to succeed, and it will make you far more attractive to banks and financiers when you need additional funding to grow the business.”

Indeed, many entrepreneurs waste a huge amount of time looking for funding which they could otherwise be putting into their businesses. A good case in point is a local seamstress who applied to the National Youth Development Agency (NYDA) for funding to produce matric jackets. While the finance was approved in principle, she needed to prove that she had orders and there was a demand for the product first. “She ended up approaching scholars and collecting deposits for their orders,” says Lebo Gunguluza, founder of the South African Black Entrepreneurs Forum (SABEF). “The deposits gave her enough money to actually manufacture the jackets, and then she received the remainder of the money for each order upon delivery — all before she actually received the funding she was looking for.”

The lesson is simple: the belief that a business can’t get off the ground without funding means entrepreneurs focus on securing finance instead of innovative ways they can get cash to launch their businesses.

“This entrepreneur actually got her company off the ground faster than she managed to secure funding,” says Gunguluza. “Don’t wait around for finance simply because you think that’s the only option open to you. Think out the box — your goal is to get cash. How can you do that? If you stop focusing on finance alone, you might be surprised by what you come up with.”

Gunguluza calls it ‘pre-selling’. If you need cash to fund your business, get that cash by pre-selling your product or service. In other words, get your clients to pay you before you deliver the goods.

There does come a point in the lives of many businesses, however, where future growth is not possible without funding. In order to make yourself an attractive prospect for financiers, Phitidis recommends first bootstrapping, and then taking the time to ask what you have to offer the financier.

The secret to finding funding

Don’t think for a moment you are alone in the financier-financee relationship. In fact, according to Alexandra Fraser, research analyst, Invenfin Venture Capital, the average funding partnership in the US lasts longer than the average marriage. So it’s important to be on the same page from the word go.

“No-one takes the time to ask the simple question, ‘What does a financier want from me?’” says Phitidis. “Entrepreneurs are always so busy thinking about what they want from financiers, that they forget that finance houses are businesses as well, with specific mandates that they must follow. As a business owner, before you start looking for finance, do your research and recognise that there are different types of funding that have specific criteria and mandates that must be met. Ask yourself which financier suits your business and industry best, and vice versa. No amount of moaning, sulking and bashing down doors will work if you are approaching the wrong financier. Figure out what they want, establish if you suit their profile, and then show them why you are a suitable candidate for their funding.”

Christo Fourie, IDC Venture Capital Unit, agrees. “Each fund has a unique mandate,” he explains. “You can’t change that mandate.
Move on and find a fund that fits, rather than banging your head against the wall and wasting your time.”

So what do financiers want?

According to Alexandra Fraser, the first thing funders want is for entrepreneurs to validate their ideas before they even pitch them to investors. “This can be as simple as starting with a Google search,” she says. “Did you research your idea and your market? Yes, innovative ideas are great, but not all ideas are as innovative as entrepreneurs seem to think they are, and many are simply not feasible. Is there a need or a want, and is there a market? That’s where you need to start.”

Fraser offers two examples. The first is Coca-Cola’s marketing success. “People were not dying of thirst before Coca-Cola hit the market. The brand needed to find another need or want to attract customers. It’s vitally important that you know what that hook will be. You can’t simply say: I have a product and people will buy it. Why will they buy it?”

An example of poor research is entrepreneurs who do not understand the market they want to operate within. “For example, we have received a number of pitches from entrepreneurs who have developed technology for mobile lotto sales,” says Fraser. “On face value this is a great idea: there is a need and a market. Unfortunately, there is also legislation expressly forbidding lotto tickets from being sold on mobile phones. Before they put time and effort into these pitches and even developing the technology, these entrepreneurs should have done their homework and validated their ideas.”

Ultimately, whether an entrepreneur receives funding or not boils down to market research. “Research can be painstakingly slow, but it’s also vitally important and will save time, money and effort in the long run. Market research isn’t only about creating a marketing plan. It determines everything you do in your business: what will customers pay? What should the business’s revenue model look like? How can the business attract and keep customers? If you can’t answer these questions, you won’t get finance.”

