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9 Different Kinds Of SME Funding

There are many different ways to get funding for an SME, each with its own set of requirements and obligations. Learn what your options are in order to decide which kind of SME funding suits you best.

Tracy Lee Nicol

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For many entrepreneurs there comes a point in a business where capital is needed either to get it started or to expand once things are up and running. How many ways are there to get SME funding from? Family and friends? The bank? Yes, but there are more ways to get funding for an SME.

The 9 different kinds of SME funding

1. Self-financing SME funding

This is when you use your own personal savings to finance the business. Be careful though, mortality rates of new businesses are high and if the business doesn’t work out you’ve lost both your business and your personal savings.

2. Money from friends, family and business associates SME funding

Often the first place to turn to if they’re able to provide, family, friends and individuals you know will often invest in your entrepreneurial venture because they have confidence in you and your abilities as much as they have confidence in the business idea.

Unless your family and friends are particularly loaded though, they can get you through the start-up and development phase but you’ll need to look into other forms of finance when needing a substantial capital injection.

Related: Funding And Financial Assistance For SA Women Entrepreneurs

3. Angel investors SME funding

If an entrepreneur isn’t able to source funds from people they know or their own personal savings, angel investors are another option. These are individuals are often business people themselves or have significant funds and are looking to assist aspiring entrepreneurs in conjunction with a return on investment. In exchange for the funds, angel investors often require equity in the business.

4. Angel funds/alliance SME funding

This is a collective of angel investors who contribute money to a fund. From there they’re able to make a number of individual investments helping diversify their risk. A typical angel fund will have a submission process in which your business plan will be reviewed, you will present, and a vote will be cast whether to invest or not.

5. Venture capitalists SME funding

This is a well-known form of funding, but it’s by no means the easiest. As a professionally managed fund, they’re looking for a high return on investment and have strict procedures to follow. Equity is given to the VC and if a business is not able to live up to its expectations the VC is able to have the company sold in order to recoup its investment.

Related: How to Write a Funding Proposal

6. Bank loans SME funding

These institutions lend money to entrepreneurs and charge interest on the loan. They will not fund what they deem high risk ventures however, and they typically have strict, well-defined guidelines to determine suitability.

These include positive cash flow for more than two years, a demonstrated history of paying off debts, sound financials, and the entrepreneur and business have clear credit histories.

7. Bridge loans SME funding

Commercial finance companies or non-bank commercial lenders can also offer finance to an entrepreneur in the form of short-term loans to “bridge” the gap between needing cash to grow while continuing to operate. These loans are different to a bank loan though because they will often finance businesses where banks have refused.

The business and the entrepreneur’s assets are assessed and, provided there is sufficient liquidity to repay the loan in the instance of default, a bridge loan will be granted. Bridge loans must be paid back in a certain time frame and accrue interest.

8. Government grants SME funding

This funding is supplied through government channels and often has lower or no interest compared to banks and commercial lenders. The truth about getting funding from government is that competition is fierce and the requirements for qualifying are strict, including full B-BBEE compliance.

9. Bootstrapping SME funding

A company owner generates funds for the business without relying on an outside source. The advantage of this form of self-funding is that the business remains 100% in the ownership of the business owner(s), but does require strict adherence to budgets and discipline in reducing expenses where possible which at times can mean a foregone salary – also known as ‘sweat equity’.

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

What-to-know-about-SME-funding

What to know about SME funding

While it may be necessary to seek funding in order to start or expand a business, it’s important to remember that whenever seeking finance externally chances are that, if successful, you will own a little less of the business or have a little less control in running it.

It’s the bargain to be made and lived with.

In order to remain in the good graces of your benefactors you must also do more than just maintain, you must grow and provide a return on investment.

When partnering with some venture capitalists or private investors, you might be forced into making major equity decisions that aren’t in the best interest of the founders or in line with the business’s strategy.

With this in mind, be cautious about where you accept money from and the terms and conditions they attach to that money.

Tracy-Lee Nicol is an experienced business writer and magazine editor. She was awarded a Masters degree with distinction from Rhodes university in 2010, and in the time since has honed her business acumen and writing skills profiling some of South Africa's most successful entrepreneurs, CEOs, franchisees and franchisors.Find her on Google+.

Attracting Investors

Alan Knott-Craig Answers Your Questions On Finding a Funder To Managing Your Staff

What you really need to know to land an investor.

Alan Knott-Craig

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Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.

The rest will come.

1. How do I find an investor?

You have 4 options:

1. Angels

Applicable if you only have an idea, and you need cash to make your idea a reality. Usually between R500 000 and R1 million. You need to milk your network: Parents, friends of parents, colleagues, parents’ friends, friends. If you have no network, you need to build a network or use your savings. There is no math to these investments. You get money because they believe in you, not because they seriously expect a return.

