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The Differences Between Small Business Loans and Funding

Posted on Mar 7th, 2022
Articles Business Finance Funding

The differences between small business loans and funding

Business owners in South Africa can make use of a variety of small business loans, venture capital funding and grants to fund their businesses. As we know, access to additional funding or financing can be crucial for business owners working to reach both growth and business targets.

The confusion for most business owners is what type of instrument to apply for. It’s important to understand the differences between small business loans, equity financing and development funding as they each target different stages of a business and have differing requirements and benefits.

What are Small Business Loans?

Entrepreneurs can apply for small business loans or debt financing from a traditional bank or an alternative lender.

The different types of debt financing instruments available are; Bridging Finance, Credit Facility, Equipment Financing, Inventory Finance, Offer trade credit, Refinancing, Supplier Finance, and a Cash Advance.

All businesses can apply for a loan. However, requirements for a business loan are more stringent and you may be required to put up collateral or surety. You will also be required to pay back the loan amount in full, as well as any interest accrued.

Advantages of Small Business Loans

As there is not equity exchanged, as the business owner your retain 100% of your business. When working with alternative lenders, business owners can also expect a speedier and more convenient process (many of the lenders allow you to apply online).

What is VC Funding

Funding options, like business loans from commercial banks or government grants are still more well-known to South African entrepreneurs, however equity financing or venture capital (VC) funding is an option that is growing in popularity.

There are a number of VC firms in the country. They invest in early-stage, emerging SMEs with high growth potential in exchange for minority equity ownership.

Equity Financing is, however, not for every business. It is ideally suited for a high growth potential company with a “repeatable and scalable business model”.

VCs in South Africa traditionally invest in a business that already has some clients/revenue who already have a proven product/market fit and have show some traction.

Read also: How To Spend SME Funding the Right Way

Advice for what not to do when seeking funding:

(1) Taking funding from the first available funder without exploring all finance options available.

(2) Not understanding the terms and conditions of the financial product.

(3) Not securing the correct financial product for their business.

(4) Not assessing whether it makes financial sense to take on additional financing.

(5) Not understanding the financial impact on their cash flow to service such facility.

Advantages of VC Funding

With venture capital funding you get more than just cash to grow your business, business owners also get access to the funders’ skills, experience and networks.

What is Government Funding

The South African government provides various types of development funding. Grants are the most popular funding methods for South African business owners.

A grant is a once-off cash injection given to an entrepreneur to assist their business. While there is no requirement to pay it back, the business is requirement to use the funds for the specified need.

Advantages of Government Funding

You are not required to pay back the grant.