Reality check

Innovative ideas are by nature ‘big picture’. They are based on the belief that anything is possible. Proper market research grounds the big picture in reality, which decreases risk for investors, and ultimately makes the business viable. “Great business ideas also don’t need to be brand new,” says Fraser. “Creating a market can be incredibly expensive because you need a huge marketing budget to introduce consumers to an unknown product or service. But, if you are offering something that is known, but solving a need or doing it better, you are tapping into an existing market. You simply need to differentiate yourself.”

Securing finance is all about proving to investors that you understand your business, you know who your market is, and you know what you are selling to them, how much you are selling, and what you will make based on those sales. In other words, you have a realistic sales forecast.

Investors aren’t going to be fooled by inflated projections either. “Using the example that there are one billion people in Africa, of whom 95% have cell phones, does not tell me who your market is for an application that lists restaurants in Cape Town,” says Fraser. “An industry and a market are not the same thing. Understand your market and then start from the bottom up.”

Do your homework

According to Daniel Hatfield, co-founder of VC firm Edge Growth, a general rule for all investors is that due diligence has been undertaken by the entrepreneur, which means – among other things – knowing where the sales will come from. “Top down thinking is great for big ideas, but the details lie in bottom up thinking,” he explains. “An entrepreneur who has researched their market, spoken to potential customers and understands what they can buy and for how much, can determine what their sales will be – and through that, how much money will actually be coming through the door. Top down thinking says, ‘I only need 1% of a R15 million market each month to make a profit’. Bottom up thinking asks, ‘How will I make my first three sales, and how will I meet the revenue target of my first six months?’” These are the answers investors are looking for. After all, they either need to see a return on their investment, or, if they are a bank, they need to know you can service the debt.

“The golden rule in partnerships is that a partner with money is very useful, but a partner who will also provide you and your team with the space, time and freedom needed to build the business is a true friend – and that friendship will stand the test of time.”

Richard Branson, Founder of Virgin group of companies

Four things funders look for

Edge Growth co-founders Daniel Hatfield and Jason Goldberg share the four main questions funders ask prospective fundees.

1. The market

Is there a great market for your product? Is it a growing market full of opportunities, or is it saturated?

2. Competitive advantage

Does your business have a competitive advantage? Do you have a value proposition that is quicker, smarter or cheaper than your competitors? Why should your potential clients buy from you?

3. The team

An idea is all fine and well, but unless it can be executed it isn’t worth much. The team is a vital component to the overall success of a business. What kind of experience do the various team members have? What does their network look like? What qualities do the various team members display, including competence, balance, high energy, motivation, determination and trustworthiness. A golden rule here is to do what you know.

4. Economies of scale

Can you start small and expand over time? Is the business scalable? If it is going to make money you need to be able to scale the idea – and you need to show how you plan to do that.

“There are never NO competitors. Tell your funder that there aren’t, and you come across as naïve, uninformed and out-of-touch with your market.”

Alexandra Fraser, Invenfin Venture Capital

Perfecting your funding pitch

If you have banged on more doors than you can count and are still receiving “no” to your funding pitch, your problem might lie in how you’re delivering your pitch. By Jason Fell

Effective elevator pitches can be crucial for entrepreneurs trying to secure funding from angel investors. The goal of the pitch – written or delivered face-to-face – is to briefly share the ’who, what, where, when, why and how’ of your business, while piquing an investor’s interest. The tricky part is cramming all of that into one explanation that, hypothetically, should be delivered in the time span of an elevator ride.

The pitch has to quickly grab potential investors, who often only read the first few sentences of a written application and then toss half to two thirds of them away. The best pitches however, describe the market the business is in, explain what problem it solves and demonstrate a track record. The worst ones fail for countless reasons.

Here are five of the worst elevator-pitch mistakes entrepreneurs make – and how to avoid them.

Mistake No. 1: You don’t explain what problem your business solves

Some entrepreneurs spend too much time talking about how their product or service works and not enough time explaining what problem it solves. People buy solutions to problems. Don’t tell an investor how your lawn fertilizer works. Tell them about their lawn.

The Fix: Share why customers will buy your product or service

If you don’t understand or can’t explain what problem you’re solving and why customers want to give you money, then investors are probably never going to want to invest in your company. Who’s your best customer? How much money do they make from buying your product? And, how much money will you make from selling it?

