Funding Your Smaller Business
Many South African entrepreneurs assume that the only source of financing for a business is a loan – from a commercial bank or a development agency. This is a dangerous fallacy as:
- Many business ventures never start as the funding is never obtained as funders prefer to provide growth rather than start-up finance
- All your energy goes into getting the loan rather than developing the opportunity thus still fail when financing is successful
- It increases your risk – if the business fails and you can’t repay the loan, you are negatively listed with the credit bureau
So what are the alternatives?
- Starting very small and investing the profits into the business has fewer risks and lets you learn the rules and develop your skills in a less complicated business. You also have an opportunity to validate demand (for your products and service) from customers, thus avoiding vanity products. Sometimes people start cash-generating businesses in another field to generate the cash to fund the more significant opportunity.
- Getting family and friends to invest in the business. Because they have an interest in the success of your business, they become an essential part of your network of useful people that increase the likelihood of success.
- Enter into a Joint Venture with your supplier and your customer.
- A supplier will sometimes give you credit to get going – on condition they have confidence in your plans, and you agree to continue buying from them
- A customer may well pay in advance for products and services you will supply in the future. This often happens when a larger business wants to outsource (get someone else) to do the work that they are currently doing in the business
- Start an investment club with your friends and take turns at drawing the capital. This is like a stokvel:
Once you have successfully started a business with alternative sources of funding it is much easier to get a loan for funding – you have a track record, and the company has some of its own capital – the banks call this gearing. It’s the proportion that you need from the bank compared to the portion of your own money you have in the business already. You have to ensure that you are managing your business and its finances in a manner that quickly demonstrates good stewardship through your financial documents such as management accounts.
This fallacy (of loans as the only source of funding) is much worse in South Africa than in other countries and may be one of the reasons why so fewer people start businesses here. While it is true that SA banks are under pressure to lend more to smaller companies, there are limits to the risks they can take. The government and the banking association of South Africa are working on enabling easier access to finance and supporting SME readiness, and several players are coming into the small business financing market but whatever the eventual solutions, you have to improve your chances of success through the above strategies and continual learning.
One way of developing your skill and funding your business is to ask successful entrepreneurs how they did it and what advice they would give you in starting or growing your business. Share those excellent ideas with others.
Henry Sebata is the Managing Partner at Avocado Vision. Helping small businesses grow by making better decisions from building business acumen is the core of Avocado Vision’s work .
Call: 011 614 0206.