Funding and Capital

Whether you’re considering starting your own business, or you’re looking to grow an existing company to new heights, business funding remains one of the most critical factors in the mind of most entrepreneurs. As the old saying goes, “cash is king” – but where do you begin when you need to beef up your bank balance?

How much funding do I need?

It’s incredibly important to make sure you’re getting the right amount of funding. Too little funding is self-defeating, giving you few options to expand or meet the needs of the business. However, too much funding presents its own set of challenges. When starting a business, those who fail to plan, plan to fail. Your budget will determine your need for cash, and how much you need to borrow or raise. Be sure to understand the costs required to setup your business, and then operate it on an ongoing basis.

Detail all of the costs involved with Building the business (inventory, equipment, website etc.), Running the business (rent, salaries, electricity etc) and the Unforeseen costs that usually pop-up (insurance, bank fees, website hosting etc.). Be sure to give yourself some room to breathe. These factors are core components of your budget and sales forecast – the important first step to take before considering how much funding you require. Based on your sales forecast, you can calculate how much you can afford to repay each month

Types of business funding:

All of these criteria can influence the type and term (length) of funding required.

Internal Funding:

Personal savings are the first place to start. Obvious enough, right? Well, we know that you wouldn’t be reading this article if you had the savings in the first place, but it’s important to emphasize. Self-funding a business is the best way to go, as it gives you complete control of your company. If you haven’t already, get into the habit of accumulating a specific savings pot for your business dream.

External Funding:

There are two primary categories of external business funding available:

1. Debt

You loan/borrow money from an external party (generally a bank or finance business) and repay this loan WITH INTEREST according to a defined timeline (otherwise known as a repayment schedule).

Pros:

• You generally don’t have to give up ownership in your business.
• The terms of a loan are largely influenced by set criteria, making them almost ‘scientific’ to calculate. This means there’s little valuation bias (i.e. difference in opinions over what the business is worth).
• The long-term value and profits of the business stay yours.

Cons:

• It costs money to borrow money. You have to be very careful to ensure that the repayment terms – including rate of interest and the frequency of repayments – suit your cashflow and plans.
• Most traditional finance institutions prefer low risk businesses, and avoid startups or new ideas.

Excessive debt can put substantial pressure on the cashflow of the business, where you might have to pay back more than your sales, turnover or budget can justify. Most people are afraid of debt, but when managed correctly, it can be a valuable asset to your business. When it comes to debt funding, be sure to understand the effects of interest, and what happens if interest rates change. By understanding and forecasting the requirements of any loan, you will be well positioned to decide your capacity to service it.

2. Equity

You raise funds from another party, in exchange for a share (or part ownership) of your business. In essence, you’re selling a piece of your business to an investor, so be prepared to put your sales hat on.

Pros:

• The investor shares the risk if the business fails.
• Often, there’s no repayment schedule.
• Investors are more likely to consider funding startups.
• Investors with ownership are more likely to provide more than just money – in the form of advice, access to their networks, and more.

Cons:

• By giving away a portion of the business, you have to share profits, value and sometimes, even control.
• Investors are harder to find.

Giving away too much equity in exchange for funding may have short-term appeal, but ultimately it can affect your long-term value in the business and the amount of control you retain. In a growing business, equity given away today is going to be worth more in the future, and entrepreneurs will have to pay a premium if they intend to buy this back.

*Note there are instances when sophisticated investors fund the business through a combination of equity and debt – common in venture capital (see below). We recommend you seek professional advice in this instance to ensure the arrangement serves your business best.

Important concepts to understand when applying for funding:

• Credit Report– Your credit report contains the information on your past/present credit arrangements and loans – think bank, home bond, store accounts – and your payment performance. South Africans are entitled to a free credit report through a registered credit bureau each year. You can complete your credit report via the getlion app.
• Credit Score– A number indicating your likelihood and ability to repay a loan to a finance institution. Finance organizations rely on credit bureaus to score and evaluate the risk of a customer or company. This score accounts for things like credit payment history and financial strength of the person/company. The more you default (or fail to pay) on credit payments, the lower your score (and higher your risk). If you have a bad record, it is unlikely that traditional financers (banks) will approve you, so consider alternative lenders like SEFA, angel investors or government grants first.  Thankfully, there are ways to improve, it just takes time. First, check your credit record. Then, if you’ve started improving your payments, contact a credit bureau and update your information to avoid delay.
• Collateral – is an asset that a lender accepts as security for extending a loan. If you own any assets (house or car), they will help reassure lenders when you apply.
• Interest Rate– The amount charged by a finance institution for lending the money. It can be fixed (stays constant throughout the term) or variable (changes during the term).
• Prime Rate– The interest rate set by the South African Reserve Bank. Most financial institution use this as a base when determining how much to charge customers for borrowing.
• Loan Term– The time period in which to repay the loan.
• Secured verse Unsecured Loan– A secured loan backed by certain security or collateral, which the lending institution can seize should you fail to pay your debt. An unsecured loan can be offered – i.e. no collateral required – if the applicant has good credit and low risk.
• Annual Fee– The administration cost charged by the finance institution for the loan.
• Alternative Funding – This is a term growing in popularity, and refers to the funding offered by non-traditional lending institutions like banks. Alternative funders are usually tech-driven, private companies that focus on providing funding to businesses in innovative ways.

Where to get funding

Once you’ve decided how much funding you require, and exactly what you require the funding for, you can start to consider the various funders available in the South African market. Certain funding is more appropriate than others, relative to what your business does), it’s age (startup vs established) and the plans for your business.

1. Banks

Banks are the most common financial institution in the economy and are a good starting point for raising funds. Most offer options specifically designed for businesses. However, banks typically require your business to have an operating history, the relevant paperwork and for you to have some form of security/collateral for the loan (an asset or item of value that the bank can claim if you’re unable to meet the commitment of the loan – like a property). This typically hinders the application of new businesses. However, If you have an existing business and run it in a compliant manner with a favourable trajectory, then bank financing is a strong option for you. Whilst banks offer some of the cheapest repayment rates, they are often the hardest to qualify for.

Bank financing is typically offered in the form of “term loans” – where you borrow a sum for a defined period, and pay back the money with interest calculated each month – or via a credit/overdraft facility, which is a limit/sum that the business can lend against when it requires. In the second instance, most banks have credit facilities incorporated into their account options – allowing you flexibility to borrow the money and pay interest accordingly. Whilst easy to qualify for, your limit starts off small and grows with time. Take note – bank loans are typically the “cheapest” form of external funding available – with typically lower interest rates.

2. Angel Investors (Individuals, friends, family).

Angel investors – seemingly named because of the early role and risk they’re willing to take in a startup business – are increasingly common. In the early stages of your business, these are the individuals willing to support your vision and business dreams. They usually require a decent chunk of equity in exchange for the risk they’re taking, but often rightly justified! If you plan to expand out of your bedroom or garage and grow your space, infrastructure or team, angel investors are invaluable. This style of fundraising is moving beyond the mere living room elevator pitches to your family and friends and is seeing the emergence of formal angel investor networks, making them an ever-viable funding option to South African entrepreneurs. As you’re dealing with individuals, you can often negotiate flexible funding terms, but there is also potential friction in raising money from your personal network. To understand more about angel investors in South Africa, visit: https://www.joziangels.co.za/ or https://www.investmentnetwork.co.za/about-us.

3. Crowdfunding

Crowdfunding is a relatively new concept in South Africa, and takes angel investing up a level. It involves running a formal fundraising/marketing campaign for your business, usually via an online platform, and allows you to pitch for funding from multiple investors, customers and members of the public. Going through a legitimate website or online platform offers potential investors the comfort of knowing you, your business or idea have been vetted and met certain criteria. The funding can take the form of equity, debt or even pre-sales of the products/services you intend to offer. As you’re competing for the attention of individual investors among other business opportunities, crowdfunding is as much about marketing and networking, as it is about your business model and plan.  To understand more about crowdfunding in South Africa, visit: https://uprise.africa/ or https://www.thundafund.com/, or https://jumpstarter.co.za/.

4. Purchase Order Financing

Often smaller businesses are able to secure valuable contracts or deals with bigger customers, but then struggle to raise the money to deliver on what was promised. Purchase order financing is relevant for SMMEs that have secured contracts or purchase orders from a customer and require the funding to deliver on those agreements in a timely manner. Unlike equity financing, the entrepreneur retains complete ownership of his business and the finance institution typically offers support to the business in delivering the contract.  P.O. financing is suited to supply-side companies offering business-to-business services. Like with any type of funding business, ensure you understand the interest and repayment terms.

5. Stock/Inventory Funding

When a business is sitting on unsold or ready inventory/products, they can consider applying for a loan against the future sales of that inventory. This helps the company with cash flow to keep the business operating efficiently whilst items are waiting to be sold. The need is often short term, making this type of financing more appropriate than bank funding, but always be sure to calculate the interest and terms of the debt repayments.