2. Early-stage VC

Applicable if you already have a working product with traction, ie: users and/growth, and you need cash to build out. Usually between R1 million and R2,5 million. There are a number of early-stage VC’s in South Africa, just ask around. Knife Capital are amongst the best. Ideally you want an introduction from a trusted party. Failing that, just email them directly. Give a simple pitch. They’re looking for 15X return on investment.

3. Late-stage VC

Applicable if you have a critical mass of users and meaningful revenue, ie: R10 million a year, and you need cash to grow. The late-stage VC’s are the likes of 4Di, hard to get access without an introduction from a trusted third party, usually one of your existing investors. They are looking for a 5X return on investment.

4. Private equity

Applicable if you have a cash-generative business that requires capital to either exit a shareholder, or to grow profits exponentially. Looking for 25% IRR.

There are also state-sponsored sources of capital for entrepreneurs from previously disadvantaged backgrounds, for example the Technology Innovation Agency. This is ‘soft’ money, requiring no equity or personal surety. If you can get it, take it.

Investors are looking for return on capital. If I invest R100 in an early stage company, I want to get R1 500 (15x) back within a reasonable period of time, ie. no longer than five years.

The key metric is Total Addressable Market (TAM). The size of the market you’re targeting determines the potential size of your business.

Assume you target a market with a TAM of R100 million (profit), and you assume you can get 10% of that market by 2020. That means your business will have R10 million of profits in 2020.

A private company is valued at a maximum of 7x profit, so your company will be worth R70 million in 2020. If you ask me to invest R1 million today, I need 21% of your company in order to realise a 15x return (R15 million) by 2020.

Start with TAM, work from there. Remember, every assumption you make will be questioned. Minimise your assumptions. Maximise the evidence for your assumptions.

Related: Alan Knott-Craig Answers Your Questions On Money And Partners

2. If you are a start-up, what’s the most important thing you can do to grow?

Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.

The rest will come.

For consumer products, always make it easy for your customers to share. Friction-free sharing is the easiest marketing tool you can have.

Feature-creep is a big risk and can be a big distraction. You need one single value proposition that is enough to get customers. Having fifteen cool features will never compensate for the lack of one killer use case.

Related: Alan Knott-Craig Weigh In On Living Your Entrepreneurial Dream

3. Our staff is growing, more than 20 now. Any tips on management? 

Having four or five staff is not hard. You don’t need to be a good manager or leader. You can muddle along. It’s when your team starts growing past the twenty number that management becomes a skill rather than a word.

There are hundreds are articles written on the art of management, but Jack Welch (former GE CEO) broke it down to this:

  • People want to know who they report to.
  • People want to know how they’re being measured.
  • People what want to know how they’re doing.
  • That’s it.
  • One boss. Clear KPIs. Regular feedback sessions.

Read this

13-rules-for-being-an-entrepreneur-coverAlan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.

What it’s about

It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.

For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.

This book is a collection of tips and wisdom that will help you make money without forgoing happiness.

Get it now

To download the free eBook or purchase a hard copy, go to www.13rules.co.za.  To browse Alan’s other books, visit bigalmanack.com/books/ 

Ask  Al

Do you have a burning start-up question?

Email: alan@herotel.com

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Attracting Investors

XPRS Capital Africa Bridges Funding Gap Faced By South African SMEs

XPRS Capital Africa answers local SMEs call for funding.

XPRS Capital Africa

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Small and medium enterprises (SMEs) are a vital component of the South African economy. However, there is a substantial portion of the country’s estimated 650,000 SMEs that have no access to funding to assist in their continued growth

In response to an increase in demand for reliable and easily accessible capital for businesses like these, XPRS Capital Africa opened its doors in South Africa. The specialist business funding provider is geared towards rapidly vetting and approving short-term business funding ranging from R50,000 to R500,000. In addition, XPRS Capital Africa specialises in extending funding to SMEs that may not qualify for funding from traditional lenders.

Simon Leps, CEO of XPRS Capital Africa explains that XPRS Capital has its roots in the US, having been founded in 2013. “The company is a renowned and established alternative online business-to-business lender. Together with a team of data scientists and using thousands of data points, XPRS Capital has developed a proprietary credit vetting algorithm and packaged product set.”

Related: Angels & Demons: What To Know When Negotiating Equity Funding For Your Start-up

“The technology and approval processes developed by XPRS Capital has a massively successful track record overseas and the experience that our company has gained over the years will help many more SMEs in South Africa to reach their potential,” says Leps.

“The XPRS Capital platform has processed over $1b worth of loans and has a proven track record of funding thousands of businesses across hundreds of industries,” he continues.

Leps adds that the company’s sophisticated algorithm allows XPRS Capital Africa to provide funding to many South African SMEs that are usually denied loans on the basis that their owners have less than ideal credit records. “Traditional lenders are often reluctant to lend capital to SME owners whose credit histories place them in higher risk categories. This has created a massive challenge for many promising SMEs. At XPRS Capital Africa, we focus on the health of the SME, and use state-of-the-art technology to provide businesses the cash flow they need to grow and flourish.”

