If you are thinking of starting your own business, it is likely that you will need funding. There are various options of funding available to help you start-up your dream business, however, finding finance for a new venture can be challenging at times.
When you set out to find funding opportunities for your business, it's important to remember that some sources of finance will be more suited to you and your business compared to others. If you're thinking of setting up an interior design business, for example, your funding needs will be very different from those of a high-tech entrepreneur seeking funding for the development of a new software programme.
A guide to the types of funding available in South Africa
This comprehensive BizConnectTM guide outlines the various options available to entrepreneurs that are seeking funding:
Related: Starting your own business in 23 proven steps
Funding Guide: Debt finance
Debt finance is basically money that you borrow, typically from a bank or various other financial institutions, to finance your business. This is when a business must raise capital by borrowing it from a lender. In exchange for loaning the money, the individuals or institutions become creditors of the business and are entitled to the payment of interest and to have their loan repaid at the end of a given term.
This type of funding can be long-term or short-term. Long-term debt financing usually helps to cover a business's need to buy basic necessities, such as facilities (business finance), and equipment and vehicles (vehicle and asset finance). Short-term debt financing includes debt securities with shorter repayment periods and is used to provide for day-to-day needs such as inventory and payroll.
Although the term debt financing arguably tends to have a negative undertone, start-up companies often use this form of financing to kick-start their operations. Even the healthiest of corporate balance sheets will include some level of debt. The most popular source for debt financing is the bank, but debt can also be issued by a private company and most commonly by friend or family member.
Debt finance organisations in South Africa
The National Empowerment Fund
Funding guide: Bank finance
Keep in mind that banks typically only offer finance to businesses that have been successfully running for a year or more, with a proven track record in hand. You can develop a track record by opening a business account, as this will assist you in keeping your personal accounts separate from your business and enable you to clearly see where you’re spending money and where you’re making it.
An overdraft is the ideal way to manage your cash flow. It is a credit option, which allows you to borrow until you reach your limit. This option is usually connected to your business account to help you keep track of much you’ve spent. It's quick and easy to arrange, the cash is available when you need it, and you only pay interest on what you use, not on the full amount at which your limit is set.
This type of funding is one of the most common ways to finance your business and is your best bet if your need for money is fairly short-term – to cover start-up requirements, for example. You will need a business plan to present to potential lenders and to calculate how much money you need to borrow. If your business has no assets that can be used as security, the bank will probably require you to provide some personal assets or a personal guarantee as security.
Related: How to use crowd funding in South Africa
This is a form of funding to obtain the working capital needs of growing businesses. Standard Bank purchases approved trade debtor invoices with an agreed portion, usually 75%, being paid at the time of purchase and a similar portion paid on all future approved trade debtor invoices. You can apply for debtor finance if your business meets these criteria:
- Minimum turnover of R200 000 a month
- Receive repeat orders from your customers
- Sell on credit terms not exceeding 120 days
- Trade with suppliers of sound financial standing
- Have few trade disputes
- All financial controls and administration should be fully computerised, allowing you to produce a monthly income statement and balance sheet.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
Asset finance enables you to buy movable assets and equipment in a way that makes it easiest to manage cash flow. Banks finance all types of capital equipment, from vehicles and office furniture to heavy duty machinery. Standard Bank Vehicle and Asset Finance's Specialised Finance Department provides advice on the financing of:
- Agricultural equipment
- Commercial fleets and buses
- Computer installations (network and mainframe)
- Earth-moving equipment and material handling
- Fishing vessels
- Machine tools
- Mining equipment
- Plant and machinery
- Radiological and medical equipment.
If you think that bank finance is going to be the most viable option for your business, here are a few tips to help you in the process.
Funding guide: Angel investors
Keep in mind, promising start-ups that have been in business for roughly two years and show high potential for success appeal to angel investors. In return for funding, you will need to share partial control or equity of your business, as well as provide a return on investment to the funders. It will depend on you and your business if it is well-suited to sharing equity.
Unlike banks or other financial institutions, angel investors are willing to take a chance and invest smaller amounts of money in high-risk businesses, with the hopes of gaining high returns within a set period of time (usually five to ten years).
These wealthy individuals use their own funds to finance projects that they believe will be lucrative, or where they can use their talent and skill to mentor new entrepreneurs. They will invest in your business and can help you sustain it until you can scale.
