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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.

Nicole Crampton

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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:

  1. Your business idea needs a customer base: Does your product or idea deliver a solution to a problem that those potential customers are facing?
  2. Your product works: Very few lenders will feel comfortable investing into just a concept, no matter how enticing.
  3. 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.
  4. 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:

  1. Bootstrapping
  2. Crowdfunding
  3. Financial Institutions: Loans and financing
  4. Government Grants
  5. Government Loans
  6. Angel Investing
  7. Venture Capital
  8. Seed Funding
  9. Equity Funding
  10. Alternative Funding
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Nicole Crampton is an online writer for Entrepreneur Magazine. She has studied a BA Journalism at Monash South Africa. Nicole has also completed several courses in writing and online marketing.

How to Guides

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.

Martin Zwilling

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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:

  1. Seek a bank loan or credit-card line of credit
  2. Trade equity or services for start-up help
  3. Negotiate an advance from a strategic partner or customer
  4. Join a start-up incubator or accelerator
  5. Solicit venture-capital investors
  6. Apply to local angel-investor groups
  7. Start a crowdfunding campaign online
  8. Request a small-business grant
  9. Pitch your needs to friends and family
  10. Fund your start-up yourself
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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.

Jared Hecht

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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.

Related: Government Funding and Grants for Small Businesses

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.

Related: Funding And Financial Assistance For SA Women Entrepreneurs

4. And you have a financial plan, too

financial-planWhether 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.

Related: What You Need To Know About DTI Funding

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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Pitching To Lenders – How To Get It Right, First Time

Gary Palmer, CEO of Paragon Lending Solutions, discusses what entrepreneurs should be aware of when preparing to pitch.

Gary Palmer

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Earlier this year, US research firm, CB Insights surveyed over 100 start-ups to better understand reasons for early failures. The most obvious – no clear market need, not having the right team, and running out of cash – featured prominently. However, poor marketing was also a top contender as a reason for failure. This doesn’t only relate to difficulty in raising awareness of the product or service, but speaks to an inability to position the company in the eyes of potential lenders and investors. 

Avoid fantasy financials

While various institutions have different mandates and place emphasis on different types of growth, all of them need to see evidence of your potential. When creating your financial projections make sure you can back up the assumptions behind the numbers. Developing financial projections is an art. Companies should certainly avoid over-inflating future earnings, but they should also be wary of being too conservative.

Reasonable, defendable assumptions that you are confident can be achieved, is the goal.  These are also important as they will set the parameters for measurement going forward and need to be realistic if you are going to live up to them.

Related: 3 Components Of The Perfect Elevator Pitch

Avoid information overload

Pitching to lenders is a process and the leadership team should have a specific, shorter pitch for the first meeting. The top level detail should be included with an emphasis on ensuring the lender understands what it is you do, which market problem you are solving, the future potential of your company and how you aim to achieve success.

I have been in pitches where the presentation looks fantastic, but runs into 30 or more slides. Once you have piqued their genuine interest, you can delve into the finer detail. Death by PowerPoint never closes deals.

Know your audience

Each lender will be looking for specifics according to their mandate. A bank may be interested only in the numbers and the underlying security of the deal. Certain asset managers, meanwhile, may be looking for local job creation, while others will pay close attention to your ESG (Environmental, Social and Governance) report if sustainability is high on their agenda. You should understand the motivators for each lender and remember that this is not a one-size-fits all exercise.

Tell a story

Humans are hardwired to respond to storytelling. From our days sitting around fires in caves we have used stories as mechanisms to teach and retain information. Entrepreneurs should weave their company’s past and future into an interesting story to grab attention. Using different mediums, like a company video, can make a significant difference. Three minutes of screen time with compelling visuals will help get the message across as well as give a flavour of the business that a written document can never achieve.

Related: 6 Great Tips For A Successful Shark Tank Pitch

Keep it clean

Once lenders are interested they will be doing more than kicking tyres. They will be doing a thorough search under the bonnet and your financials should hold no hidden surprises. Up to date management accounts and audited financials are imperative While we all know how difficult it is to run a start-up, having personal loans run through the business accounts will not do.

You don’t have to go it alone

Pitching to lenders is a skill, and not everyone is a born salesperson. You only have a few minutes to catch an investor’s eye. It makes sense to work with a partner who knows the lending environment and all its players. Insight and experience is the secret sauce when it comes to securing lending. Find an independent lending specialist at the beginning of the fund raising exercise who can help you craft your pitch and, most importantly, help you negotiate the best possible deal.

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