How do I finance my business?
So you’ve registered your company. What now? The first thing your business needs is cash to cover the (substantial) start up and operational costs. There are several combinations of financing available to small businesses. The most successful entrepreneurs have creatively used all their resources to come up with the right solution.
Personal Assets
The first place to look is in your own pocket. Lenders expect owners to put up a significant amount of the start-up money, after all, if you have no skin in the game why should they risk their money? Where does this money come from? You can pool together funds from personal savings, credit cards, home mortgages, or the sale of personal assets.
If you do a stock take of your assets, you are likely to realise you have more resources than you thought. This would typically include investment and savings accounts, real estate and other movables like cars and collectables. You can either dissolve / sell these or alternatively, use them as collateral to borrow from a lender. A home owner, for examle, can get a home equity loan on the part of the mortgage bond that is already paid. How about renting out your home or holiday home if you have one? The possibilities are endless. If you are still employed, maybe consider starting a saving fund specifically for your future start up.
Loans from Family and Friends
For many entrepreneurs, the next stop is family and friends. If you have an idea that has considerable commercial potential, you might be able to get family members and friends either to invest in your business or to lend you some money. Remember that family and friends are like any other creditors: they expect to be repaid, and they expect to earn interest. Even when borrowing from family members or friends, it is important to draw up a formal loan agreement stating when the loan will be repaid and specifying the interest rate. Everyone has a story about that relative that always approaches family members looking for financing but never repays that money, don’t be that guy!
Commercial Loan Finance
The financing package for a start-up company will probably include loans from banks or private finance companies. These lenders are tough nuts to crack – they will only lend you money if you convince them that your idea is commercially feasible. It is getting harder to get money through this channel in the current economic climate. Moreover, they prefer you to have sufficient talent and experience to run your company successfully. Lenders want to see a well-developed business plan, with detailed financial projections demonstrating your ability to repay loans, as well as some sort of collateral pledged in order to guarantee repayment. Financial institutions offer various types of loans with different payback periods. A quick way to get finacing from these institutions would be Purchase Order financing where a lender advances money to you based on a confirmed purchase order from your customer / client or Invoice Factoring which is similar to Purchase Order financing but in this case, the lender applies the advance to amounts due from customers. This is ideal when you already have an operating business and you need access to quick cash.
Here in South Africa, we have access to financial institutions like ABSA, Standard Bank, FNBand Nedbank, state owned enterprises like the IndustrialDevelopment Corporation(IDC), the Small EnterpriseFinance Agency(SEFA) and the NationalEmpowerment Fund(NEF) as well as private lenders like Business Partnerswho provide great support to small enterprises.
Grants and Enterprise Development Funds
The government and associated organisations provide grants and assistance that can help get your business off the ground and expand. A grant is an award that does not need to be repaid and it is also not subject to tax as these incentives are made available to spur small businesses. Some grants will come in the form of matched grants, which means that the funder will require you, as the beneficiary, to also contribute to that funding need. For example, if its an 80:20 matched grant and you have applied for R100,000, the funder will give you R80,000 on condition that you show that you have R20,000 to contribute.
While in theory, a grant seems like the most obvious choice, the selction criteria is strict and like any other funder, you have to show your business plan and prove viability of your business or project. There is a standard checklist for this like a SARS Tax Clearance Certificate, copy of business registration cerfiticate and projected financial statements for start-up and/or expansion.
We have access to several grant programmes with the more commonly known being the Department of Trade and Industry(DTI) providing great incentive programmes like the Black Business Supplier Development Programme (BBSDP). For the youth, there are also grants available from the National Youth Development Agency(NYDA).
Enterprise development funds are more or less like grants but these are typically issued out by large corporates with the aim of growing small enterprises. There are endless funds available and they usually in line with that particular corporates objectives or business. The selection process is just as strict and having your paperwork in order is important.
Other Sources
There are new ways of raising funds, including crowd funding on websites like Kickstarter, IndiegogoGoFundMe, and locally, we have StartMe. The funding model works on the principle of pooling funds from various investors. Crowdfunding platforms each tend to cater to specific categories, such as Kickstarter which focuses on creative projects or Crowdfunder, an equity-based platform which is used for businesses looking to raise investment capital. Many sites allow companies to raise money in exchange for rewards or products for example, if you are raising funding for a cool new gadget, you could reward your funders with one depending on the level of funding. Others have an equity-based model in which businesses give up a bit of their share, the backers receive shares of the company, usually in its early stages, in exchange for the money pledged. Crowdfunding requires a lot of work and more often than not, you have to run a campaign to get attention from potential investors as there are many other entrepreneurs looking to attract investment on these platform.
It is important to think carefully about your finance options and be prudent in how much financial assistance you ask for. Good governance is a must to ensure financial discipline and to ensure the long life of the business. Business owners who bootstrapkeep control over their company for a longer time, allowing them to better influence its vision and mission. Some lenders and partners could impose terms and conditions which are not in line with this and that could suffocate this. As the business grows, funds can be put directly back into enhancing the business, rather than into servicing your loans. On the other hand, if you wait too long to finance your business you could lose out on market opportunities.