Angel capital fills the gap in start-up financing between friends and family and large venture capital investment – it is usually difficult to raise more than a few hundred thousand rand from friends and family, and most traditional venture capital funds usually only consider multi-million rand investments. This funding opportunity is therefore a common second-round of financing for high-growth start-ups. From the angel’s perspective it is high risk, and so they will expect a high return on investment to make it worth their while.
Related: How to make a sought-after funding proposal
Angel Investors in South Africa
Angel Investment Network
Angel Hub Ventures
Here are some additional tips that you can read through if you are considering angel investors as a funding opportunity.
Funding guide: Private equity
Private equity consists of money from third-party investors that is pooled together and then invested into other businesses. They can commit large sums of money for long periods of time. Private equity companies usually seek to invest large sums of money into big businesses, but there are smaller private equity firms in South Africa that may be interested in making smaller investments. Be warned though, that securing private equity can be a time-consuming and challenging process.
Private equity firms usually look for entrepreneurs who have contributed to their businesses using their own funds, have a solid credit history, a well thought out business plan and the necessary experience and skills to successfully operate in their chosen field.
A private equity investor is usually looking for:
- A business owner with vision, self-confidence, drive and energy, with aspirations to grow their small business.
- A clear team leader and team with complementary expertise, for example, management, marketing and finance.
- Knowledge of market, potential to grow within your market and an innovative product.
- A product or service with a competitive edge or unique selling point.
Keep in mind that this type of funding usually requires part-ownership of the business and a share of the profits. However, a private equity investor doesn’t want permanent ownership of your business, they’ll want to ‘exit’ your business within five to seven years by selling shares. Private equity investors will also require a return on investment of at least 35% a year.
Private equity is typically an option for a business that is demonstrating rapid growth, often through some kind of product innovation. Ensure this is the right funding option for you and your business before committing to it.
For majority of small to medium-sized businesses, this type of funding necessitates fundamental changes. The potential rewards are great, but you as a small business owner will need to be prepared to make the sacrifices that go with reporting to external investors and delegating to a larger management team.
Related: The secrets of crowd-funding your business
Private Equity Funding in South Africa
Funding guide: Venture capital
Venture capital (VC), a type of private equity, is equity funding provided by outside investors into early-stage, high-potential, high-risk ventures in return for above-average returns. The VC capital fund makes money by owning equity in the companies it invests in, which usually offers a new technology or business model in high-tech industries.
This form of funding is attractive for new companies with limited operating history (and a tried-and-tested concept) that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, they usually get significant control over company decisions, in addition to a significant portion of the company's shares and future value.
VC funds provide strategic direction to ultimately grow investments to a profitable exit. This includes experience and insights into international expansion, legal requirements regarding exchange control and intellectual property (IP) protection and an international contact base to open doors for entrepreneurs. Among the main advantages of VC is that investors only realise their investment if the business does well. If it fails, there is usually no obligation to repay the investment.
VC’s usually assist in four stages in your business’ development:
- Idea generation: This is where you’ll receive low level financing to help prove a new idea.
- Start-up: VC’s help with early stage businesses that need help with elements such as marketing or product development.
- Growth: When your business has survived the start-up stage and it is thriving, you may need funding to help you reach the next level of development. At this stage the funding is usually for the option to make more of whatever your business currently does.
- Exit: This is where VC’s help you to finance the ‘going public’ process for your business.
It’s essential that you do your homework before applying for venture capital to ensure that your offering matches their preferences. For additional advice on applying for this type of funding, click here.
Private Equity Funding in South Africa
Related: Grants, funding and incentives for agriculture in South Africa
Funding guide: Government funds
South African government funding assists previously disadvantaged South Africans to develop new businesses. Government funding is typically also focused on high growth sectors that will improve job creation. There are also specific requirements to meet for each type of funding, otherwise your business won’t qualify.
Department of Trade and Industry (DTI)
The DTI provides financial support to qualifying companies in various sectors of the economy. Financial support is offered for various economic activities, including manufacturing, business competitiveness, export development and market access, as well as foreign direct investment.
The DTI has multiple funds underneath it, including the Film Incentive Programme, Clothing and Textile Competitiveness Improvement Programme (CTCIP), Aqua-Culture Development and Enhancement Programme, as well as the Automotive Investment Scheme.