Mistake No. 2: You offer too many facts and numbers

Entrepreneurs often use statistics to help explain their business. While some figures – such as your sales and revenue – are important to establish a track record, don’t go overboard. Leave out the ‘step-by-step numerical proof of your market size’ and rather be compelling. Save the reams of facts for later.

The Fix: Tell a story

To capture an investor’s full attention, explain your business by telling a story. Use personal examples about how your service or product has solved a problem in your own life. Or, put the investor into your story. If you’re selling a product for people who are blind, don’t start off talking about the difficulties blind people face. Instead, say something like, ‘Imagine if you or a loved one were to go blind tomorrow…’

Mistake No. 3: You tout sales forecasts

Early-stage sales projections often don’t carry weight with investors because they aren’t supported by actual sales history. As businesses grow, revenue streams, prices and even entire markets can change, rendering preliminary forecasts useless.

The Fix: Focus on the benefit your business offers customers

To help make up for the fact that you might not have a long sales record, it’s better to explain the benefits the business will provide customers and how the company is different from the competition. Answering services companies have been around for centuries, but if yours, for example, uses technology to deliver messages immediately without the client having to call in and pick them up, that solves a problem and has the potential to create excellent revenue and profit. That’s what’s attractive to investors.

Mistake No. 4: You’re too attached to your business plan

For some investors, it’s a red flag when entrepreneurs aren’t willing to work outside the protocol outlined in their business plans. For example, you have a device that monitors electricity and, according to your business plan, you sell that device to customers for a fixed price. But, when a customer wants to lease the device instead of owning it, and you tell them you can’t do that, it might be a problem for an investor.

The Fix: Embrace new revenue opportunities

If there’s a new way to consider packaging or selling a service, a ‘true entrepreneur’ will seize the opportunity to make money. Being flexible and willing to accommodate customers when they want your service in a format that differs from what you already offer is good. The goal should be to make your product as sellable as possible.

Mistake No. 5: You discuss ownership stakes

While it might seem natural to explain how much ownership you’re willing to offer investors, don’t do it in the initial pitch. It’s like the sticker price on a car. If it’s too high, you don’t even talk to the salesman. You just walk off the lot.

The Fix: Save it for the follow-up

Details about who gets what after an investment generally come up after an investor has finished researching your company. If an investor asks about ownership terms early on, you should simply say you’re “flexible.” Remember, your goal in the pitch is to build a relationship with the investor. Get them to fall in love with your idea.

“I invest in a person who understands their subject matter and has a strong passion to succeed. I need to see big drive and stamina to know they are in it for the long haul and won’t give up when there are hurdles, disappointments and difficulties.”

Vinny Lingham, Serial entrepreneur and investor

Improve your chances of obtaining funding

Understanding bankers and knowing how credit decisions are made can mean the difference between getting a loan – or missing one. By David Bangs

Banks typically don’t fund start-ups, but there is a point where your business is generating revenue and you are ready to apply for a bank loan. Here’s a brief guide to what makes funders tick and some tips to help you navigate their world. The main concern bankers have is protecting their capital, money with which their depositors have entrusted them. Consequently, bankers are generally very conservative. Their first priority is to recoup the principal of the loan. Their next priority is to earn a reasonable rate of interest on the loan. And their third priority is that you prosper and open more accounts with them.

Your job is to provide the banker with as many reasons to feel safe as you can. You start with a loan or financing proposal – a statement of what you need, why you need it, when you need it, and how you plan to repay it. The documentation should include a description of how much you need and what you’ll do with the loan, up-to-date balance sheets, cash-flow pro formas and projected income statements. All banks have forms to help you prepare these, but using your own business plan increases your credibility.

The nuts and bolts

Applications are rejected for the following credit-related reasons:

  • Too little owner’s equity
  • Poor earnings record
  • Questionable management
  • Low quality collateral
  • Slow/past-due trade or loan payment record
  • Inadequate accounting system
  • Start-up or new company
  • Other (only 4% of rejections have other reasons)

“If we recognise red flags during the pitching process we won’t give funding. These include a lack of understanding of the industry in which the entrepreneur operates, false claims being made or misrepresentations and a misalignment between the business plan and the entrepreneur’s oral ‘pitch’.”

Keet van Zyl, HBD Venture Capital

The ‘Six Cs of Credit’

What do bankers look for when considering a financing proposal?

