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How To Raise Working Capital Finance

There are more than 150 working capital funds available for SMEs in South Africa. Here’s what you need to know to access them.

Darlene Menzies

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A healthy cash flow is the life blood of a business. The reality is that most businesses experience cash flow problems from time to time, which could be caused by a structural problem in your supply chain, inadequate debtor controls, poor pricing structures, bad planning, too much capital being tied up in stock or possibly the impact of unplanned growth on your existing resources.

Whatever the reason, the good news is that there are more than 150 different working capital funds available for SMEs in South Africa. Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs.

The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.

What’s available

Overdrafts and credit cards

Overdrafts and credit card facilities are a good option for relatively small, short-term cash flow problems. Most banks are willing to provide profitable businesses with overdrafts and credit facilities and you will only be charged interest on the money you use. Some banks charge a small monthly fee for these facilities even if you don’t use them, but this is a small price to pay for the convenience of being able to meet financial obligations.

Related: Equity Crowdfunding In SA Explained

Contract finance

Also known as getting upfront cash to fund the work for an approved contract. If the reason for the cash flow problem is high sales volumes that result in a temporary cash flow issue, contract finance can be a good option. Contract financiers want to know that your client is reputable and has a good payment history. They’ll also want assurance that you have the knowledge and experience to fulfil the terms of the contract.

First prize is contract finance that enables you to control both the finance and the contract work although in some cases the lender will insist on controlling the finance and may even want involvement in managing the project. Most contract financiers charge an interest rate linked to prime and you will also be charged for drawing up cession documents if this is relevant.

Debtor finance or invoice financing

Also known as getting cash while waiting for customers to pay invoices. If the cash crunch is caused by customers who will take a long time to pay you, debtor finance can be useful. In this case, unlike contract finance where the finance is provided prior to the work being completed, debtor finance requires that the work has already been done and that the customer has been invoiced. As with contract finance, the credibility and credit history of the client is key to lenders as they rely on their ability to pay your invoice.

On average you can raise between 75% and 80% of the value of the invoice within a day or two of sending the invoice to your customer. There is usually an administrative fee to be paid plus interest on the loan — it can be an expensive way of getting finance but it is better than waiting 90 or 120 days for your customer to pay you if you have cash flow constraints. Debtor financiers offer two options — invoice discounting and factoring. Factoring is when your client pays the lender who then returns the outstanding portion of the invoice to you (less their fees).

Invoice discounting is where the customer pays you and you pay the lender i.e. the client does not know that you have borrowed against their invoice. There are usually big penalty costs for late payments. Be aware that if the client does not pay by the specified date agreed with the lender, you will incur additional penalty costs.

Retail Finance

For businesses that operate in the retail sector and generate their revenue from debit or credit cards or EFTs there are lenders who provide loans that are repaid by deducting a small percentage of daily sales. You will need to generate a regular income of at least R30 000 monthly to qualify for this type of finance. The useful aspect is that repayments vary according to income generated. During busier months, you’ll pay more, and less during quiet periods.

Terms Loans

Term loans are another popular way of raising finance to cover cash flow gaps. The money is loaned for a fixed period and you agree to repay at regular intervals. Interest charges are usually linked to prime and the rate is linked to your risk profile. The duration of term loans varies according to the business’s needs and lender’s terms.

You will be expected to provide collateral to raise a term loan. Lenders will also check your credit rating and financial statements, business plan and possibly the order book before they agree to lend you money.

Related: The Truth About Venture Capital Funding

What working capital funders expect

What working capital funders expect

The key to obtaining working capital funding is understanding the lenders’ risk. To minimise their risks, lenders will require security for the loan. Providing collateral is often difficult for entrepreneurs who do not own property or have assets or investments that can be ceded to the lender for the duration of the loan.

Lenders will ask you for a list of personal assets and liabilities and based on this information, they may ask you to sign personal surety for the loan. If you do not own sufficient assets, you’ll need to find someone who does who is willing to stand surety for your loan. This means that if the business fails to repay the loan, the lender will approach the person who signed surety, to settle the debt.