If your business doesn’t fall within the parameters of the DTI’s specific funds you can always apply for the more general options in hopes of receiving government funding. For example, the Black Business Supplier Development Programme, Isivande Women’s Fund, Business Process Services, as well as the Critical Infrastructure Programme.
Khula Enterprise Finance
Khula helps SMMEs to secure loans from banks. It does not lend money itself. Khula also provides mentorship to entrepreneurs, helping them to manage their businesses successfully. The mentorship programme includes the transfer of skills on a face-to-face basis, the development of viable business plans, and pre- and post-loan services.
The purpose of the Khula Fund is to:
- Organise early-stage debt funding to qualifying small- and medium-sized businesses that are majority owned by South Africans.
- Assist smaller businesses in rural and peri-urban areas of South Africa.
- Promote black economic empowerment (BEE).
- Improve access to finance.
- Improve job creation.
- Encourage meaningful economic participation of black South Africans.
- Foster entrepreneurship for both men and women in the small- to medium-sized business sector.
South African Micro Finance Apex Fund (SAMAF)
SAMAF gives financial services to small-scale entrepreneurs living in rural and outer urban areas. SAMAF does not lend money directly to the public. It uses existing institutions within communities to handle the funds and lend to qualifying entrepreneurs. SAMAF has three products:
- The Micro-Credit Fund (gives loans to entrepreneurs).
- The Capacity Building Fund (gives funds to be used for equipping the institutions with skills, systems and equipment).
- The Savings Mobilisation Fund (encourages savings).
SAMAF is specifically targeted at young people between the ages of 18 and 35. The target market is survivalists, micro, small and medium businesses including co-operatives that fall within the following funding options:
- Survivalists and microenterprises - loans between R500 and R50 000
- Small Enterprises - loans between R50 000 and R1 million
- Medium enterprises – loans between R1 million and R5 million
Related: 5 Early funding mistakes that can kill your company in the long run
National Empowerment Fund (NEF)
The NEF's role is to support B-BBEE. It anticipates future funding and investment requirements to assist black entrepreneurs and communities achieve each element of the BEE Codes of Good Practice. These include a focus on preferential procurement, broadening the reach of equity ownership, transformation in management and staff, while preventing the dilution of black shareholding.
The NEF differentiates itself not only with a focused mandate for B-BBEE, but by also assuming a predominantly equity-based risk to maximise the empowerment dividend. It applies sound commercial decisions to support national priorities and government policy, and targeted investments through the DTI’s National Industrial Policy Framework (NIPF). The work of the NEF therefore straddles and complements other development finance institutions by allowing the organisations to work in close collaboration with each other.
Funding guide: Government grants
The difference between government funding and grants is that grants don’t have to be repaid, but they do require a considerable amount of paperwork. You will also be required to account for exactly how you spend the money.
Black Business Supplier Development Programme (BBSDP)
The Black Business Supplier Development Programme (BBSDP) is a cost-sharing grant offered to black-owned small enterprises, to assist in improving their competitiveness and sustainability, and to become integrated into the mainstream economy and create employment.
Enterprise Investment Programme (EIP)
The Department of Trade and Industry's (DTI's) Tourism Support Programme (TSP) is a sub-programme of the Enterprise Investment Programme (EIP). It is a targeted incentive, aimed at supporting the development of tourism enterprises, thereby stimulating job creation and encouraging the geographic spread of tourism investment. The TSP is targeted at both local- and foreign-owned entities and offers a cash grant of up to 30% towards qualifying investment costs in furniture, equipment, commercial vehicles, land and buildings required for establishing a new tourism facility or expanding an existing tourism facility.
Support Programme for Industrial Innovation (SPII)
The Support Programme for Industrial Innovation (SPII) is designed to promote technology development in South Africa's industry, through the provision of financial assistance for the development of innovative products and/or processes.
The Co-Operative Incentive Scheme (CIS)
The Co-operative Incentive Scheme (CIS) is a 90:10 matching-cash grant for registered primary co-operatives (a primary co-operative consists of five or more members). The CIS is an incentive for co-operative enterprises in the emerging economy to acquire competitive business development services and the maximum grant that can be offered to one co-operative entity under the scheme is R350 000.
As you go out to kick-start your new venture, give some careful thought to where your funding is coming from and if it’s the right type of cash-access tool for you to realise your dream of starting your own business.