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The Myriad of Funding Opportunities

  • An entrepreneur’s biggest hurdle

    Any entrepreneur will know that funding is usually the biggest challenge to overcome. For most entrepreneurs, the first step is to apply for a bank loan. More often than not, they get turned away because their business is too risky.

    But it doesn’t have to end there. The truth is that entrepreneurs have been knocking on the wrong doors. Given the many institutions and initiatives designed to take on risk, funding opportunities for start-ups are abundant. The problem is that entrepreneurs don’t know where to go. So, we’ve compiled a brief guide to help you out.

    We all love video, so here is a quick explainer video with the detail explanations provided below. 

    Which phase is your business in?

    The first thing every entrepreneur needs to understand is who the different investors are and how much risk they are willing to take on. A good indicator of this is where your business is in the business lifecycle. Introducing the J curve:

     

    If you are in the start-up phase, you are most likely spending money on set-up costs, leaving your revenue in negative territory. When your business eventually breaks even, it will enter the growth phase. And hopefully, if all goes well, your business will settle into the mature stage.

    SURVIVING THE START-UP PHASE

    1. You and the three F’s

    You are your best source for funding. Put as much of your own money as you can into your business. Not only does this show your commitment by putting your “skin in the game”, but it also enables you to maintain control of your business. Second to this, the three F’s are a great source too: Family, Friends or Fools who believe in you and your game-changing idea.

    2. Grants

    While grant funding may not be for everyone, there are various grants available. Your eligibility will depend on your industry, location, ownership status or impact on economic growth and job creation. Be aware that grant applications can take time and are not guaranteed, so don’t rely on this option too heavily.

    3. Angel Investors and VC’s

    Angel Investors are typically wealthy individuals willing to take a chance on a great idea with talented and passionate founders. Venture capital firms (VCs) take a similar approach. While these investors are willing to take on risk in the early stage of a business, their intention is to sell their stake at a profit once your business is operational. VCs typically don’t hold onto their investments for more than 5 years, but the specifics depend on the company. Be cautioned that VCs may want to be active and involved in the strategic direction of your business, so make sure you know and trust whoever you are partnering with.

    4. Crowdfunding

    Of course, there’s always the increasingly popular and modern crowdfunding route. These are fantastic online platforms, and we have a few good ones here in SA. Crowdfunding allows a start-up to raise funding from many individuals (family, peers, customers, investors) through the Internet in exchange for shares, prototypes or some other rewards specified by the platform.

    5. Competitions

    One of my favourite options – which not many people consider when looking for funding – is prize money from competitions. While this is not a conventional route, there are many competitions for small businesses and entrepreneurs in SA. Why not consider entering a few? You have nothing to lose and everything to gain, including the opportunity to refine your pitch. Even if you don’t win, it’s a great way to test your idea and viability against competition. You may even get some exposure should you make it to the final round. It also happens to be fertile ground for networking with other contestants.

    ACCELERATING THE GROWTH PHASE

    All the options available for start-ups can also apply to businesses that are in their growth phase. There are, however, a few more specific paths to look at involving niche financiers and innovative products.

    Niche financiers and Development Finance Institutions (both public and private) are willing to lend money to emerging companies but they require a small track record – maybe a year or two or minimum revenue. These financiers take on risk in exchange for some security e.g. equipment, buildings, cession of company shares and personal surety. So before you sign on the dotted line, make sure you understand exactly what the terms and conditions are. The following innovative products can do wonders to help SMEs manage their cash flow:

    Invoice discounting

    Not all clients will pay you on time for your product or service, yet you need to pay your suppliers and staff. These financiers will then buy these invoices from you at a discount and you can get the cash upfront.

    Bridging finance

    You may have landed a big contract or tender, but you need funds now in order to get the contract started and pay suppliers and staff before the client pays. Financiers will then lend you money for a few months on the back of this signed contract.

    Business Cash Advance

    Here, a lender will provide you with funding based on your future sales and you can pay it off based on a percentage of your monthly sales. So if you have a bad month, you can pay back less. If you have a particular good month, you can then pay the loan off more quickly. This is a very flexible and effective tool to manage unpredictable cash flows.

    MANAGING THE MATURE PHASE

    When managing the mature phase of your business lifecycle, you will most likely be faced with two main options: the more traditional option and the less conventional one:

    The traditional option

    Traditional banks prefer stable companies with solid track records. They may be willing to provide larger loans over a longer term, at cheaper rates than the alternative funders mentioned before. But this is mainly because the businesses they choose are considered less risky. Loan applications often take long and they may request taking security over the business assets.

    The unconventional option

    Private equity firms are similar to venture capital firms. Where VCs focus on younger, riskier companies, private equity firms look at more mature companies. Typically, they buy a minority stake in the company (less than 50%), leverage the business and then sell it at a profit in about 5 years. Similar to VCs, private equity funders will have a say in the strategy of the business. So make sure that you know and trust your partners, and scour those terms and conditions with a fine-tooth comb.

    Not all funding options were created equal

    There are pros and cons to every option mentioned here. The best way to make an informed decision is for the entrepreneur to understand the objectives of the various investors/funders. Investors are primarily driven by risk versus return. As the timeless phrase goes: the bigger the risk, the bigger the return.

    Typical bank funding looks at lower risk options, charges interest on loans and most probably asks for security. No matter how well or poorly the business is doing, the interest and capital needs to be paid. With higher risk on the opposite end of the spectrum, investors request a stake in the ownership of the business. While this may not sound expensive, it is actually the most expensive form of capital. When you give up part ownership of your company, you are giving up some of your control and future profits. While it is sometimes necessary to bring a co-founder or VC on board, you have to be very conscious of who you choose. This decision may have long lasting effects on your company and shouldn’t be based solely on who had money at the time. Choose carefully and deliberately.

     

    With all these options, you might be asking yourself where to find the key players. Simply log onto Entrihub and the answers will be waiting for you.

     

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