For many entrepreneurs, the minute they realise they need small business funding, they automatically panic and wonder, “How on earth am I going to get funding?”
The good news is that there are a number of ways you can get funding for your small business if you know where to look and do the right preparation.
How small business funding differs from big business funding
Basically, it’s a matter of scale. A small business isn’t likely to require R100 million in finance.
A small business can get started on as little as R1 000 – and with profits put back into the business – can grow organically and rely very little on external funding.
The other difference pertains to size in another way: Big business tends to refer to corporate entities with shareholders, boards of directors etc., while small business tends to refer to privately owned and operated business.
The dangers of running your business finances through your personal account
Say you want to start a small business crafting wooden furniture and you can buy most of the equipment on your credit card.
In one way, it’s the quickest and easiest way to get going, but running your business finances through your personal accounts come with risk.
Not separating your business from you personally sets you up for legal liability.
Related: Opening a Business Bank Account
If, for example, you default on credit card payments or fall into debt, your personal assets can be seized over and above your business assets.
The other risk is that of keeping clear records and distinctions of which expenses are business and which are personal. This can lead to tax complications come tax season and you can incur fines that can close your business.
Having a separate account for your business also lends credibility to it, and in the event you require finance from a bank, your clear financial documentation will aid the bank in assessing whether to grant you a loan.
Why a clean credit record is so important to small business funders
In order to qualify for grants or loans, the lending facility needs to assess whether you’ll be able to repay the loan, and your credit record is their way of checking. Even if you’re starting a brand new business, if you have a tarnished personal credit record or are blacklisted for bad/non-payment, your ability to borrow will be negatively affected.
Related: Small Business Start-up Guide
Every South African is entitled to a free credit report once a year. You can learn more about about your credit record through credit bureaus like TransUnion.
Various small business funding options available
If you’re not in the position to self-fund through use of personal credit and/or savings, you can investigate these following ways to get small business funding.
Small Business Funding Option 1: Angel Investment
An angel investor is typically a wealthy professional who is able to provide you with start-up capital in exchange for equity in the business or a fixed percentage interest on the loan. Angel investors can be individuals or form angel networks in order to distribute risk.
Angel investors can be hands-off, not wanting to be part of the business, while others may want to be involved in decision-making and/or act as a business mentor.
A rookie mistake made by many is to enter into verbal agreements with angel investors without terms and conditions written and signed by both parties.
Without a contract in place, conflict can arise; an investor can withdraw their funding, and the business’s future can be jeopardised.
Make sure whenever finance is involved, there is a written agreement in place.
Small Business Funding Option 2: Bank funding
If you choose to approach a bank for finance you need a number of things in place before you approach them.
First is a comprehensive and fully understood business plan complete with financial projections. You also need to provide a full set of financials for them to examine.
Then you need to understand the kinds of loans available and which kind is best suited to your needs.
Related: Business Plan Format Guide
If, for example, you need to buy equipment which devalues with age and use, it’s not advisable to take a long-term loan where you’ll be paying for it long after it’s served its lifespan.
Bank Finance Options for Small Business:
- Overdraft – is ideally suited to managing cash flow.
- Business revolving credit – this is a line of credit available as and when it is needed and repayments are typically fixed monthly instalments. The original limit is usually restored after a set percentage has been repaid.
- Medium-term loans – are ideally suited for capital expenses and repayable for a period of two to seven years, but can be longer. Interest and repayment tend to be linked to prime, how much collateral you have, and the value of the asset you need finance for.
- Business mortgage / Property finance – in the event you wish to buy or renovate property for your business or convert part of a residence into office space, this is the loan to investigate.
- Vehicle and asset finance – Whether it’s a vehicle or specialised equipment required, talk to your bank about vehicle and asset finance to determine whether its terms are suited to your business.
Small Business Funding Option 3: Crowd Funding
Relatively new to the scene, crowd funding is an exciting way to gather finance.
It works in a similar way to angel investment, except many individuals are able to pledge varying amounts to the business in exchange for equity, interest, or other more creative returns.
As an example, new products, music albums and films have been crowd funded in exchange for early releases, while restaurants have named menu items after benefactors.
Typically, however, a product or service is pitched and uptake in funding helps determine whether there is demand for it, and first releases help fine-tune it.
South African crowd funding platforms include:
The top international crowd funding platforms include:
Small Business Funding Option 4:
Funding for Previously Disadvantaged Individuals (PDIs)
Small Business Government Grants and Loans
The government is involved in small business development by providing funding to previously disadvantaged individuals. These can take the form of grants, loans and tenders.
A government loan, like a loan from a financial institution, is given to an approved business that is required to repay the loan. It usually has more lenient repayment schedules and interest rates.
A government grant, by comparison, does not require repayment by the awarded business.
The South African Department of Trade and Industry (DTI) has a number of initiatives designed to improve business activity for previously disadvantaged individuals, women and youth.
