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.
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.
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.
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.