You have the idea and the passion, but what about the money to start or expand your business? While obtaining finance is never an easy task, it is possible and there are more options than one would think.
The first starting point for most businesses is glibly referred to as the three ‘F’s’: family friends, and fools. While this is a viable option because there is often little or no interest charged on the capital amount, this money does come with ‘interference’ strings attached and it is rarely sufficient to adequately fund a business startup or a major capital investment. The reality is that business is cyclical and the quest for funding is ongoing; it is just the size and scale of investment that varies in terms of the business life cycle and the nature of the business.
Other investment is generally through debt or equity sources. Debt financing is usually the quickest form of raising cash, however, depending on the terms of repayment and the interest it can be a crippling burden. Negative cash-flows are not sustainable in the long term. Nonetheless, if the debt can be carefully managed, then it is an attractive option because there is no change in shareholding and any future profit is for the business owner/s.
Accessing bank loans is challenging for a business with no credit history and no equity. Banks will usually require personal equity such as a house before granting a loan. Business owners with personal access loans benefit from favourable terms and interest rates but the risk to family security is obvious.
Equity finance, as the name implies, is where investment is in exchange for some form of ownership in the business. While there is no debt to service, which is always better for cash flow, this does mean that any returns will be diluted by the number of investors.
There are other less traditional options available and sometimes a creative approach may be the right solution:
Factoring or invoice advances are useful for an operational business. Money is advanced against invoices that have been billed but not yet paid, normally for a percentage. This is a helpful cash-flow tip but if the invoice amount is significant, it can provide an important cash injection.
Product presales. This is a clever juggling act of selling an item not yet in stock. It does require nerves of steel, a good knowledge of supplier turn-around times and the ability to accurately forecast the units required. Many online shops operate this way and they are quite open about ‘in stock’ items and the delivery period.
Venture capital is an option for small businesses that are already optional and attractive as an investment opportunity. Venture capitalists generally focus on specific industries so they are able to provide business insights and advice, in addition to the funding. The down side is that the investors are looking for quick returns and not long term growth.
Enter a business idea competition. A great idea and a solid business plan may be your winning ticket. Daisy Health Foods is a local example of a good idea being presented at a competition and the rest, as they say, is history.
Crowdfunding is becoming an interesting option to raise cash. Crowdfunding enables businesses to pool small investments from a large number of investors. Some sites allow companies to raise money in exchange for rewards or products or a small equity share. It is important to do your research and read the terms and conditions carefully but watch the space, this is an exciting development, “According to Massolution’s 2015CF report, the global crowdfunding industry is expected to grow to approximately $34.4 Billion …by the end of 2015. (https://crowdfundinglegalhub.com/2016/01/04/ crowdfunding-a-look-at-2015-and-beyond/)
Last but not least, there are Government grants, which do not need to be paid back. There are various funding agencies in South Africa and your business may qualify. See https://fundingconnection.co.za/funding-agencies-in-south-africa
Key take out: Finding and attracting the right kind of investment requires a good plan, hard work and a creative mind… but your business is worth it!
Author: Janet Askew