1. Character: Character judgement of an individual is based on past performance. Personal and business credit histories are reviewed.

2. Capacity: This is figured on the amount of debt load your business can support. The debt-to-net-worth (debt/net worth) ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage (low debt/net worth).

3. Conditions: Economic conditions, both regional and national, have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won’t extend credit easily.

4. Collateral: Collateral is a secondary source of loan repayment. Banks want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your banker sleep better at night.

5. Credibility: Do you know your business? Can you be counted on to be level-headed? How credible are your plans? Are they a collage of dreams or a carefully reasoned and researched plan? A business plan helps you answer the banker’s questions without hesitation.

6. Contingency plan: A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan proves forethought. It is a short worst-case business plan that examines the options open to the business and how those options would be treated. Decisions made in panic are poor decisions. A contingency plan avoids panic.

“It is vital for entrepreneurs to demonstrate a pragmatic and proven approach to getting the product to market.”

Charmaine Groves, Old Mutual’s Masisizane fund

Your funding options

Need cash but don’t know where to look? Here’s a breakdown of funders:

Angel investors: Angel investors are individuals who want to support start-ups financially. They use their own funds, and they tend to back the entrepreneur rather than the business.

Government grants: There are various government funds out there, and they all have their own terms, conditions and mandates. Do your research to determine which fund’s mandate suits your business.

Venture capital: This is not debt funded (ie debt that needs to be serviced, or paid for, like a bank loan). It is funding for high-risk, scalable, tech-related businesses. Venture capitalists are taking a huge risk, so they expect large returns. You will need to prove that your business is scalable and offers those returns. Again, make sure your business suits the fund’s mandate.

Seed funding: Some VC firms will offer seed funding, which is for start-ups.

Private equity: This is a share of the business in exchange for funding, and will usually involve angel investors or VC funds.

Bank loans: Banks specialise in debt products, which means you need to be able to service the loan. If you can’t prove that you can make loan repayments, you won’t qualify for a loan. This means you need to already be generating revenue.

Bootstrapping: Bootstrapping refers to building a business without funding. Why would you need to do this? The type of funding you receive is dependant on the stage of your business. The younger your business, the greater the risk you pose to financiers. As soon as you are successful and generating revenue, it becomes much easier to source funding.

“Funding works on a one in 100 rule: for every 100 business plans we receive, one will get funded.”

Alexandra Fraser, Invenfin Venture Capital

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

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Attracting Investors

Access To Finance In SA: What You Need To Know

Finfind’s inaugural SMME Access to Finance Report reveals some of the biggest challenges SMEs face when trying to get finance. Understand the landscape, and you can adjust your business to obtain more finance.

Darlene Menzies

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Access to finance is a primary challenge for the majority of SME owners, particularly in the early stages. Without an understanding of the complexities of SME funding and the challenges experienced by both the providers and seekers of finance, it’s impossible to address the obstacles that are hindering increased deal flow.

Many countries have transparent data from lenders on a number of SMEs applying for loans, the reasons they are applying, financing terms, the interest rates, rejection reasons and rates, non-performing loans and factoring volumes. However, this information does not exist in the public domain in South Africa, even though it is crucial for policy-making. There is an urgent need for quality data and increased transparency to map SME’s access to finance and understand their funding challenges so that practical solutions can be developed.

Finfind has responded by publishing South Africa’s inaugural SMME Access to Finance Report. As an innovative fintech company that provides SMEs with a free funder matching service and an up-to-date database of over 420 finance products from public and private sector SME funders, Finfind has comprehensive data on the providers and seekers of finance. The report has enabled us to provide valuable insights about SME funding that can benefit policy-makers, funders and organisations involved in SMEs.

Some of the key findings of the report include:

High demand for SME finance

The SME funding gap in South Africa is estimated at between R86 billion and R346 billion per annum. It provides a compelling, largely untapped market opportunity for innovative funders who are able to develop new lending models and risk assessment tools tailored to address the challenges of this complex and burgeoning market.

Related: Small Business Funding In South Africa

Funders require new risk assessment models

Banks currently struggle to serve SMEs as they treat business (big and small) as a single market, and apply traditional lending methods that use collateral and conventional financing scorecards as a one-size-fits-all approach. These traditional instruments are detrimental to micro, very small and small businesses securing finance. For funders to close the credit gap, innovative new credit scoring models that enable more accurate risk assessment need to be designed specifically for this target market.

