Despite there being ample funding channels available to startups and SMEs, there is a dearth of information about where and how to access them. This is thwarting the ability of small businesses to access funding, grow their businesses and create jobs.
Entrepreneurs in South Africa are battling to raise the funds they need to grow their businesses. 47% of start-up entrepreneurs that Seed Academy surveyed this year, cited the lack of finance as their major impediment to business growth.
Start-up businesses reach a point in their lifecycle where only financial resources will move their businesses into operationally viable concerns.
Ironically, there are a host of public and private funding vehicles available to entrepreneurs in South Africa. Despite the abundance of institutions that have large sums of money available, about 85% of entrepreneurs are self-funded.
Many more are simply not able to bootstrap (self-fund). Our latest statistics show that only 2% of startup entrepreneurs have benefited from bank loans and Development Finance Institutions (DFIs).
So what is on offer?
There are ample opportunities for businesses to secure funding from public and private institutions. Government and its various ministries and agencies together have hundreds of different support mechanisms to promote SMEs across the country.
Angel funders and seed investors
Angel funders and seed investors collect capital with more than one person investing in an attractive small business and sustaining it until it scales. Promising start-ups that have been in business two years or so and show high potential for success appeal to angel funders and seed investors.
In return, the entrepreneur shares partial control or equity of the business and provides a return on investment to the funders. Interestingly, these same enterprises have usually been turned away from traditional institutions.
In South Africa, our angel network is still immature compared to other countries, but this is starting to change.
Crowdfunding or crowd source capital
Crowdfunding or crowd source capital is another way of raising capital in smaller amounts from a larger number of people. It relies on the power of the internet and social media to expand the pool of prospective investors beyond that of traditional lenders.
Typically, the entrepreneur will profile her or his business on a website that is specially designed to link entrepreneurs with potential investors.
Venture capital funding
A small business that may be high-risk but shows real potential for high returns will be attractive to venture capital funders, who usually build a portfolio of several different entrepreneurial concerns at one time.
There are different types of venture capital firms, and each has a different approach to the kind of support they provide.
Traditional bank loans
Banks are traditionally risk-averse, though they are increasingly developing products to support the growth of SA’s SME sector. Yet they still tend to go for ‘safer options’ to minimise risk.
When considering loans to small businesses, banks will want to see accurate cash flow forecasts and proof of longer-term clients and lucrative prospects from the entrepreneur.
New and creative funding options
It is also important for entrepreneurs to keep in touch with the news and trends, and look out for new and creative ways in which private and for-profit social enterprises are opening up funding opportunities.
For example, Seed Engine, the WDB Investment Holdings and Grovest have developed a creative response to the dearth of funding for early and growth stage businesses by launching the WDB Seed Fund.
Entrepreneurs are being invited to apply for funding. Another useful online resource for South African entrepreneurs is www.finfindeasy.co.za. It is designed to help small enterprises access finance with a depth of information and links to key enterprise finance institutions like the National Empowerment Fund (NEF), Industrial Development Zone and Small Enterprise Finance Corporation (SEFA).
Development Finance Institutions (DFIs)
The Department of Trade and Industry (DTI) is a major player in the DFI space in South Africa. The DTI alone offers a huge range of different kinds of funding. Together with its agencies, notably the Industrial Development Corporation (IDC), it has been highly successful in catalysing small businesses in critical economic sectors.
DFIs offer grants which do not need to be repaid and don’t accrue interest, but will have stringent application requirements. DFIs offer loans at far lower rates than traditional financial institutions and allow for flexible repayment terms – a huge plus for growing businesses.
Other public sector funding vehicles that entrepreneurs can explore include: