For many entrepreneurs there comes a point in a business where capital is needed either to get it started or to expand once things are up and running. How many ways are there to get SME funding from? Family and friends? The bank? Yes, but there are more ways to get funding for an SME.
The 9 different kinds of SME funding
1. Self-financing SME funding
This is when you use your own personal savings to finance the business. Be careful though, mortality rates of new businesses are high and if the business doesn’t work out you’ve lost both your business and your personal savings.
2. Money from friends, family and business associates SME funding
Often the first place to turn to if they’re able to provide, family, friends and individuals you know will often invest in your entrepreneurial venture because they have confidence in you and your abilities as much as they have confidence in the business idea.
Unless your family and friends are particularly loaded though, they can get you through the start-up and development phase but you’ll need to look into other forms of finance when needing a substantial capital injection.
3. Angel investors SME funding
If an entrepreneur isn’t able to source funds from people they know or their own personal savings, angel investors are another option. These are individuals are often business people themselves or have significant funds and are looking to assist aspiring entrepreneurs in conjunction with a return on investment. In exchange for the funds, angel investors often require equity in the business.
4. Angel funds/alliance SME funding
This is a collective of angel investors who contribute money to a fund. From there they’re able to make a number of individual investments helping diversify their risk. A typical angel fund will have a submission process in which your business plan will be reviewed, you will present, and a vote will be cast whether to invest or not.
5. Venture capitalists SME funding
This is a well-known form of funding, but it’s by no means the easiest. As a professionally managed fund, they’re looking for a high return on investment and have strict procedures to follow. Equity is given to the VC and if a business is not able to live up to its expectations the VC is able to have the company sold in order to recoup its investment.
6. Bank loans SME funding
These institutions lend money to entrepreneurs and charge interest on the loan. They will not fund what they deem high risk ventures however, and they typically have strict, well-defined guidelines to determine suitability.
These include positive cash flow for more than two years, a demonstrated history of paying off debts, sound financials, and the entrepreneur and business have clear credit histories.
7. Bridge loans SME funding
Commercial finance companies or non-bank commercial lenders can also offer finance to an entrepreneur in the form of short-term loans to “bridge” the gap between needing cash to grow while continuing to operate. These loans are different to a bank loan though because they will often finance businesses where banks have refused.
The business and the entrepreneur’s assets are assessed and, provided there is sufficient liquidity to repay the loan in the instance of default, a bridge loan will be granted. Bridge loans must be paid back in a certain time frame and accrue interest.
8. Government grants SME funding
This funding is supplied through government channels and often has lower or no interest compared to banks and commercial lenders. The truth about getting funding from government is that competition is fierce and the requirements for qualifying are strict, including full B-BBEE compliance.
9. Bootstrapping SME funding
A company owner generates funds for the business without relying on an outside source. The advantage of this form of self-funding is that the business remains 100% in the ownership of the business owner(s), but does require strict adherence to budgets and discipline in reducing expenses where possible which at times can mean a foregone salary – also known as ‘sweat equity’.
What to know about SME funding
While it may be necessary to seek funding in order to start or expand a business, it’s important to remember that whenever seeking finance externally chances are that, if successful, you will own a little less of the business or have a little less control in running it.
It’s the bargain to be made and lived with.
In order to remain in the good graces of your benefactors you must also do more than just maintain, you must grow and provide a return on investment.
When partnering with some venture capitalists or private investors, you might be forced into making major equity decisions that aren’t in the best interest of the founders or in line with the business’s strategy.
With this in mind, be cautious about where you accept money from and the terms and conditions they attach to that money.