Many types of business funding exist within South Africa, yet some entrepreneurs are unaware of it. From government funding to investors and using your own funds, it can be difficult to know what type of funding will help your business the most.
Institutions and government entities offer many funding options for qualifying business owners. These options cover that might suit different types of businesses better than others, and can be limited to some industries.
To help small to medium-sized enterprises (SMEs), we’ve compiled a list of funding options that are available to applicants.
Business Funding Through Bootstrapping
Bootstrapping is funding generated from the business owner’s personal savings or credit. Owners who choose this option not only have the funds available to some degree, but they also prefer to stay in control of business decisions. This might sound like a good idea to stay away from other shareholders, but it places a lot of risks on one person. It has the potential to restrict cash flow yet enhances the likelihood of future fundraising when it shows success. The deciding factor of choosing this option will ultimately land on the availability of funds and whether income is sufficiently sustainable to make up for the owner’s savings.
Crowdfunding your Business
In essence, crowdfunding is a method of fundraising from the public. It is usually attempted through websites that were made for setting a fundraising goal, sharing the campaign and giving contributors the opportunity to donate funds. These include Indiegogo, Kickstarter, Thundafund, Back-a- buddy and GoFundMe, to name a few.
In some cases, donations can be incentivised on some sites to make the opportunity to donate more attractive to contributors. However, crowdfunding is a type of business funding that can be risky: The funds you collect might not be enough. Trying to rectify this through marketing campaigns can also negatively impact your final amount due to high advertising costs.
It still remains a good choice thanks to its low barrier of entry.
Business Funding with Investors
For start-up businesses, investors are a good source of business funding. The downside is that the owner(s) need to relinquish a higher percentage of control to the investor. Yet, this can be the ideal fit for a company that is unable to obtain funding from traditional financing sources.
Angel Investors
Also called angels, angel investors are affluent individuals who are willing to invest in a business before it is clearly defined. Beyond bringing capital to the table, angel investors also bring market access, networks and years of experience.
This type of business funding is received in exchange for shares or a repayment agreement can be reached.
Venture Capital Investors
Like other investors, venture capital investors provide business funding in exchange for shares. The owner, therefore, gives up a lot of their own equity.
These investors, whether an individual or a juridic entity, usually get involved with the business after it has been established and has proven that is successful. This means that as the business grows, its access to funding also grows with the opportunity for venture capital investors. It is common practice to give them at least one seat on the board of directors.
Unlike loans, their lack of interest payments can be attractive. However, to build the business to a point where investors are attracted to it takes a considerable amount of time and money.
Seed Funding
Seed funding looks at a business as a little seed that needs to be planted to grow a giant tree that bears fruit. It is an initial investment for a stake in the company. With this funding, the business is able to start and get to a point where it can be showcased to potential larger investors.
The operations it might be used for are getting the business registered, research and development, marketing, and market research.
Accelerators as Business Funding
Often, business incubators and accelerators are used as synonyms. But this is incorrect. Although there are overlapping similarities, these two types of business funding have different approaches to helping small business owners. Even if both of these help your network to grow, how you can leverage them is vastly different.
A business accelerator programme combines a small seed investment for a start-up with mentorship. It has a set time in which a certain goal needs to be achieved, usually somewhere between one to four months. Competition to get accepted into such a programme is quite high.
If you are lucky enough to join such a programme, you can count on resources such as IT equipment and Wi-Fi that would otherwise not have been available to you.
Incubators
Incubators are focused on creating an environment where entrepreneurs can generate ideas. They are often run by government divisions or universities.
Not all incubators can provide you with funding or structured mentorship, so you need to be aware of what a particular programme can provide you with.
Types of Business Funding through Loans
Loans are usually available through traditional financial institutions. However other specialised funds provide financial assistance to businesses that meet a particular criteria. The Green Energy Efficiency Fund (GEEF) is an excellent example. It offers loans from between R 1 million to R 50 million to businesses that want to invest in energy efficiency and renewable technologies that make them more sustainable.
Beyond funds such as these, here are some loan options an entrepreneur can consider:
Working Capital Loans
Working capital loans can be a good option for multiple business uses. From funding operational costs to investing in business expansion, this short-term loan covers day-to-day expenses.
Although access is easy, interest rates are usually extremely high. You can find a list of working capital loans to investigate, here.
Unsecured Loans
For entrepreneurs who don’t have collateral, this can be a practical option. Anyone who also chooses not to risk assets can benefit from this option. These loans can be utilised for business expansions, cash flow management, or investment opportunities.
Bridging Finance
Bridging finance, as the name suggests, is a type of business funding that bridges the gaps in a business’s cash flow. This short-term loan is flexible, secure and quickly approved. Yet, the high interest rate and short repayment timelines make it difficult for some businesses to use.
Purchase Order Funding
Purchase order funding is specifically designed to assist businesses with funding between when a large order is placed and when it is fulfilled. This gives the business the opportunity to purchase any raw materials or pay for any inputs that they require to produce the large order for the customer.
Another benefit of this type of business funding is that it gives the business more buying power, so they can buy more at better prices in a short time.
Types of Business Funding from the Government
The South African government provides funding to small to medium enterprises through a variety of programmes and institutions. Some of these include the National Empowerment Fund (NEF), the Small Enterprise Development Agency (SEDA), and the Small Enterprise Finance Agency (SEFA).
The types of business funding that the government provides can be divided into grants, incentives and equity funds.
Grants
This type of funding is awarded to entrepreneurs to develop their businesses. It is allotted in a percentage. Depending on the details of the grant, it can be a 100% grant which means that no repayment in necessary, or that the other remaining percentage is repaid by the recipient. For example, a 70% grant means the recipient needs to pay 30%.
Incentives
Funding through incentives encourages the recipient to achieve a goal such as making a set amount of profit. Incentives from the government can then be used after the fact and include tax advantages as well as preferential access to infrastructure.
Equity Funds
With equity funding, the government provides funds as if it was investing in your business. The implication is that you have to provide them with a shareholding percentage of the business.
Whether you are looking to fund your start-up or help your business grow, obtaining finances will always be a key element. By knowing what options you have at your disposal, and understanding your business needs, you can make the decision that is the perfect fit for your SME.
