One of the biggest hurdles facing aspirant entrepreneurs in South Africa is raising working capital to start a small business. You may have the best product or service on the block, the best talent around and a wide-open gap in the marketplace, but without sufficient funding, your enterprise might be dead in the water. Here’s how to get business finance for your small business…
Why do new business ventures fail?
Paradoxically, the very things that cause most new businesses to fail – a lack of cash and a lack of how-to skills – are both in abundant supply. The trick lies in knowing where and how you can access business finance.
Before you even begin trying to secure a business loan you need to establish in which category your business falls. Is your business a:
- Survivalist Enterprise – i.e. your business earns you just enough to stay alive, such as selling fruit at the train or bus station?
- Micro-Enterprise – i.e. a sole proprietorship, with an annual turnover of less than R300 000?
- Very Small Enterprise – i.e. part of the formal economy, and includes skilled tradesmen and technicians (like plumbers, tailors, electricians and IT specialists or licensed professionals) with a staff of approximately ten people?
- Small Enterprise – i.e. an organization of up to 100 staff, and with an annual turnover of less than R5 million a year (distribution, manufacturing, transportation, sales, trading industries)?
- Medium Enterprise – i.e. with more than 199 full-time staff, with fixed premises like offices, workshops, small factories, showrooms, as well as technology, machinery, plant and specialist equipment and tools and a turnover of up to R20 million a year?
Next, you need to prepare a business plan, without which most lenders or investors won’t even consider your request.
Types of Business Financing
Once you know what sort of business you’re operating, you can consider the various types of business funding available.
- Private funding – also known as mom-and-pop-finance, private funding consists of your own savings and whatever money family and friends can lend you.
- Government funds for small business – a large source of business funding is from the State coffers via different funds in the form of credit guarantees, grants and unsecured loans. While these funds can be useful, be warned – there is much red tape involved. State funding is available across a wide spectrum of business activities, in areas such as IT, construction, manufacturing, tourism, agriculture and franchising. One of the best government assistance plans for small business is the Khula Credit Indemnity Scheme, which operates via retail banks or Khula regional offices. Khula enterprise finance is most suitable for entrepreneurs without collateral or other security, and who are looking to expand their business ventures. Khula’s mentorship programme is particularly valuable for help with the loan application process and initial assessment of your business plan. Working capital can also be accessed via the Small Enterprise Development Agency (SEDA). SEDA is part of the Department of Trade and Industry and offers a one-stop shop for entrepreneurs. Entrepreneurs under the age of 35 can get business finance from the National Youth Development Agency.
- Bank Finance for start-ups – The major financial institutions all offer business funding via various means – credit cards, revolving credit, overdrafts, debtor finance, and asset and property loans. Some banks have special loan packages for start-ups, emerging businesses and franchises. Unlike government funding, bank loans must be repaid in full, with interest. You will need to supply collateral and have a reasonable credit history.
- Venture and Equity Capital – An equity investment is capital in exchange for shares in the company. As a rule, you can forget about private equity to raise working capital unless you’ve already established a successful business; you’ve got a unique, patented, new technology; or big name partners on board. For more about angel investors, seed money and early-stage capital, see the South African Venture Capital and Private Equity Association.