When you start a business, you have all these visions of where you would like to go.
But, there is always one challenge: funding.
This, among other reasons, is why many SMEs in South Africa and across the world fail. Funding is the fuel which keeps businesses, especially small ones, afloat. Business finance is a helpful tool for SMEs. It can assist a business in improving its working capital. It can help purchase an asset or to reconstruct your company’s debt.
But choosing the right type of funding is crucial for any business regardless of the size. Because the last thing you need is to find yourself in a loan term that costs you more than what you’re getting out of it.
So, before going to any financial institution, read below to understand the type of funding available for your business.
Many wealthy individuals who have money to spare will offer to invest in SMEs. They do this because they can receive a higher return from your business than from an investment. To get an angel investor’s attention, you need to; make your business look appealing, pitch to an investor, provide an opportunity for them. Or offer them a good deal.
You need to keep in mind that an angel investor will want something from your business. So, offer them what you’re comfortable with. Either they’ll want to fill a position in your company, have it as convertible debt, be a silent partner or help mentor you to help grow the business.
This is dependent on whether they’re interested in the field of your business. Or if they’re only looking to fund businesses. And, although this may seem like the ideal type of financing, it does have its challenges. One of the drawbacks is that you may no longer have total ownership of your business. This can be a problem, especially if you and the angel investor don’t share the same business views. So, before you do anything, get to know what the angel investor wants from your business. This will ensure both of you are looking towards the same goal and that you don’t clash. But, this still doesn’t prevent issues that may happen down the line.
Business funding from a lender
Business funding is one of the safest options, especially for small businesses. Yes, you will have to repay the business loan. However, unlike an angel investor, you will still have full ownership of your business. And, if having full ownership of your business is important to you, this is a better option.
Nowadays, you can find tailored financial solutions. For example, if you need to buy an asset like a car, you can get asset finance. Asset finance, where you can either rent out equipment or purchase it. All you’ll need to do is meet the business vehicle finance requirements.
Although this is an example, it shows you how you can tailor your finance which fits your business’s needs. But, if you’re sceptical about the amount of money you’ll repay, you can determine your monthly instalment by using a financing calculator. Many lenders offer business finance calculators in South Africa, which give you a guideline of how much you’ll be repaying.
Another finance solution is government funding. The government has three different types of incentives:
- Tax incentive: which is when your company can subtract a specified amount from the money that goes to tax.
- Equity funding: which means the government’s funding agencies buy a small portion of your business and become percentage shareholders.
- Full or cost-sharing grants: in most cases, they aren’t repayable. But, cost-sharing grants need you to obtain additional funding to cover the expense.
As good as it may sound, government funding isn’t advisable if you’re in a tight spot and need funding immediately. Government funding has long processes which may take time before you get funding. And, if you need money, then government funding may not be ideal for your business.
In business terms, bootstrapping is starting your SME without any, or very little funding. This means business owners won’t seek funding from lenders, angel investors or government funds. Now, you may be wondering where you will get the money to run your business? Well, you’ll be using the money you’ve earned from your customers and personal savings. That money can then be ploughed into your business.
This helps businesses take off without debt or angel investors. But, the growth of your business will be slow as the money you earn will also need to go towards your business’s expenses. Additionally, you may apply for a line of credit from financial institutions to keep your business afloat. It would; however, be small balances with short terms. For example, you’d use the funding for new equipment, hiring employees, or when your cash flow drops.
With bootstrapping, there are pros and cons. For example, the pros are;
- You’re your own boss, and you only answer to yourself.
- You decide where you want your business to go, and what direction to take.
- Every aspect of the business is your responsibility.
However, as there are pros, there are also cons:
- It entails a lot of risks, as you can lose everything if your business doesn’t succeed.
- You’ll need to work hard when it comes to networking as you won’t have many relations.
- It will take a while for you to see a substantial amount of growth.
- So, when you think about bootstrapping, you need to be sure of your choices and understand what the disadvantages will be.
So, which funding is best for your small business?
At the end of the day, it will always be your decision. However, it’s important to think about what will happen in the long run with your decision and how you want to grow your business.
For instance, if you feel strongly about being the sole owner of your SME, then angel investments aren’t for you. And, if you wish to see your business grow at a rapid pace, unwilling to risk using your personal savings, then going the bootstrapping route won’t do. The safest route to take for someone who wants to grow their business, and maintains sole ownership, is a business loan. Yes, you will be tied down to a fixed agreement; however, it will be one that is manageable and will work depending on your business and its needs.
Lenders will take a look at your affordability and decide from there how much they can offer you, and you will decide how long you need to pay. At the end of the day, you can always decline if you feel like it won’t work for you. You can also use a lender’s financial calculator to get a guideline of how much you will need to repay and for how long. That way, by the time you go to a lender, you’re at least prepared and know what to expect.
To find out about funding options for your SME, contact WesBank here.