You can read more at www.dti.gov.za > SMME development > financial assistance. Any business wanting to gain access to grants or funding needs to be BEE accredited and have a tax clearance certificate.
Enterprise Development (ED) Funding
This form of government mandated funding is devised as a means to create more jobs in South Africa through business development, and enterprise development is one of the elements of the BEE scorecard.
Large corporates are required to pay towards enterprise development or use an Enterprise Development beneficiary in their business supply chain as part of their BEE scorecard.
How a small business benefits from ED funding is by enrolling in a corporate’s ED empowerment programme that can include mentorship, incubation, becoming procurement ready, how to be commercially viable and sustainable, etc.
Small Business Funding Option 5: Bootstrapping your Small Business
If you’re not drawn to the previous examples of funding, you can bootstrap your business. Fundamentally it’s starting and growing a business without external help.
This is achieved through getting operational as quickly as possible; keeping fixed overheads as low as possible – even if you have to work in your childhood bedroom or understaff; reinvesting profits into the business; and keeping growth in check by maintaining steady growth over explosive growth.
Related: 6 Tips For Bootstrapping
The 10 Most Reliable Ways To Fund A Start-up
Every funding decision is a complex tradeoff between near-term and longer-term costs and paybacks, as well as overall ownership and control.
One of the most frequent questions I get as a mentor to entrepreneurs is “How do I find the money to start my business?” I always answer that there isn’t any magic, and contrary to popular myth, nobody is waiting in the wings to throw money at you just because you have a new and exciting business idea.
On the other hand, there are many additional creative options available for starting a business that you might not find when buying a car, home or other major consumer item. If you have the urge to be an entrepreneur, I encourage you to think seriously about each of these, before you zero in on one or two, and get totally discouraged if those don’t work for you.
Of course, every alternative has advantages and disadvantages, so any given one may not be available or attractive to you. For example, professional investors put great priority on your previous experience in building a business, and they expect to own a portion of the business equity and control for the funds they do provide. These are tough for a first-time entrepreneur.
Thus it is always a question of what you qualify for, and what you are willing to give up, to turn your dream idea into a viable business. Here is my list of the 10 most common sources of funding today, in reverse priority sequence, with some rules of thumb to channel your focus:
- Seek a bank loan or credit-card line of credit
- Trade equity or services for start-up help
- Negotiate an advance from a strategic partner or customer
- Join a start-up incubator or accelerator
- Solicit venture-capital investors
- Apply to local angel-investor groups
- Start a crowdfunding campaign online
- Request a small-business grant
- Pitch your needs to friends and family
- Fund your start-up yourself
The Ultimate Guide To New Business Funding
In our comprehensive small business funding resource, you can find all the main types of funding and how you can go about applying for each.
Funding continues to be one of the top challenges facing South African start-ups and small businesses. Acquiring business start-up funding can make-or-break your business, but is your concept ready for funding? What’s the best type of small business funding for your start-up? What do you need the new business funding for exactly?
“The truth is, finding the money to run a start-up requires a lot of preliminary planning, regardless of whether you’re going to pursue outside funding or choose to bootstrap your first few months,” says Jared Hecht, CEO of Fundera, an online marketplace that matches small business owners to the best possible lenders.
Are you ready for funding?
“If you’ve been operating for a while and need money to scale, which is when you’re most likely to get hold of funding, you should be able to prove that you’ve been keeping records and have a good handle on the financial state of your business. You need to know your numbers,” advises Matsi Modise, Managing Director of SiMODiSA.
“You also need a good understanding of your industry. You need to be able to talk intelligently about the prospects for your business. It’s important to show that your business truly can scale. Moreover, investors don’t want to hear over-optimistic projections — you need to be able to back up your claims,” she says.
For more on Matsi Modise’s full story and lessons she’s learnt from hands-on experience.
Before you wander down the rabbit-hole of small business funding, you should first determine whether your business is ready for funding. Here are a few identifiers that indicate whether your small business needs funding:
- Your business idea needs a customer base: Does your product or idea deliver a solution to a problem that those potential customers are facing?
- Your product works: Very few lenders will feel comfortable investing into just a concept, no matter how enticing.
- You’ve compiled a business model and business plan: Your business model and plan provide proof, both to yourself and to any potential lenders, that your business idea is practical and operable.
- You have a financial plan: Your potential investor will want to see how you plan to use your money, exactly how much you need and why you need it.
Here are a few more determining factors as to whether your business is ready for funding. Some insightful techniques Elon Musk’s career can inform you about getting business start-up funding.
Alternatively, if you’ve realised your start-up isn’t quite ready for new business funding, here are a few pointers to get there from a small business that secured investment on the inaugural episode of M-Net’s Shark Tank.
Keep these 5 mistakes to avoid when seeking start-up capital in mind when starting your journey to business start-up funding.
Here are 10 ways to get funding for your new business:
6 Signs Your Business Idea Is Ready For Funding
Potential investors need to be convinced that your idea is viable before they offer you cash.
Are you fundable?