For terms loans, retail finance, overdrafts and credit cards, the lender will focus on the financial strength of your business and its trading history. They usually only consider companies that have been in operation for at least a year and can show that the business is profitable, has a regular income and achieves good credit scores. For contract finance and debtor finance, lenders focus on the quality of your client and may fund working capital advances to businesses that are not yet profitable.

Working Capital Loans

Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs. The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.


Resource

Finfind is SA’s leading access to finance solutions for SMEs. This revolutionary online platform links finance seekers with matching lenders, providing easy access to over 200 lenders and over 350 loan options. Finfind is supported by USAID and sponsored by the Department of Small Business Development.

Go to www.finfindeasy.co.za to find the business finance you need. It’s free and easy to use.

Darlene Menziesis Chief Executive Officer – Finfind. The World Economic Forum named Darlene Menzies one of six Top Female Tech Breakthrough Entrepreneurs in Africa for 2017. She is a technology innovator and serial entrepreneur with 15 years’ corporate IT experience with ABSA Bank and ICT outsource giant BCX. Since leaving corporate employment in 2001, she has established several successful technology businesses and has firsthand experience in what it takes to start and grow a successful enterprise. She is a public speaker, a media spokesperson and recognised expert on the SME sector.

How to Guides

What Elon Musk Can Teach You About Getting Funding for Your Start-up

Elon Musk has made some very smart start-up moves — but he’s also made mistakes. We can learn from both his successes and his failures.

Ivan Kreimer

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If there’s one person who embodies the idea of ‘entrepreneur,’ it’s Elon Musk.

He has been responsible for the development of a large number of high-profile technology companies, which include Zip2, X.com (later merged with Confinity to form PayPal), SpaceX, SolarCity, Tesla and many others.

What’s remarkable about Musk is the way he funded his start-ups, especially SpaceX and Tesla. While he has relied on external funding, he nonetheless had to face many setbacks that almost brought his companies to an early end.

As an entrepreneur, Musk can teach you a great deal about how to get funding for your start-up. Here are the three most important learnings you can get from his experience.

Convince investors with your commitment

The mid-nineties remind us of an era of unprecedented economic growth and a feeling of prosperity toward the country’s future, something that stands in sharp contrast with our present.

Related: Elon Musk’s Formula For Successfully Growing Companies Faster

The context in which Musk raised venture capital to fund his first start-up represents another drastic difference compared to the present. In 1995, there was slightly over $8 billion available in the global VC market, a small piece of the current $155 billion that was raised last year.

In that same year, Musk launched his first start-up, Global Link Information Network (which eventually got rebranded as Zip2), a company that provided directions across the San Francisco Bay Area. According to Ashlee Vance, author of Musk’s biography Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, his beginnings were humble. Musk, his brother Kimbal, and a small sales team initially pitched the new company door to door.

For the first few months of operations, Musk couldn’t rely on the large pool of available VC funding, or the experience or connections he has today. The only strategic advantages that set him apart were his passion and commitment.

Due to their lack of funding, Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away. To convince their investors, Musk and his brother relied on a creative trick: They built an elaborate casement around the computer that worked as Zip2’s server and put it on a large, wheeled base that made it look like “a mini-supercomputer.”

This trick, together with the frugality in which the Musk brothers lived, helped them become profitable soon. Their early profitability helped them raise money from a small group of angel investors, which would eventually lead to a $3 million investment from Mohr Davidow Ventures, and finally, a $307 million acquisition by Compaq.

Due to their lack of funding, Elon Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away.

The passion and commitment Musk showed goes beyond the funny tricks and futon nights. Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company, X.com, which would lead to PayPal. The sale of PayPal to eBay netted Musk $180 million, which he then used to fund SpaceX, Tesla and SolarCity.

If there’s one thing the beginnings of Musk’s journey show, it’s that he’s the kind of entrepreneur who works for the long run. When he’s involved with a company, he goes all in. He invests everything he has, putting all his energies into building them.

It’s hard for a venture capitalist to reject an entrepreneur with such a hard-working spirit. You don’t need to shower in a YMCA to show the sacrifice you are willing to make for your company (unless you are truly broke, like the Musk brothers were back then). Rather, you need to show you live and breathe your company, and that you are willing to do anything to make your vision happen.