6. Accounts Receivable Financing

Much like inventory finance, accounts receivable funding (a.k.a. invoice discounting) lets the business borrow money against the money it is owed from customers (in accounting terms, known as debtors). Accounts (or monies) yet to be received are an asset to the business. As those outstanding amounts are paid by customers, the business is then able to settle the debt it raised. This helps the business with cashflow whilst it waits to receive what it is owed.

7. Working Capital Finance

Working capital refers to the cash available for the day-to-day operations of the business and is often the sign of a business’ health. It’s the sum of your assets less liabilities – i.e. what you have available to work with. Working capital lets you deal with daily requirements, like stock, staff, utilities and equipment to operate efficiently. All business owners must have a finger on the pulse of their company’s working capital in order to plan accordingly. South Africa has seen the emergence of several companies willing to provide loans for working capital requirements, which are suited for short-term projects.

8. Merchant/Retail Cash Advance

A merchant cash advance is a popular short-term loan to help businesses with existing turnover/sales manage their operational costs until payments are made by clients. The amount loaned is tied to the average monthly turnover of the business, and repaid over an agreed term. Repayments often come out of future earnings, so the business repays as it earns. The more the business makes, so the repayment is adjusted downward. This funding is usually offered to businesses that use a card machine to accept payments, as the funder has insight into their turnover. Funding is typically offered at a favorable interest rate, and usually no collateral is required.

9. Government Grants

The South African government recognizes the important contribution of small businesses to the economy and provides various funding options to qualifying businesses in the interest of business development. Grant funding is extremely attractive, because it’s one of the few forms of financing that doesn’t need to be repaid. Because of this appeal, it has strict qualifying criteria and deliverables, such as B-BBEE and job creation. Most applications are lengthy and labor-intensive, and the recipient is required to spend the funds in a pre-determined manner. Various funds have been established to cater for specific businesses in specific industries. Examples include the Small Enterprise Development Agency (SEDA), The National Empowerment Fund (NEF), The National Lotteries Commission, The Department of Trade and Industry (DTI) and National Youth Development Agency (NYDA) amongst others.

10. Venture Capital

Venture Capital is a formalized type of investment/fundraising, where registered institutions, fund managers or groups invest in high-growth, innovative businesses in exchange for ownership. They can do so with a combination of equity and debt funding instruments. Unlike most angel investors, VC’s typically bring with them sophisticated networks, advice and support – and typically play an active role in ensuring that the company meets growth expectations. Venture Capital providers typically invest larger amounts and try to invest in early-stage companies, in order to realize substantial returns over the term of their investment. It is also common that VC’s manage a pool funds on behalf of collective investors, to whom they charge a fee in exchange for managing and growing their money. Venture capital requires a bespoke style of fundraising, formal pitchdeck/presentation sessions, and is usually relevant when a company already has some market traction, is ready to scale in customer volume, and has already raised the funds to get to that point. Whilst attractive, venture capital is one of the hardest forms of funding to secure, so we recommend upskilling yourself and seeking advice before pursuing this funding.

Your funding application checklist

• Calculate how much funding you require.
• Formulate a business plan outlining what the funds will be used for. Important to ensure this covers operations, marketing and finance. You can access a great business plan template via the getlion™️ app.
• Compile a budget, sales forecasts with timelines, and a strategy for growth.
• Understand and document the risks to your business, and plan around them.
• Make sure you have up-to-date financial records (good accounting software is a non-negotiable here). You can access great discounts on accounting software via the getlion™️ app.
• Make sure you have up-to-date tax records. Not registered for tax yet? Why not do so via getlion™️, in partnership with BizPortal.
• Understand the value of any security/collateral you can offer – get a valuation on your home.
• Make sure your compliance is in order – company records, annual returns, TCC, B-BBEE certification etc. Not sure where to start? You can find the answers via the getlion™️ app, in partnership with BizPortal.
• Do you know, and can you improve your credit score? In partnership with a registered credit bureau, getlion™️ gives users access to one free credit report, annually.

Using getlion™️ to find business funding

We’ve just launched our first-of-its-kind funding portal, where you can find, apply and increase your chance of receiving funding from a large number of reputable alternative funders. Simply unlock the Funding Portal by reaching “Silver”🥈 on our rewards program.

And remember… No amount of funding can fix a bad business model, poor customer service, or the inability to sell. Take the time to refine what you want to build and upskill yourself to do so.

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