I am setting up a new business, do I need to raise cash, and if so how do I go about finding funds?
There are various ways of raising money to support a business whilst it still finds its profitability legs.
When you are starting out, you’re not at the point where a traditional lender or investor would be interested – you’re too much of a risk. So that leaves you with selling personal assets, borrowing against your home, maxing out credit cards, and asking loved ones for loans.
There is a lot of risk involved, including the risk of bankruptcy with your personal finances and relationships with friends and family.
Friends and family
If approaching family and friends, you need to keep the agreement strictly business – put the agreement in writing. State how much money you need, what you’ll use it for and how you’ll pay it back. Doing this not only protects both parties but also your relationship.
An overdraft can work
One of the most common ways to finance a new business is via using an overdraft – you can use as much as you need (up to your limit), cash is available when you need it and you only pay interest on what you use.
Applying for bank funding
Another option is to borrow money from your bank to run your business.
In exchange for lending the money, the institution becomes a creditor of your start-up and is entitled to receive interest and to have their loan repaid at the end of a given period.
Long-term debt financing usually helps to cover the purchase of facilities, equipment and vehicles. Short-term financing allows entrepreneurs to cover day-to-day needs such as inventory and payroll.
Venture capitalists take equity
Venture capitalists (VC) are a type of private equity, and are another good option for some business types. Equity funding by outside investors into early-stage, high-potential, high-risk ventures usually demand above-average returns.
VCs work whereby they own equity in the company it has invested in, which usually has a new technology or a new business model in high-tech industries.
A potential con to using a VC, is that in young businesses, they usually get significant control over decisions, in addition to company shares and future value.
The benefit of VC funding is that they provide strategic direction, as they ultimately want to grow investments to a profitable exit. As an entrepreneur you will gain from their experience, insights into international expansion, legal, intellectual property (IP) protection and an enviable contact base.
Bootstrapping is another option
Of course, there are some businesses can be self-sustaining: built up quickly enough to make money without aid from investors who might otherwise come in and take over. But this is dependent of many factors.
Remember. This is what sets entrepreneurs apart from the employed: taking risks to start a business. It’s an entrepreneur’s rite of passage.
What do I need to do in order to get a successful crowd funding campaign?
Advice on getting the gold you need for your crowd funding campaign.
I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?
70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.
To get the best out of your campaign, I would strongly advise you do the following:
- Lay out your plan way in advance
- Keep a proper and well-articulated business plan
- Create a compelling story.
- Use the social media and start a social media campaign
- Frequently promote your fundraiser, connect and interact
- Dish out rewards and incentives
- To go viral, go for educative, informative and entertaining videos
- Be more than unique and creative as more exposure will translate to more potential pledges
- Choose the right crowd funding site for you.
- Know and understand your end target audience
Where can I turn when banks are not helping?
Getting bank finance for my restaurant is almost impossible.
Getting bank finance for my restaurant is almost impossible. How else can I access the funding that I need?
Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.
Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.
The business cash advance
For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.
In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover. For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.
The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across. Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.
Quicker turn-around and more accessible
Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security. It is also much faster, typically available within two weeks.
The advance amount is based on historical credit and debit card sales and pay overs are daily. The costs are fully transparent and there are no penalties for late payments or extended payback. However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.
As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.
Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.
What to use the advance for
The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc. Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.
Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.
Am I stupid to turn down a VC investor?
Bootstrapping your business initially will pay dividends down the line.
I’ve started my own business two years ago and I’ve recently been approached by venture capitalist investors. While I could really use the funding, I’m reluctant to give away a large portion of my business at this early stage. What should I do?
While it’s exciting to be approached by investors at any stage in your business, in the early years it might be better for the business to keep it small, keep your overheads low and bootstrap your venture as much as you can. This not only allows you to build a viable business and product offering at your own speed, it means you can to do without creating a huge amount of debt.
By building a sound and profitable business model from the outset, you will attract more attractive funding offers down the line.
Read the full article here.
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