For aspiring entrepreneurs, sometimes the hardest thing isn’t coming up with innovative ideas, it’s knowing which of those ideas are worthy of financing. Watch out for these six signs to know when you’re ready to seek the financing you need to turn that big idea into a reality.
It’s thrilling to hit on a great idea for a business and envision yourself at the helm of a lucrative new endeavour. Less thrilling, though, is the prospect of securing the necessary financing to get from idea to real-life CEO.
The truth is, finding the money to run a start-up requires a lot of preliminary planning, regardless of whether you’re going to pursue outside funding or choose to bootstrap your first few months. Most start-ups looking elsewhere to kickstart their cash flow will have the best luck securing funding through their personal networks. You can look to an angel investor, a loan from friends or family or even crowdfunding.
Regardless of which financing route you take, your potential investors need to see evidence that your idea is practically viable before they throw their hats into the ring. These six signs indicate that your business idea is ready for financing — and just might provide the evidence your potential investors need to be convinced.
1. Your idea serves a true, identified need
Your business isn’t going to work, let alone make money, if it doesn’t have a customer base. And, what’s more, if they don’t need whatever you’re creating. This may seem obvious, but many aspiring entrepreneurs get so caught up in the excitement of their big ideas that they fail to plan for how that idea will function in the real world.
Before you jump into the financing process, you need to identify your target customer segment and understand their behaviour. You should design your product or idea to deliver a solution to a problem that those customers are facing.
While we’re on the subject of product: You need to know what that product or service is, how it works and how you’re going to sell it. You’ve identified potential problems that may arise with your product, or barriers you may come up against in the market, and you have a game plan for troubleshooting those snags.
Then, you need to perform due diligence in your industry. Determine exactly how you’ll situate your business within the existing market, understand how your product can shift and grow along with it, and differentiate yourself from competitors. And make sure your customers can afford your product or service.
2. You’ve tested out your product, and it works
Pay attention, especially to that second part. Very few lenders will feel comfortable investing their money into just an idea, no matter how enticing it might be.
Your business idea is ready for financing when you have material evidence to bring to your investors’ table — whether it’s a prototype of a physical product or a beta version of a programme or website. Be ready to present any data, reviews or research you’ve acquired after testing out that product, too. And if that data isn’t favourable, you might need to go back to the drawing board.
3. You have a business model and plan
If your business model is the what, your business plan is the why.
Your business model indicates your business’s revenue streams, and your business plan lays out how you’re going to acquire those revenue streams. How is your business’s leadership team organised, and how is your business legally structured? What kind of equipment, staffing and marketing plan do you need to operate your business and generate income?
Both your business model and plan provide proof, both to yourself and to any potential lenders, that your business idea is practical and operable.
4. And you have a financial plan, too
Whether you’re pitching an investor or seeking a small business loan through a lender, your financier will want to see how you plan on using that potential money. You can’t just ask for money as an entrepreneur. You need to know exactly how much money you need, why you need it and how you’ll use it.
That’s especially true if you seek financing through an angel investor. Since these individuals lay their own money on the line to fund your start-up, they need to be sure your venture is sustainable, eventually lucrative and that you’ll use their resources wisely.
Poor financial planning, or no financial planning, certainly can’t convince potential lenders of your business acumen. So, draw up a financial road map that projects exactly how you’ll get from point A — where you and your resources are now — to point B, where you hope to be within the next one to five years.
Be sure to include a detailed plan of your projected business expenses, or how much capital it’ll take to get your business idea off the ground, and your operating expenses, or how much it’ll cost to keep that business going.
5. You’ve recruited a qualified team to execute on your vision
Even if you created your business idea on your own, in reality, every entrepreneur needs help kicking off, then operating, their start-ups.
Before you seek financing, recruit a capable and qualified management team to run your business, or have a hiring plan in place to do so ASAP. And if you don’t have enough relevant experience in the field yourself, you’ll need to gather a team of partners or mentors to fill the gaps in your knowledge. It’s crucial to acknowledge you can’t do and know everything yourself.
6. You can prove you spend money responsibly
Although you might not have a way to prove you’re responsible with business financing yet, you want to make sure you’re positioning yourself to create a track record so investors and lenders can trust you.
Even if you start with seed money from close friends, or crowdfunding from Kickstarter for your business idea, you may need to seek additional financing through a larger venture round or a small business lender.
That’s where the proof becomes necessary. For instance, if you’re working with a lender, they’ll want to know that your business is capable of repaying your debt before extending you a loan. And any other investor will want to know that any money they give you will be spent responsibly, especially if they’re expecting returns.
One of the best ways you can do that is to cultivate a healthy financial profile, and keep a high business credit score. Open a business credit card, and follow best practices to improve your credit score, like paying all your bills in full and on time and regularly checking your credit reports for errors.
Then, the proof will be in the numbers. Alongside a squeaky-clean track record and a strong personal credit score, a great financial history will position you for the financing your growing SME needs.
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