Using the unique algorithm that we have optimised for the South African market, we are able to accurately assess any SME that has been in business for over a year, to rapidly provide a 3 to 12-month funding solution, notes Leps. “The online application takes less than 10 minutes, allowing SME owners to spend less time filling in forms for funding, and more time on their business.”

XPRS Capital Africa provides funding directly, working closely with SMEs to offer the fastest approvals, best possible repayment terms and most accurate risk profiles for any business.

“Cash flow is the lifeblood of every single business. Our mission is to provide this quickly, affordably and reliably,” Leps adds.

He notes that, given the high number of businesses that have trouble accessing financing, SME owners should also know how to maintain their own positive credit records. Thereby they can ensure that their businesses have access to as many options as possible.

“Ensure that all areas of your company are looked after to the same degree as most funding providers want to see that all aspects of a business are well managed. Up to date, audited financial statements and management accounts, well managed bank accounts, and good budgeting and forecasting show that the owners are attentive. Owners also need to know their businesses inside and out and be able to answer questions about their cash flow and deal pipeline.”

Related: The Investor Sourcing Guide

In addition to this, Leps says that the customer’s experience when dealing with the business could also have a measurable impact. “Any touchpoints that are available to your customers will be looked at by potential funders, so all customer facing assets should look professional and be kept up to date. This goes for websites, online portals and social media accounts.”

“The ability to access additional funds when your company needs it is the key to long-term survival. That’s why it is paramount to maintain the best possible credit record. However, it is also important to remember that, whatever the financial state of your business, business owners are never completely out of options,” Leps concludes.

For more information or to apply for funding, please visit https://www.xprscapital.co.za/ or contact XPRS Capital Africa on (087) 625-0665  or info@xprscapital.co.za.

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Attracting Investors

The Dangers Of Crowdfunding With Coolest Cooler Founder Ryan Grepper

Crowdfunding is about more than simply raising quick cash for your business idea.

GG van Rooyen

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In 2013, Ryan Grepper launched a crowdfunding campaign on Kickstarter for a product he called The Coolest Cooler. Ryan described The Coolest Cooler as a “party disguised as a cooler,” and he equipped it with things like a cutting board, blender, Bluetooth speaker and USB charger.

The campaign was a failure. Ryan had set his goal at $125 000, but the campaign only made around $100 000. According to the entrepreneur, there had been a couple of reasons for this failure. He felt that he had set his goal a little too high, and he also thought that it had been a mistake to launch in winter when people weren’t thinking about beach parties and picnics. Most importantly, though, his product hadn’t quite been ready. The prototype he based the campaign on wasn’t ready for market.

Related: Equity Crowdfunding In SA Explained

So, in July 2014, he went back to Kickstarter with a more polished version of his cooler. His target this time around was also a more modest $50 000. The campaign was an immediate success. Less than 36 hours after launching, he hit his goal, and astonishingly, a day after that the campaign hit $1 million. By the end of the campaign, The Coolest Cooler had raised more than $13 million — 20 000% more than its $50 000 target.

Sadly, though, this story doesn’t have a particularly happy ending. The Coolest Cooler became a victim of its own crowdfunding success. Ryan had a clever product idea, but nothing much more than that. In return for all that money, he had promised funders a reward in the form of their very own Coolest Cooler, and he now faced the daunting prospect of fulfilling $13 million in orders. As many product-based start-ups also do, he had grossly underestimated the cost of building his cooler. During the campaign he had priced the Coolest Cooler at around $175, but it quickly became clear that he would need to sell it at $400 to make a profit.

Eventually, Ryan had to demand that funders send in an additional $100 to get their coolers, and he also started selling the product on Amazon before all the funders had received their coolers. Two years after the campaign, 36 000 people were still waiting. The Oregon Department of Justice eventually started investigating Ryan’s company and reached a settlement in 2017 that will hopefully see funders receive a portion of the company’s future profits. Thousands of backers, however, will probably never get their Coolest Coolers.

If done correctly, crowdfunding can offer more than a capital infusion into your business — it can also allow you to test the market and find out if there’s an appetite for what you’re offering. A successful campaign won’t just help fund the business, but will also help you create a loyal and vocal group of customers who can help you spread the word.

Related: Kickstart Your Business Through Crowdfunding

As Ryan Grepper’s story shows, though, there are dangers. Given the very public nature of crowdfunding, you won’t be explaining problems to your investors behind closed doors — instead, you’ll have to answer to annoyed funders on social media.

For this reason, it’s important to understand exactly what crowdfunding is, and what the expectations of potential funders are likely to be.

Watch Ryan explain what the Coolest Cooler is below:

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