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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+.

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Attracting Investors

The Investor Sourcing Guide

How to attract and obtain investors to your established, high-growth business.

Greg Morris

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As an established, high-growth company, you may find that you need to source capital, identify a mentor, or work closely with other affiliates to prosper. In this case, partnering with an investment holding company can be a valuable growth tool.

So, what should you do if you want to be acquired by a holding company?

Read this.

1. Research everything

If you’re considering a long-term investment partnership, make sure you conduct substantial prior research. There may be many potential investment partners out there, but each has specific venture and industry directives. Get to grips with these.

Related: Is Venture Capital Right For You?

2. Be candid with yourself

The amount of capital that you need will affect which holding company you choose. In particular, you’ll need to understand what your risk profile looks like relative to the returns you expect to provide. This will also help you to source, entice, and keep the attention of the most appropriate partner.

3. Identify your must-haves

Any investment partner you choose is likely to be able to provide you with funding, a broader network, and economies of scale. Beyond these, however, you’ll need to decide on your most important benefits (must-haves), so you can target the companies that can offer you the best fit.

4. Spell out your funding plan

You’ll need to be very clear on how you plan to spend the funding you get from your investor. This plan should stipulate, in particular, how you plan to grow.

Related: 5 Key Questions To Answer For Raising Funding

5. Scrutinise each investor

Make sure to analyse your potential investors’ investment history, so you can get a clear idea of where your interests are aligned. Look specifically at things like:

  1. Where investors’ get their funding
  2. What their investment track record looks like
  3. What their investment directives are
  4. Their appetite for risk
  5. The returns they usually aim for

The crux of the matter

Research is essential, no matter which holding company you hope to be acquired by. This will help you to find, attract and retain an investor who gives you the funding you need, and lends you the support to be innovative, productive, and profitable.

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Attracting Investors

6 Great Tips For A Successful Shark Tank Pitch

Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes.

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Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes. Entrepreneurs will often need to promote their businesses to prospective customers, lenders, investors, employees and even suppliers.

All stakeholders would like to know with what and whom they are dealing. They will need to assess risk and will try and evaluate the business against others who are competing for those same funds.

1Know Your Product

You should be able to describe your business within 60 seconds, in a confident and positive manner. Let the stakeholder know what particular problem your business solves which makes it viable and attractive.

Your brand and how you intend to develop it is important in determining whether they will invest or lend you money. Share critical information with them such as large customers, patents and trademarks and details of forward orders.

If you are looking for funding or investment, make sure you have the relevant paperwork to back up what you are saying.

Related: 10 Tips From The Dragons Of Dragons’ Den SA

2The Numbers

You must have your numbers at your fingertips.  A true and successful entrepreneur will know his numbers instinctively and be able to recollect and present them convincingly. Stakeholders want to know your turnover (sales) over the last couple of years, your gross profit and net profit.

Investors want to know what they are investing in and whether there is strong potential for their money to grow. Lenders will want to assess their risk — how are you going to repay the money? Moreover, you as the business owner, need to be sure that you will be able to make the required repayments.

You must know what your margin is, as this will largely determine your viability as a business. Margin or gross profit is the difference between the selling price of the goods and their cost and is usually expressed as a percentage.

3Know What You’re Asking For

asking-for-business-funding

Be clear as to the size of the investment you want to give away and how that determines the ‘valuation’ of the business. Therefore, if you wish to raise R200 000 for 10% of the business, that means you value the business at R2m — be sure you can back that up or you will get taken apart.

4Have a Business Plan

The best way to fully understand your business is by way of having a detailed business plan, which has been prepared whilst working through every facet of your business, from the original idea to the finished product.

As the business owner, you need to live this business plan and be able to use it as your daily guide to success. Develop it, change it where circumstances require it, but most importantly know it and understand it.

In this way, you will be able to deal with most of their questions, be they about marketing, research, international expansion etc. It is also a good idea to know your competition and what they are up to.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

5Sell Yourself

In most interactions, you the entrepreneur, are selling yourself. Whether it is an investor, lender, customer or prospective employee, it is their impression of you and your capabilities which ultimately determine whether they want to work with you.

Be confident, defend your position where required, as you will need to parry some blows but do not behave arrogantly.

6Learn From Your Mistakes

Many entrepreneurs who have presented to the Shark’s Den and not been able to garner investment have turned their business into great successes. You need to be able to learn from the experience, and if rejected, bounce back even stronger.

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Attracting Investors

3 Things You Must Have In Place To Get That Start-up Bank Finance

If you’re planning to secure funding for your start-up, you need to put the right foundations in place.

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The South African landscape for raising finance is tough for any business, with stringent lending regulations. Here are three areas to focus on as you set up your start-up to ensure you’ll qualify for a loan or equity funding.

1Securing a Market

Most SMEs I have mentored or advised start with expressing how big the total market size is for their product or service, but, while this is important to understand, the big question is: What percentage of that market will you attract and how?

Look at the ‘how’ first and work your numbers backwards. For example, if you secure a R10 million contract to supply an item that has a market size of R37 billion you are capturing only 0,03% of the market. However, if you’re able to cover your monthly expenses (including your loan repayment) and make a profit, that’s what counts. You should be able to show this contract or letter of intent to procure, which shows how and where you will find this market.

Related: The One Question You Must Be Prepared To Answer When Pitching Investors

2A Strong Team

When you’re starting out you’re likely to be the sum total of your team. If you’re going down the entrepreneurial journey alone, make sure you have identified who will mentor and guide you through the areas you don’t have competencies in and cost this into the business start-up and running costs.

Focus on who in the business is going to:

  1. Sell and market: Do they have the necessary skill, network, product and market knowledge?
  2. Control the money: Are they financially savvy and can they make sure that money is being used for the right things?
  3. Operate: Who has done this before? Can this individual manufacture the product or arrange the supply of goods or services, ensure quality control and sound human resource management?

3Compliance

Formalising your business is costly but necessary. If you don’t have a formal entity, shareholders agreements, loan agreements, financial statements, management accounts, tax compliance and so on, you will come short when looking to raise finance.

Understand these costs upfront and include them into your start-up budget — this will save you a lot of pain in the long run.

Related: 3 Ways For Social Entrepreneurs To Access Fundraising

The truth is that finance is available for women who have the right business ingredients just as much (if not more — in the South African context) as it’s available for men and just as with men. And, resources such as these help to unpack and guide the core fundamentals that are needed to make business bankable/fundable.

Then it’s all about implementation and staying on track to translate all that you’ve done and all that you wish to do in a bankable business plan, and approach the relevant funder for your needs. The right business mentor can certainly help you on that journey.

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