How to Finance a new business
Ask your family and friends to invest in your business.
Asking family and friends is one of the most popular way to finance a new business. It can however put important personal relationships at risk if not properly pitched and thought through. Afterall you are asking them to take a chance on your venture and risk their financial future. It is therefore essential to have a formal business plan in place before starting conversation with loved one about investing. This should include formal financial projections. This will indicate to your investors that you have a real plan and take their money seriously. Further consideration needs to be given to how the arrangement will be structured. Is it equity (shares in the business) or is it a loan (if so, what does the pay back schedule look like)? It is essential to emphasize the risk involved and remind that that whilst the business plan might look bullet proof there is a good chance their money will be lost.
Pitch to Angel Investors
Angel investors are people looking to buy into private company projects. Their involvement in the day to day running of your business depends very much on their skill set and experience and whether they want to be involved – some just want to invest passively. It is essential when presenting to an Angel investor that you are very clear and succinct in your vision and that you avoid using any jargon. You will also need to know your stuff so be sure you can answer questions on market and competitor dynamics, have a clear view of the context you will be operating in and have good sales and marketing plans. If you can bring in an expert or someone with a lot of experience in your chosen field, then do so – it will go a long way in building confidence in the project.
Use a crowdfunding platform.
Although crowdfunding is a relatively new concept in South Africa, it is gaining momentum. The basic concept of crowd funding is using the internet to reach a large number of people to invest small sums of money into a project. It is hassle free and admin light which adds to its attractiveness as a funding option.
Each crowd funding platform will have its own terms and conditions which need to be adhered to but they are all relatively easy to use. You can then harness the power of social media to raise and spread awareness of your project to reach more people. An internet search for crowd funding platforms in South Africa will get you started.
Apply for a Microloan.
One of the frustrations with funding a new business is a lack of a credit history, collateral or ability to secure a loan. This is where microlenders come in. They specifically focus on short term unsecured loans which are usually for smaller amounts than a bank would lend. There are many to choose from so make sure that the one you use is reputable. It is a good idea to understand how their commission is structured, what interest rates they will charge and any other administration fees they may charge. Make sure that they give you a detailed breakdown of all of the costs you will incur and the monthly repayment plan. Many of them have very easy to use websites and usually have very quick turn around times, so you will wait a few days rather than weeks for approval.
Contract finance
This is a loan provided against a signed and approved contract for business that your company has secured. The money from this loan can only be used to fulfil that contract. It is often used to bridge temporary cash flow problems which are caused by high sales volumes. Contract financiers can be quite particular about who the contract is with aw they need to be certain that the money will be paid. So client with a good reputation and payment history would be preferable. They will also want assurance that you have the knowledge and experience to fulfil the terms of the contract.
There are various ways that contract financiers can control the flow of funds; from giving you full control by enabling you to control both the finance and the contract work, or the lender could insist on controlling the finance and could want involvement in managing the project. There are fees associated with contract financiers such as legal and administration as well as interest charged with is linked to the prime lending rate.
Debtor financing
This is a process a business can use to fund itself by using its accounts receivable ledger (debtors) as collateral. Companies that have low working capital reserves can find themselves getting into cash flow problems because invoices are paid on net 30 terms. Debtor finance requires that the work has already been done and that the customer has been invoiced. Again, the credibility, reputation and payment history of the client is a key factor to lenders as they rely on their ability to pay your invoice.
There is usually an administrative fee to be paid plus interest on the loan. Debtor financiers offer 2 different options; invoice discounting where the customer pays you and pay the lender (they are not aware that you have borrowed against their invoice) and factoring which is when the client pays the lender who then settles your outstanding portion of the invoice with you and retains their fees portion.
Bank funding
Small business owner and start-ups can approach banks for loans. Most banks have several loan products available depending on your needs. Many of these loan products will require collateral or security in some form. Be sure to understand the charges – both administration and interest and ask questions. It is essential that you fully understand the terms of the loan especially if you are offering collateral. More recently banks have become aware of the potential of small and start-up businesses and have started targeting this market with products specifically tailored for such entities.
Government Funding Agencies
The South African Government has several grants and funding opportunities which focus on providing funds for business ventures which can make a difference in our economy. Each fund has a different focus from the people it is funding (BEE, women, youth) to industry sectors (land, technology etc.)