Many people think up potentially good business ideas, but stumble when it comes to finding ways to make it happen.
A big sticking point is how to fund a start-up business.
1. Using your own money
As a would-be entrepreneur you may need to rely on your own money to start your business – especially in the initial stages. This is often referred to as bootstrapping. You may be considering using money you have saved up or a retrenchment package or savings withdrawn from a retirement fund.
Or you may borrow against your home.
Using other sources of income that you can rely on to start your business is a good way to avoid the problems with borrowing. An example of this would be moving in with family, renting out a home you own and using that income to start your business.
Creating a business out of a side-hustle while you are still working and earning is another way to get started.
Funding your business entirely by yourself can be both liberating and limiting. And it is not without risk.
You won’t have anyone telling you what you can and can’t do in your business, but you may also miss out on good advice from lenders or shareholders if you don’t approach anyone else for funding.
Many businesses need outside funding to grow and take on bigger orders or operations.
The risk of using your own money is that if your business fails, you could lose the money you invested – potentially your life savings or home. Worse still, if you have borrowed money in your own name, you could be burdened with debt you have to pay off after your business fails, with disastrous consequences for your later years.
Read more: Should I use my own money to start a business?
2. Borrowing from friends and family
Depending on your family situation, this may be an option, but it may also be a way to introduce conflict in your family and may cost you friends.
If you borrow from those you know, formalise the loan by putting it, and the terms you agree to, in writing.
3. Take out a business loan from a bank
Banks offer business loans to those who have:
Most banks will ask you to sign surety in your personal capacity which places your personal assets at risk.
A business loan will cost your business in interest. Interest rates vary depending on your credit record and how risky the bank regards you as a borrower. Rates are typically high if you are a first-time borrower. You will also need to factor in the cashflow required when capital repayments become due.
Banks are typically quite risk averse and won’t lend unless your business case is strong.
4. Get a loan from an alternative lender
Alternative lenders offer loans to businesses who can prove their turnover and do not always ask for collateral. Loans that are not secured by any collateral are likely to cost you more in interest than a loan that is secured.
These lenders typically lend to businesses that have been up and running for six months and have a turnover of R30 000 a month or more.
Lending may be quicker and easier through these alternative lenders whose applications are often paperless and online. But watch out for the interest cost of these loans.
5. Get a government agency grant or loan
You may be able to get a grant from a government agency set up to promote small businesses, but typically these agencies only give grants to certain people or businesses – usually black economically empowered businesses, those that are owned by women or young people.
The National Youth Development Agency, for example, gives grants to people between the ages of 18 and 35 who enrol for mentoring and other programmes teaching necessary skills.
The National Empowerment Fund provides loans and other non-financial assistance to black economically empowered businesses.
Other examples are the Technology Innovation Agency which provides funding to commercialise projects stemming from research at certain institutions and the Small Enterprise Finance Agency that gives loans to small businesses with proven track records.
While grant funding often does not need to be repaid, to qualify for this money you will be required to meet certain requirements, complete a lot of paperwork, have a solid business plan, participate in certain programmes or do things like hire local staff.
You will also face lots of competition and may not be successful in your application.
6. Use a business incubator or enterprise supplier development programme
There are some business incubators and corporate enterprise supplier development (ESD) programmes that will support you and your business if it can be a future supplier to an industry. These programmes sometimes assist you with finance, or at least an application for finance or an equity deal.
ESD programmes may also link you to new clients for your business.
They are typically looking for at least 50% black ownership.
7. Look for an angel investor
Angel investors are often successful business people who want to help young entrepreneurs starting out.
They are not easy to find, but if you do find one who is willing to invest both time and money in your business, it can be invaluable. They are regarded as patient investors.
There are some networks of angel investors and friends, family, mentors or people you know may often act as angel investors.
Angel investors usually look for some kind of equity or share in your business in return for the capital they invest. They may ask for an agreement that guarantees future equity when your business reaches a level where you can offer it to investors.
Angel investors also look for business owners who are committed and passionate, and your business must have financials and be viable and profitable.
8. Get funding from a venture capitalist
If your business is profitable and forecast to grow fast in the near future, you may be able to interest a venture capitalist in investing in it.
Venture capitalists are typically looking to invest by buying shares in your business and to sell those shares within five to seven years, making a healthy capital gain on what they invested. They will also expect to make a return on their capital invested of between 10% and 20% a year in the form of dividends.
They are unlikely to consider businesses growing at a slower rate or an unprofitable business.
The advantage of getting this kind of funding is that you do not have to repay a loan.
The disadvantage is that these investors will want to be involved in key decisions you make and demand returns higher than what you as a business owner can achieve.
9. Sell to a private equity investor
If you have a well-established business that needs to grow, you may be able to interest a private equity investor or a fund that invests in private equity to invest in your business.
Private equity investors typically look for businesses with innovative products or services that can disrupt the market in addition to a strong management team leading the business.
They also look for businesses with a good track record and financial accounting, and a growth plan showing how the business will, with additional funding, grow its profits over a period of five to seven years.
Getting private equity shareholders is less onerous than listing on a stock exchange but you will still need to value the business, create a share ownership scheme and be willing to give up some of the equity in the business.
After investing in your business through a growth phase, the private equity partner may sell its holding on.
10. Use crowdfunding or crowdsourcing
Crowdfunding or sourcing is becoming a popular way to find funding – particularly small amounts for startups – by asking many people to help you fund your business or project.
Crowdfunding can involve asking for donations, offering a reward or product in return for a
donation, offering to repay contributors with interest or offering equity in your business in return for funding.
Users of crowdfunding platforms typically form a community of like-minded people who can also help you with advice and provide a valuable way to test the potential take-up of your project, product or service.
You don’t need business plans, forecasts and other financials, you just need to make a good pitch for the funding, which may or may not meet with success.
