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Choosing the right funding for your business

by Blog Author Telkom ‎12-07-2017 11:53 AM - edited ‎17-07-2017 10:50 AM

Whether you are in the beginning stage of starting a business or are looking towards expanding your existing operations, funding capital will be top of your mind. There are several funding options that will suit your business, dependant on which phase you find your business in.

Here are some funding options to consider:

 

Asset and operating capital finance

 

  • 1. Bootstrapping

Bootstrapping your business is all about using whatever resources you have at your disposal to fund your endeavour, be it your own personal savings, getting a customer to pay upfront for a product yet to be developed, or even consulting as a means of selling your time to build your business. In South Africa, self-financing is the number-one form of financing used by most business start-ups.


Even before you can consider approaching bankers, venture capitalists or government you must be prepared to put some ‘skin in the game’. Funders will want to know how much you have placed in your own adventure before they will be prepared to even consider investing. After all, if you don’t have enough faith in your business to risk your own money, then investors will not be prepared to part with their own.

 

Only certain types of businesses will suit bootstrapping as a funding option, and even then self-financing may only see you through the first few months of your start-up journey before you will have to consider other funding alternatives. Traditional start-ups in retail or light manufacturing, such as a clothing boutique, can get by with bootstrapping for the first three to six months before they will have to seek outside funding.

 

An online or digital start-up can survive on bootstrapping for a year before seeking funding from venture capitalists or angel funders. Banks won’t be much of an option for this type of business as they are looking for tangible assets and not an idea for the next Instagram.

 

  • 2. Debt funding

Banks: 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 with untested models and markets as it is seen as too high a risk, no matter how great the idea is.

 

Your business would have to have been in operation for at least two years. Be prepared to present a solid business model and plan and have sound financial records that prove that you have enough liquidity, should you default on the loan.

 

Trust is a key requirement in any relationship. Entrepreneurs should build a solid relationship with their banks, ensuring open and honest communication. This relationship will play a critical role in establishing a proven track record.

 

Credit card: A small business that is struggling to find funding could borrow against a credit card as an alternative to receiving funding. It may be a scary option when contemplating increased debt, but if your business vision succeeds then the outcome will be rewarding. Be clear about the risks you are undertaking when increasing credit limits to save yourself from financial pain in the future.

 

  • 3. Angel investors

Funding for very early-stage ventures can take the form of ‘angel investment’, usually involving a wealthy individual prepared to put stock in higher-risk ventures than a venture capitalist (VC) would. Angel investors generally get involved much earlier than VCs.

 

Sometimes referred to as ‘family, friends and fools’ angels come in two varieties: People you know and people you don’t know. They are usually not motivated solely by profit, and most, particularly entrepreneurs themselves, might get involved purely for the enjoyment of helping a start-up grow and succeed.

 

Angels are more likely than venture capitalists to be persuaded by an entrepreneur’s drive to succeed, persistence and mental discipline. They would have more flexibility than VCs because they would be investing their own money into the start-up.

 

Friends and family members are more willing to invest in you and are less likely to scrutinize your business idea and business plan, or to demand a high return on their investment. However, receiving money from friends and family can create personal and emotional issues that could impact later on your business. Be clear on their expectations upfront so that their generous funding does not bite you later on when your business starts to grow.

 

Equity investment

  • Partners

Taking on a business partner is a big step. A partnership can be an effective means to bringing in resources and skills that you and your business otherwise lack, however it brings with it responsibilities and the possibility of financial burden.

 

One of the most critical decisions in forming a business partnership is the selection of partners. Many partnership headaches can be avoided if care is taken in the initial selection of the right partner. You should seek partners that bring value and understand your business vision in order for the partnership to complement your long-term goals.

 

The best performing partnerships are the ones that are high on both the contractual and relational dimensions. Both parties must implicitly trust each other but still take the time to contractually define the relationship upfront.

 

“When entering into a partnership the rules and responsibilities must be allocated to each person,” says Gil Oved, co-founder of The Creative Counsel. “The partners must have roles that are mutually exclusive in order for the partnership to work.”

 

  • Venture capitalists

Venture capitalists (VC) are a group of investors operating in a partnership to make and manage investments in young, early stage companies. They are known for backing high-growth companies in the early stages, and many of the best-known entrepreneurial success stories owe their growth to financing from venture capitalists. VCs can provide large sums of money, advice and prestige by their mere presence.

 

Venture capital companies typically seek out high growth potential early-phase companies and often place more importance on the management team, entrepreneurial concept and potential for aggressive growth than the quality of the physical business plan itself.

 

Venture capitalists look for transparency and need quality information to base their decisions on. They also understand that business ideas are a dime a dozen, but entrepreneurs that can put them into action are invaluable.

 

“No investor can make a reasonable decision without understanding your market traction, what value you bring to your customers and the length of your sales cycle,” says Paul Smith, researcher and trainer in the area of high-growth and lean start-up entrepreneurship.

 

Government funding

  • 1. Government loans

Government funding is offered in the form of a loan and has to be paid back with interest over a specified period. The interest rates are much lower and repayment terms longer or more flexible than bank loans and can be used for short-term or long-term funding. Most applications are assessed on their own merits but preference is given to gender or to historically disadvantaged South Africans.

 

  • 2. Government grants

Government grants have been set up by the government to extend funding to previously disadvantaged South Africans to foster black economic development. Grants don’t have to be repaid but there is more paperwork involved in applying for this type of grant. The grantee is also required to account for spending the money in the manner specified by the grantor.

 

Don’t feel despondent when faced with the difficulties of funding your start-up or seeking expansion funding. With the right preparation, outlook and attitude you can actively seek out and utilise the funding option that will be the right fit for your business.

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