Whether your business dreams involve a small business that can support your lifestyle or you have bigger ideas of world domination Zuckerberg-style, sources of funding needn’t be the barrier to achieving your dreams.
When it comes to funding sources, there are a number of different kinds that have different benefits, expectations and obligations. Know which one is for you to save time, energy and heartache.
Funding sources: The right kinds for your business
If you’re interested in a lifestyle business or consultancy, it’s best to seek SME funding from family and friends, to bootstrap the business or to use your credit card. These kinds of businesses typically require little start-up capital and when bootstrapped often require less capital than you would expect. Where possible, avoid getting in debt unless you are certain you will be able to repay your credit card.
Banks are another source of funding, however these institutions have strict criteria for granting a loan. Banks will almost never provide funding for a start-up or untested models and markets as it is perceived as too high risk, no matter how exciting the idea.
This means the business must have been in operation for at least two years, have sound financial records, have a solid business model and plan, and must carry enough liquidity to cover the loan in the event of defaulting.
Importantly all partners involved in the business, and the business itself, must have a clear credit record or the application will be rejected. Banks will also charge interest on their loans which, if not kept in check can overwhelm and cripple a business.
When it comes to venture capitalists, these firms typically invest in tech companies and will not consider small consultancy and lifestyle businesses. They have strict requirements for providing capital which includes a stake in equity, high return on investment, the potential for the company to list, and a clear exit strategy.
Venture capitalists are not in it for the long-haul, they want a fast and high return on investment and then the ability to exit and move on to the next thing. If your business is not structured in this way, it’s unlikely your bid will be successful.
Angel investors and crowd funding tend to be more focused on aiding a budding entrepreneur and developing a great idea than making money out of funding like a VC or bank. While both may require some form of equity, they combine the desire to help with investment opportunity.
Government funding is a fiercely competitive field for finding funding. The conditions of funding are to assist previously disadvantaged individuals, and must be B-BEEE compliant.
The funding must also help develop the economy and so small businesses are unlikely to qualify. There are a number of funds available through government departments like the Department of Trade and Industry that can assist with finding funding or loans though.