If you’re starting your own business, it’s inevitable that you’ll need some financial assistance at one time or another. But understanding the landscape for business finance in South Africa could be time consuming. This article outlines some of the options for you to consider.
It may be that you need a loan to get your venture off the ground, or an overdraft to see you through the first few months of trading. Perhaps you may need help buying equipment or credit for purchasing materials before you get paid yourself.
Raising money may seem difficult, but it needn’t be that arduous so long as you ensure the fundamentals are in place.
Clearly this article can only ever be a starting point. We hope that as a result of using it you feel better positioned to access the support you need. Should you need to talk to someone then our Caban Investment advisers will be only too pleased to help.
With the current situation of the economy, we saw many small businesses liquidate as well as large corporations downscale their staff to the minimal. Hence, many skilled tradesman have ventured into their own small businesses, backing their own business plan and personal commitment to make the idea a reality. Banks are not easily offering loans and it is becoming more difficult to secure business finance. Start-up capital is often a necessity to get off to a good head start with my business venture.
Business finance in South Africa, as many other parts of the world has become an increasingly sought after and often scarce resource for entrepreneurs. The thought process behind this from the banks perspective is now well known and much discussed and for many entrepreneurs seeking finance, business angels and virtue capital firms have become a sought after option. Business angel investors often provide the first significant outside capital invested in start-up companies. After an entrepreneur or team of entrepreneurs identify a business opportunity, and exhaust their own resources, they often turn to business angel investors to keep the venture growing. Without this capital, many new ventures simply cannot grow.
As entrepreneurs create new opportunities, some ventures show great promise and growth, and some of those will require additional capital. That capital can be provided in the form of debt or equity, but new venture risk is usually something that the banking industry avoids (with the exception of the credit card industry). Formal venture capital and business angel investors help meet this investment need of new ventures, a role that is uniquely important at a time when credit is particularly tight.
As a business seeking business finance, there will be numerous options for you to consider.
Angel investors for instance, are often more likely to get involved at the early stages of start-ups which many of them fund exciting and forms part of the reason why they are investing in businesses in first place. They want to get involved in the business and support the owner on the start-up and growth sages of the business. Because of the nature of their interest and resources a at their disposal this also makes plenty of the business sense as their relatively low investment at the early stage can secure them a healthy share of the new companies equity. They have become an increasingly important source of equity finance over the last decade for new and nascent businesses as venture capital investors are not able to accommodate a large number of small deals with their attendant due diligence and oversight needs. Business angels are now prominent co-investment partners in the early-stage market.
Venture capitalists on the other hand are more likely to invest money once the business is established, providing greater monetary amounts in return for shares in the business, and sometimes a role in the company, usually at the board level. Venture capital firms are more likely to take on high investment opportunities where the return may be equally attractive in order to justify the risk being taken in the first place. So as a small business or entrepreneur, this is something that you and your business angel may consider at a later stage of your business.
But what could be some of the other options for you to look at?
Buying equipment – Taking finance will add commitments and overheads to your company, so remember to consider all your options. Can you lease the equipment instead, or simply hire it as needed? What’s the most tax efficient option for you and your business?
Buying premises – Could the money you spend on property be better put towards running and growing your business? Would your business be better off in rented premises?
Seeing the business through a lean period – Before you get a loan or overdraft to see you through, consider all the other options available to you. Could you reduce stock levels,
or find new ways to tackle late paying customers, or perhaps you could negotiate better
deals with your suppliers.
Self funding Most small businesses start
on a modest scale; owners use their savings, investments and assets to help raise funding. Pros
You get all the profits and retain control
You don’t have any interest repayments or loan charges (unless remortgaging your home)
It demonstrates your commitment, which can influence financiers at a later date
G You’re using up cash reserves that could be useful if your business hits a rough patch
Assets used to raise money, like your home, are at at risk if you don’t keep up repayments
Angel investing is becoming more popular in South Africa. Contrary to media reports about the lack of accessibility to private investors and their inability to fund new businesses, South Africa still has its economic obstacles to overcome - fairly high everyday living expenses and a high unemployment rate - investors are trying their utmost to bring more business into South Africa, since investing is the only way to revive an economy.
Friends and family This is a cost-effective way to get finance. To fund a short-term cashflow problem consider a loan. For a longer term solution, consider giving them a share in your business in return for investment. You need to be honest with investors about the risks, and should draw up a formal agreement. Pros
Family and friends are more likely to be supportive of your idea
The terms and conditions are usually more generous than those of a bank
It can sometimes test relationships
Your bank may ask for security against a loan – such as your business premises or house. If you have trouble providing this, you may be eligible for the one of the many business grants made available by the SA Government or IDC.
Grants Discretionary grants are available for some new businesses, usually in specific industry sectors or geographical areas.
The money does not have to be paid back
You don’t give up a share of your business
The application process can be long
A grant typically only covers between 15-50 per cent of your costs
Bank loan You pay back a certain amount each month, plus interest, for a set period.
A clear repayment schedule means you can forward plan your cashflow
You don’t give up control of your business Cons
Banks can be reluctant to loan money to start-ups with no business track record
Your bank will probably ask you to come up with a share of the capital
Navigating business finance in South Africa may be challenging. Speaking to a friend already in business or accessing one of our business advisors could save you time frustration.