Megan Dedekind | 09 April 2024
Megan Dedekind is an area manager for Business Partners Limited
Innovative financing models play a crucial role in enabling small businesses to thrive and compete in their respective industries.
By understanding their unique needs and exploring tailored funding options, entrepreneurs can access the capital they need to grow, innovate and succeed - both in the short- and long-term.
When applying for finance or starting to raise working capital, it’s important to understand the ways in which certain financing models are tailored to meet specific business and founder needs.
Some small business financier firms provide applicants with a list of criteria that need to be met to be eligible for funding, while others prefer a more open-ended approach.
And while there is generally no hard-and-fast rule about which kind of funding is best suited to which kind of business, each model has a set of pros and cons that may suit businesses in a specific mix of industries. Here are three financing models and their industry best fits:
The past few years has seen crowdfunding enter the ring as one of the most viable contenders in the small business financing space. In South Africa, it was used as early as 2005 – Verity Price became the first local artist to raise R300 000 for the release of her own music album, using crowdfunding.
Not only is crowdfunding effective as a funding method, it’s also a great way to test a business idea before investing a lot of time, money and other resources into taking it further.
More recently, South African brand, Sugarbird Gin, managed to raise over R1 080 000 using crowdfunding, and as the co-founders have attested, it provided the most effective means by which to bring their product to market and involve their family and friends in the journey.
In terms of which industries are most crowdfunding-friendly, the answer is vast. However, one of the golden threads running through most crowdfunding success stories is that businesses that pitch their ideas using this method need to inspire. It’s all about the backstory – so craft it well.
If you can succeed in achieving an emotional connection with potential backers and give them a reason to believe in what you’re doing, your chances of success will be high.
Many entrepreneurs opt to take out a small business loan to raise the capital they need to get their business off the ground, fund its launch or to propel their venture into the next phase of growth.
Small and medium enterprise (SME) financiers will typically consider a wide range of sectors but will need to be presented with a solid business plan that provides a clear overview of how the business will manage cashflow, market research that has been conducted, the business’s unique value proposition and its staffing requirements.
The success of applications depends on various factors, such as market demand, growth potential and the risk profile of the business and its founders.
Some industries commonly supported by small business loans include retail, as well as brick-and-mortar stores, online retailers, and specialty shops which often require financing for inventory purchase, expansion, or marketing efforts.
Businesses in the hospitality industry, such as restaurants, cafes, hotels, and event venues, also commonly seek loans to cover startup costs, renovations, equipment purchases, or seasonal fluctuations in cash flow.
In addition, small manufacturers seeking to scale operations, invest in new machinery, streamline production processes, or expand into new markets also often rely on loans to finance these initiatives.
Another financing model commonly used by aspiring entrepreneurs is venture capitalism and angel investor funding. Venture capital (VC) firms provide capital to companies that have high growth potential, often in exchange for an equity stake in the business.
Unlike their peers in the private equity space, who prefer companies that may be further along in their growth journey, venture capitalists tend to go for start-ups.
Angel investors also provide financing to early-stage ventures but are usually not affiliated with a particular company and provide this funding in their personal capacity or as part of a series of investments in their professional capacity.
Since this kind of funding allows investors to take a more active role in running the business, entrepreneurs stand to benefit beyond the financial component. VCs and angel investors are often experienced businesspeople or specialists in their fields who can provide mentorship and much-needed guidance on how to build a successful business.
It's not uncommon to hear professionals in the investment community describe VC investments as being “sexy”. This is because VC has earned a reputation for investing in disruptive ideas or businesses that could very well be the “next big thing”.
For this reason, VC funding is best suited to the emerging technology, biotechnology, and renewable energy industries.
Even with all these options, it is important to remember that entrepreneurs need more than just money; of equal importance is access to support services.
So, when raising finance always understand exactly what your business needs are, and then try to match it with the requirements of the financier.
Understand all pros and cons of the various financiers including their involvement in your business, their reporting requirements as well as their return-on-investment requirements.
Lastly don’t be afraid to negotiate, go prepared and believe in yourself and your business.
