The country is relying on SME’s to create jobs, 11 million jobs by 2030 to be precise. Depending on where you get your stats, SME’s contribute between 20%-42% to the country’s GDP. 70% to 80% of small businesses close within the first year of operation. Thereafter, only about half of the survivors will last for the next five years, many small business failures are due to lack of funding or cash flow difficulties.
Gurus in this space advise to borrow cash, only if it’s essential, and this move should be preceded by cash flow planning and forecasting. What is the opportunity you are chasing and what’s the return? If returns exceed the cost of credit, that’s good for the business. Use your own money as far as possible. If that’s running out, and you’re onto a good thing, see if family and friends can’t help before going the formal route.
Sources of funding
Friends and family
This is potentially a good source of finance because these investors may be willing to accept a lower return than many other investors as their motivation to invest is relational and not purely financial.
The Angel Investor or Venture Capitalist
An Angel Investor is a wealthy individual willing to take the risk of investing in SMEs looking for a big reward. They are typically willing to invest in start-ups in the initial stages of their business venture, when most investors consider this period too risky. These are rare and often particular about where they invest. They are also useful as they will often have business acumen and many useful contacts. Ensure you get the right value if you give equity.
Venture Capitalists ensure their returns by selling the company to a bigger company operating in the same trade or by growing the company to such a size that a stock exchange listing is possible. Similar to Angel Investors, they are well connected in the business community and are willing to provide significant finance to the right business, but will, in return, require a significant stake in the business.
Bank Finance
Banks will often need large capital assets like property or machinery as collateral when giving loans so that if you default, they have the asset to sell as a guarantee. Banks often require personal guarantees from the owner-manager of the SME, which means they risk personal wealth to fund the company. When applying for credit, make sure you know the full cost of the credit. You should know about the interest but also, the bank fees charged, monthly fees and upfront establishment fees. Bank finance is also a slow process so be sure to apply early.
Banks are the least likely source of funding for SMEs. 75% of small businesses do not apply for finance because they are either scared, or feel that they would not qualify for a loan. Banks and government lenders view SMEs as a less attractive investment opportunity due to perceived high levels of uncertainty and risk. This has been evident from the lack of business funding provided by banks to SMEs despite being guaranteed by the government.
Crowdfunding
Crowdfunding involves funding a venture by raising finance from a large number of people (the crowd) usually via the internet. There are now in excess of 500 crowdfunding platforms on the internet and over 400 crowdfunding campaigns are launched every day. Popular sites include Thundafund, Uprise Africa, Jumpstarter, GoFundme and Kickstarter.
Alternative sources of funding
Retail Capital and Yoco both have payment structures that are tailored to your business turnover and cash flow cycles. A cash lump sum is transferred into your business’ bank account in exchange for a percentage of your future turnover, which will be paid until the agreed amount is paid back. The payment options are flexible with Retail Capital and can be fixed or match the cash flow cycles of your business. The payment terms for Yoco are estimated based on previous trading history, but will all depend on your future business performance.
Fundrr provides tailored unsecured funding with same day feedback using advanced algorithms to assess the businesses they fund. Their requirements include 6 months of asset ownership, 3 months of trading and over R30K in turnover per month. Repayments are in 3-12 months and can be done; daily, weekly or monthly. Your Fundrr score will determine your interest and this will depend on your turnover, duration of the loan and the frequency of your repayments.
Bridgement offers finance to businesses registered in SA, with an annual turnover of R500 000 and a trading history of six months. You can borrow between R20,000 – R5 million in funding. The fees vary, and customer behaviour and performance will contribute to the rate. For Xero customers, you are able to integrate your Xero account and streamline the application process.
Lulalend is an online provider of business funding where you can get approval in less than 24 hours.You can apply for between R20 000 – R2 million and repay it over a six or twelve-month period. Fees are between 2-6% per month of the amount borrowed. For Xero customers, they have a simple application process that will speed up your financing needs.
Business Fuel offers business loans up to R3 million in less than 72 hours.To apply for business funding, all you need is 12 months of bank statements, no personal balance sheet, business project plan, cash flow forecasts or historical financials.
Better Banc will offer business funding of between R20 000 – R1 million, with a flat fee and no interest. The repayment period is from 6 – 12 months. No equity stakes, board seats, or warrants required. Better Banc will let you know about your funding within 24 hours of application and the application is a simple 5 minute process.
Final Thoughts
We have provided a few options available both in the traditional and alternative space when in search of funding either for starting your business or to bridge a gap in your cash flow. Every source of funding has tailored packages for what you have and what you need. Ultimately, you, as the business owner, have to make the decision on which to choose, depending on what you can afford and what suits your budget and cash flow plans. Our team at Iridium are here to help you navigate this journey. Get in touch with us if you’d like to chat further about your business and its cash flow needs.