There is a lack of SME credit record data in South Africa

South Africa has comprehensive consumer (personal) credit record data that is well organised and regulated. However, this is not the case for SME credit record data. The credit bureaus in the country have little, and in some cases, no credit history data for SMEs. There is no regulation of SME credit record data, and no standard means of data collection (or a framework for credit records) for SMEs.

This poses a major challenge for SME lenders as they use the credit score in their risk assessments. Funders request credit reports (credit checks) from the credit bureaus to assess a business’s historic credit conduct. In the case of SME lending, funders request the credit report for both the owner and the SME, even though they are two separate legal entities.

The current system does not uphold legislation that distinguishes between the owner and the business, which means that when SMEs apply for finance, lenders rely on the credit records of individual owners to assess the risk of lending. This prejudices SMEs that might be extremely creditworthy but have owners with compromised personal credit scores.

Related: Government Funding And Grants For Small Businesses

The lack of SME finance readiness is a major hindrance to securing finance

The qualitative research shows that many SMEs are unable to access funding as they cannot provide funders with proof that they are bankable and can afford the finance they are requesting. Funders need to examine the SME’s financial records to determine that the business is viable and to assess their ability to repay the funding. To do this they require access to the SME’s latest financial statements and up-to-date management accounts including income/cash flow projections and outstanding debtors, tax clearance certificate, VAT statements and business plans amongst others.

Financial record-keeping is a major challenge for many SMEs and they are not able to produce these documents. Without these, they are unable to access finance, and are ill-equipped to make sound decisions in their business or properly manage their cash flow. Poor cash flow management often results in SMEs falling behind on VAT and PAYE commitments as they are unaware of what is owed. Many viable businesses are liquidating due to liabilities owed to SARS and other creditors as a result of poor financial record-keeping and an inability to secure funding.

Further to these key findings, the report provides valuable insights into the supply and demand for SME funding. It profiles the SMEs seeking finance by geographic location, turnover, age of business, sector, job creation, financial need and amount of finance required, amongst other key indicators. It also profiles the funders, and considers the supply and demand matches and mismatches, highlighting some of the funding gaps and opportunities in this critical sector.

About the smme access to finance report

Finfind launched the report in partnership with the SA SME Fund and its findings have been made freely available to stakeholders in the SME ecosystem. The report identifies providers and seekers of SME funding in South Africa, and the associated challenges, gaps, opportunities and potential solutions to increase funding success in this vital sector. While ground-breaking in terms of the information it provides, this initial report did not answer all the questions in this complex environment, but provides an excellent start to understanding the landscape.

Related: How To Get A South African Government Loan

The report is based on independent analysis of Finfind’s funder and SME finance seeker datasets in 2017, the largest SME access to finance research sample to date. In 2017, Finfind had a total of 126 916 visits to its platform, 81,2% of which were unique visitors. The average time spent on the site was more than five minutes per user.

The report analyses comprehensive data from more than 10 000 SME funding requests that were matched with a base of 148 funders and 328 finance offerings. Comparisons of the Finfind data with data from SARS, GEM SA and StatsSA studies show that the Finfind data is representative of the SME market and that the report findings can be generalised for SMEs in South Africa.

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Attracting Investors

Looking For Funding? Try Manufacturing

There are over 200 national incentives for the industrialisation of South Africa. Can you tap into grant funding to grow your business?

Nadia Rawjee

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Many people ask me why the focus of public investment in SMEs and business is so heavily weighted on the manufacturing sector?

The reality is that investment in industrialisation results in a multiplier effect in jobs, foreign earnings through exports and increased tax revenues. Countries that focus on industrialisation have proven its potential to stimulate economic growth and address social challenges.

If you’re looking for opportunities and the support needed to realise these opportunities, manufacturing is a good place to start. The Department of Trade and Industry (DTI) offers several manufacturing-based incentives and grants.

Below are the ten key general principles associated with the DTI incentives:

1. Matching concept

DTI grants are based on a ‘matching’ or ‘co-funding’ principle, which requires an applicant to invest a portion of the funds required for the project for which funding is being requested. The DTI will fund a portion of the project qualifying costs (anywhere from 10% to 90% depending on the specific fund) on condition that the applicant can prove a source of the remaining portion. The source of the difference can be debt, equity or any other form of funding.