Don’t give up control too soon

A hard fact about the tech world is that few start-ups get to grow to billions of dollars in valuation without any VC funding. This leads to dilution of equity and loss of control of the company.

Related: 5 Habits That Made Elon Musk An Innovator

Most start-up founders need to live with that situation, and many get to keep control, thanks to the high trust VCs have for the founder and executive team. The case of Mark Zuckerberg, who owned 28.4% of Facebook‘s shares at the time of its IPO, is a good example of this.

Yet, in some other cases, founders lose excessive control too soon, leaving them powerless against the more professional and experienced VCs. This is something Musk learnt early in his career.

Musk’s career in Zip2 had an abrupt and sad ending: The first funding round deeply diluted his equity, which left him powerless after his board of directors decided to bring on a new CEO and make Musk the CTO. While Musk was still on the executive team, he couldn’t tolerate the lack of control and the way the new CEO, Rich Sorkin, ran the company.

Musk met a similar fate with his second start-up, X.com. After Musk merged X.com with one of its competitors, Confinity, he ended up being the CEO of the new company, PayPal. Unfortunately, he was ousted from the CEO position after a rather trivial fight over the technology platform PayPal used.

The lack of control he had over his two companies had a significant impact on his future ventures. Nowadays, Musk prefers to start by investing as much money as he can, making sure he always has the upper hand in his company’s decisions. His obsession over equity control explains why, while he was going through Tesla’s funding, he maintained his ownership percentage.

The lessons are clear: Before you focus on raising as much money as you can, remember to keep some equity of your own (particularly if you are an inexperienced CEO). If you care about your company’s vision, you need to make sure you can carry it out. It’s hard to achieve such a feat if you hold little voting control over your company. Becoming profitable as early as possible can help you overcome this issue, especially if you get creative.

Elon Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company, X.com, which would lead to PayPal.

Be resourceful

Lack of resources isn’t something that sits well with Musk. He has been willing to do whatever he has to do to have his companies prosper. What’s remarkable about Musk is that whenever he’s got all the odds against him, he turns the situation around by being resourceful.

To help you understand what I mean by this, let’s take a look at what he did with his latest venture, The Boring Company. Despite the fact he funded the company with his own money (as usual), the mission to build underground tunnels seems like an expensive task, making the company strapped for cash.

Related: Elon Musk’s Lessons On Getting To Mars

To raise money for the company, Musk decided to sell expensive flamethrowers at $500 each, which helped him raise over $10 million in just a few days. Instead of spending a long time raising money with the help of VCs (which would have diluted his ownership), he took one of his most significant advantages — his personal brand — and used it to make money for his start-up.

Being resourceful is an attitude shared by almost all successful tech entrepreneurs, as in the case of the founders of Airbnb. According to Leigh Gallagher, author of the book The Airbnb Story, when the founders were on the verge of bankruptcy, they decided to sell cereal prior to 2008’s Presidential election. Thanks to their PR-fueled campaign, not only were they able to extend the life of the company (which today is worth $31 billion), they were able to get accepted into Y Combinator, the famous tech accelerator, which would lead to their first funding round and the growth of the company. As Paul Graham, the co-founder of Y Combinator said, “If you can convince people to pay $40 for a $4 box of cereal, you can probably convince people to sleep in other people’s airbeds.”

The lesson you can learn from Musk is that if you lack funding (or any other thing that is essential to the existence of your company), it’s your job to do whatever it takes to get it. Life isn’t fair for risk-averse entrepreneurs, yet Musk has been able to make his companies work by getting creative, thinking on his feet and showing commitment right from the start.

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How to Guides

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

Government grants and funding are a great source of finances when you’re trying to get your business off the ground or expand to new horizons.

Entrepreneur

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A small business can on average employ 12 people. The drop in entrepreneurial activity over the past five years is equal to 2.3 million possible job opportunities lost. Small and micro business sectors are the main source of real employment in the economy.

South Africa’s economy needs to inspire entrepreneurship in order for it to grow. By creating an environment that is friendlier to small businesses and actively encouraging the sector, the country is in a better position to create jobs.

