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How To Find Funding in South Africa

One of the challenges involved in starting a business is how to find funding. Fortunately there several places to look to and things you can do to look like an attractive investment. Below is a guide for how to go about finding funds for an SME.

Tracy Lee Nicol

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Many entrepreneurs believe they’ve got a great idea but are hamstrung in getting the project off the ground because they don’t know how to find funding.

By taking steps in critical areas like market research, understanding the (realistic) scale of the opportunity, having a water tight business model and a comprehensive business plan, you can improve your odds of finding funding.

How to find funding: Where to look

Self-funding is the simplest way to kick-start your new venture. The catch of course is whether you have the funds in the first place to invest. Fortunately by bootstrapping a business and reducing as much excess expenditure as possible it could take a lot less money than you think to fund your business.

The advantage of this strategy is that you maintain full control and ownership of the venture. A word of caution though: If you have an asset like a house, you may be able to borrow against it. The risk however, is that if the business doesn’t work and you’re unable to make the repayments, you could lose your house.

Resource: 9 Different Kinds Of SME Funding

Branching out from self-funding is bootstrapping. This means that by reducing your expenditure to the bare minimum (which can also mean forgoing your salary for a time) and selling unnecessary assets, that the business will be able to fund itself as it grows and develops.

In getting funding, you will need to meet strict criteria as they are unlikely to finance a high risk venture or someone with a poor history of debt management. Due to unstable global economics, banks are also unlikely to finance a start-up as they are perceived to be high risk. On the plus side, the current interest rate cut means that it’s cheaper than ever to repay a loan.

If you don’t want to go via a bank for finance, you can investigate different forms of investors. These include angel investors who are individuals prepared to offer funds to a budding entrepreneur in exchange for a return on investment. The alternative is venture capitalists.

These are private firms that invest in high return ventures but require an equity stake in exchange for their funding. They also require adherence to the business plan and progress milestones must be met. If the business doesn’t live up to expectations the venture capitalist can liquidate the company to recover costs.

A variation of angel funding and venture capitalists is crowd funding. This is a group of individuals who contribute small amounts of money and collectively invest in a business venture. Like venture capitalists crowd funding receives equity in the business.

Related: How to Write a Funding Proposal

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How to find finding: Pleasing your investors

  • Get it right. When pitching to investors make sure you know all aspects of the business, the products or services, its place in the market and the industry it operates in. If possible, have the product or service out in the market before approaching investors as they would rather see real data than speculative data.
  • Have the background. Investors want to know that they’re putting their money in a good venture. Have the relevant skills, experience, management skills and knowledge to give them the confidence they need to invest. This also means having good understanding of your competition.
  • Demonstrate a need. It’s all well and good having a great idea that is unique in its offering, but if there is no market there is no business.
  • Return on investment. Angel investors aside, the majority of investors will want a good return for their risk. Be realistic (erring on the side of caution) with your financial projections showing how long it will take to break-even, turn a profit and repay funds. Included in your pitch should be a clear exit strategy so they can cash in and move on. Most investors are savvy business people and they’ll smell a rat a mile off, so don’t ever lie.

Related: New Ways SMEs Can Find Funding

 

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+.

How to Guides

Does Your Business Really Need Funding?

Strategy, risks, and opportunities.

Carl Wazen

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Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.

First, ask yourself some hard questions

Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.

Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.

Define your goals

The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.

Related: Government Funding And Grants For Small Businesses

Evaluate your financial pain points

Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.

It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.

Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.

Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.

Consider your options

Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.

If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.

If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

Scenario planning

However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:

  • How long will it take before your investment starts covering the costs of your loan?
  • How will you manage repayments if your forecasted growth doesn’t materialise?
  • How can you pivot to reallocate resources if your plan is not working out as initially intended?

The bottom line

Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.

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How to Guides

How Investors Choose Who To Invest In

Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.

Allon Raiz

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The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.

The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.

Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.

1. Is she honest?

You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.

Related: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.

2. Does she work hard?

I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)

In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.

It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.

3. Is she smart?

Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.

Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.

4. Is she ambitious?

Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.

An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.

Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.

Read next: The Investor Sourcing Guide

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Are You Struggling To Find Financing For Your SME? Try Alternative Finance

If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.

Spartan SME Finance

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Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.

Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.

An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.

The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.

One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.

Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.

A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.

This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.

Related: 5 Key Questions To Answer For Raising Funding

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