 2. Qualifying/allowable investments or activities

The DTI sets rules for what can be funded by way of a grant (qualifying costs). These may differ based on the incentive, but the general rule is that the main application of grant funding is for plant, machinery, tools and equipment. Land and working capital will not qualify and would form part of the co-funding.

Related: How Investors Choose Who To Invest In

3. Project size

This refers to the full project size and includes all costs involved in implementing the project. All costs include capital expenditure (e.g. plant, machinery, tools and equipment), working capital (e.g. salaries, wages, stock etc.) and other costs including, but not limited to, land, vehicles, business development and certifications.Not all costs will qualify for funding from an incentive.

4. Bankability

Projects are evaluated to determine their bankability. The DTI aims to ensure that the principles applied in an application and business plan are realistic and will result in a sustainable business and/or project. In evaluating bankability, the DTI will look at the ability and know-how of the team and will require the applicant to show proof of market.

Proof of market is demonstrated by off-take agreements, purchase orders, contracts or letters of intent.

5. Timelines

Incentives are strategic funding and, as such, are not an appropriate source of funding for distressed businesses or businesses with short timeframes. This funding should be viewed as strategic funding. The DTI may provide timelines for processing applications, however, applicants must be prepared for timelines longer than those indicated. Applications may take anywhere from three to 12 months to be processed and approved.

6. Approval prior to investing

Investments made prior to the approval of an application will be non-qualifying investments. This means that an investment made before receipt of an approval from the DTI cannot be recuperated. This will be enforceable even if the investment made formed part of an application that was approved.

7. Milestone based claims

The DTI will make payments based on project milestones as indicated in an application. Each fund may define its own milestone parameters.

Related: Who Would Invest In Your Start-up, And Why?

8. Rebated claims

Claims are rebated to applicants. This means that an applicant must first invest, in line with its application, and then submit a claim for the approved investment. This principle demonstrates the importance of securing co-funding, which will be used to initiate the project.

9. Tax free grants

Grants awarded and paid are tax-free.

10. Equity substitution in nature

As grants are not repayable, they can be considered equity for purposes of securing debt. Most debt funders require a portion of equity from an applicant to lower the risk of debt. Debt financiers will consider a grant as an equity contribution, allowing applicants to unlock debt that would otherwise not have been available.

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6 Steps To Ensuring You Meet Your Funder’s Mandate

Find your funder, approach the right people, and tick all the boxes.

Diana Albertyn

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1. Determine why you need funding

According to Quinton Zunga, founder and CEO of RH Bophelo, a special purpose acquisition company with interests in the healthcare sector, many business owners do not understand cash flow and its impact on the operations of a business. “A good idea without enough cash flow is not sustainable,” he says. “You have to prepare the business for the worst-case scenario and ask yourself ‘what if things don’t work out my way? Do I have a plan B?’ Don’t assume you’ll be able to access finance to save the business if your cash flow is poor.”

The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.

“There’s a big difference between funding that will help you grow your business, and trying to plug a self-inflicted cash flow problem,” agrees Kumaran Padayachee, CEO of Spartan SME Finance, an alternative funder.

The key to growth funding can be summarised in one sentence: Will this help me make money? If the answer is yes, you’ve ticked the growth-funding box. If you’re not sure, relook your financials and forecasting. If the answer is no, you’re trying to solve a cash flow problem that will not be fixed by taking on more debt funding.

“As a funder, we care about what entrepreneurs want the money for,” says Kumaran. “We look at business models and strategy. We take a view of the entire picture, which gives us insight into whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or an access-to-market problem.”

The real insight is that it shouldn’t only be up to funders to determine the answers to these questions, but business owners themselves. If you understand why you need funding, one of two things will happen: You’ll realise there’s a problem in the business that funding won’t solve, and you can begin working on it; or you’ll be prepared when you apply for funding, increasing your chances of securing the finance you need.

The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.

Related: Government Funding And Grants For Small Businesses

2. Understand the funding landscape

paul-jackson

Different sectors, industries and funders have their own rules and mandates. To understand the funding you’re trying to access, you need to first understand the sector you’re in, and the funding rules 
that apply.