Two simple measures that would go a long way to support and develop entrepreneurs is access to finance and improvement of logistics.

The government created government funding to extend finances to previously disadvantaged South African’s in order to develop black economic development. Your much needed capital investment could come from government funding opportunities.

Financing a small business, whether you’re starting-up or trying to expand, is a challenge all entrepreneurs go through. Here are a few examples of government funding that focuses on black entrepreneurs:

Content in this guide

  1. National Empowerment Fund (NEF)
  2. Industrial Development Corporation (IDC) Funding
  3. Small Enterprise Finance Agency (SEFA)
  4. The Isivande Women’s Fund (IWF)
  5. Khula SME Fund
  6. Black Business Supplier Development Programme (BBSDP)
  7. Incubation Support Programme (ISP)
  8. National Youth Development Agency (NYDA)
  9. PDF Download
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How to Guides

Seed Capital Funding For South African Start-Up Businesses

Want to kickstart your business, but don’t have enough funds in the bank? You can unlock capital through seed investment from one of these local seed finance firms.

Pritesh Ruthun

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Access to early stage development funding for up-and-coming businesses in South Africa remains a key hindrance standing in the way of entrepreneurial development.

There are, however, numerous strategies to finance your business’s launch, or early stage development. One of these tactics is to secure seed finance or seed capital investment.

Seed Capital: How It Can Help Your Small or Medium Business

The money you need to launch your business (or conduct any early stage development of a product or service) can come from a bank, an angel investor, or friends and family. But these money lenders can be tough to secure when you don’t really have a track record or much profitability to show yet.

This is where seed capital funding can help you.

According to Investopedia, seed funding lives up its namesake –  in that it’s the capital needed to ‘seed’ a business.

A portion of your seed funding could come from family members, friends, banks, or angel investors, but there are also a rising number of specialist firms out there that can provide you with specific capital or business finance to ‘seed’ your business.

The Difference Between Seed Capital and Venture Capital

The key thing to remember with seed funding is that investments usually range in the tens of thousands to hundreds of thousands. Other forms of investment, such as venture capital investments, can range into millions of rands. So, if you are an entrepreneur looking to fund a new idea with seed money, expect to receive smaller investments when compared to venture capital.

Related: How to Write a Funding Proposal

Sage Advice on Early Stage Funding from A Seed Funder

Geoff Ralston is a partner at YC, a seed funding organisation based in Mountain View, California, in the United States. More than two decades ago, he founded Four11, where he built RocketMail, one of the world-wide-web’s first web mail services.

In 1997, RocketMail became Yahoo Mail. Ralston has worked in engineering, then ran a business unit at Yahoo, and went on to become Chief Product Officer. After Yahoo, Ralston became CEO of Lala, which was acquired by Apple in 2009.

He says the ecosystem for seed (early) financing is far more complex now than it was even five years ago: “There are many new VC firms, sometimes called ‘super-angels’, or micro-VC’s, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds.”

The Pros and Cons of Early Stage or Seed Funding for A Business

PROS: Seed funders can invest much needed capital and they can provide expertise and back-end assistance, which could be helpful in the early stages of business. If you are seed-funded, you also earn credibility in the marketplace should you wish to take a loan or seek further investment at a later stage. Ultimately, any seed funders you take on could open up proverbial doors to a vast network of like-minded entrepreneurs and future business partners or investors.

CONS: Seed funders require a return on investment, like any other investor. Some might be more focused on the money (returns) and could push you to take necessary steps to see a return on their investment – including ousting you from your own company, according to Under30CEO magazine.
A seed funder could potentially steer your business in a direction that you don’t agree with, but this could be because of their experience in the game.

Related: You’ve Raised Early-Stage Funding! Now What?

If you are ready to take the step and talk to firms about seed funding for your company, here’s a list of organisations that can help you kickstart your business operations with early stage capital investment:

  1. 4Di Capital
  2. Technology Innovation Agency
  3. Grovest
  4. Business Partners
  5. Seed Engine
  6. Edge Growth
  7. Kalon Venture Partners
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