For example, property is a long-term investment and funders in this space require a commitment of at least five to 15 years. TUHF, which is a specialised residential property finance company, also requires 
an equity contribution, as it does not offer 100% financing.

“Funding is usually made up of two components: Financing (loans) and equity (owner’s contribution),” says TUHF’s CEO, Paul Jackson. “The purchase price of the property, the costs of refurbishment and the amount of money the client can contribute of his own money are the three main contributing factors that determine how much financing the client will need to 
apply for.”

More importantly, entrepreneurs approaching TUHF are dealing with industry experts operating within a niche space. This is true of most funders, and should be carefully considered by business owners.

When you’re considering your growth options, focus on what you absolutely need to push the needle, and make do with what you can as you build up your pipeline.

“In every case ask the question: Do the costs involved in accessing the finance make sense? Will this help drive growth? How? Once you’ve ticked those boxes, consider all your funding options. There are a lot of solutions available to you, from bank funding, which is the cheapest to access but requires a lot of collateral, to private equity funding, which involves giving away equity in the business,” says Kumaran.

“Alternative funders like us play in the middle of these two traditional options. Alternative funders tend to be niche and specific, focusing on specific sectors or industries. They carry more risk and don’t require collateral, which is why they’re more expensive than banks, but they bring industry and sector-specific insights as well — and it’s debt funding, which means you aren’t giving away equity in your business. Their processes tend to be efficient as well, largely due to the niche nature of the funder. When you’re ready to grow, find a funder that matches your needs and understands your business.”

3. Start early

“Raising capital patiently is key, because acquiring funding quickly but unwisely could lead to repayment issues,” says Quinton. “Some funding can only be accessed later and you need to be patient, or you may find yourself struggling to pay it off before your business has grown big enough to do so. You need to focus on preparing a business plan and understanding the cash flow impact of the decision you make. Look for an advisor or banker to work with you on the business plan.”

4. Know what funders look for

All funders are looking for specific business and personal traits in the business owners they back. Quinton values integrity and honesty, a good understanding of the business they are in, and personal commitment. “Funding a new business is always tough because the entrepreneur may not have experienced all the sides of the economy and may not be accustomed, mature and ready enough to go to the next level. This is where a steady track record is advantageous,” he adds.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Paul agrees. For TUHF, the entrepreneurial character and competence of the borrower is of paramount importance. “We follow a character-based lending approach,” he says.

“A client that displays certain characteristics is considered a better investment option. These include entrepreneurial qualities; an open-minded attitude that is willing to take advice; someone who is self-disciplined and manages the cash flows of the property to the benefit of the property, and not for personal use. Other sought-after characteristics include someone who keeps their tenants happy by keeping the property clean and well maintained, providing all-round good customer service; is committed to doing everything in their power to ensure the success of the deal; is up-to-date on utilities; and directly involved in the property management, even if there is an external service provider.”

5. Avoid red flags

Every funder has red flags they watch out for and they will walk away from a deal if they find them. “A bad past business track record indicates the business owner’s legal, financial, and HR values,” says Quinton. “These are important to us. Without some ethos and standards, you end up not being on the same page as your investor. I usually ask about the entrepreneur’s previous partnership — how they handled it and why it ended. Desperation is also a deterrent, as is a poor business case.”

Paul agrees. The driving factor in TUHF’s business is the borrower’s aptitude in property. “Real estate competency is therefore a key characteristic of TUHF borrowers. It’s important that the building is properly matched to the skill and entrepreneurial competence of the borrower. Some of the conditions we evaluate include a credit record, ensuring the borrower is not under debt review, or blacklisted; returned debit orders on a client’s bank statement; track record and state of repair of the client’s other properties; having the right risk attitude, which in our case is considered, cautious and patient; taking the time to do due diligence; and property fit — does the size and nature of the project match the client’s talents and experience. It’s a red flag for us if one of these is mismatched.”

6. Don’t give up

The most important step in funding is perseverance. Many business owners knock on multiple doors and make numerous applications before finding a funder that fits. This could be because red flags need to be addressed and financial management accounts followed, but each time you approach a funder you learn something new that you can implement in your business.

“Don’t view failure as a disaster,” says Quinton. “Figure out which stage of the lifecycle your business is in and align that to your commitments.”

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