Funding, or rather access to funding, remains the ever-present challenge for entrepreneurs in South Africa. Understanding what type of funding options you have is another challenge. Therefore, this article explores the funding options available in South Africa.
Many types of funding exist. What’s more, they can be divided into particular categories such as self-funding, government funding and loan types.
Grants
Grants are a type of funding distributed by the government. Business grants are aimed at developing businesses and can often be industry-specific.
A sum of money is usually pre-determined by the branch of government that is responsible for dispersing the funds and is allocated in a percentage. This is either a 100%, which means no repayment or matching of funds. Alternatively, a cost-sharing grant has a percentage that the government pays, but the rest of the money needs to be covered by the recipient.
Non-repayable grant does not imply that you receive money for free, because there are often a lot of requirements that you need to meet or programmes you need to participate in.
Angel Investors
Angels refer to funders who invest in your business for a share in the business. Often, their investment is also accompanied by mentoring or management control, so it is important to factor that impact into your decision-making.
Asset Finance
Asset financing is funding that is specifically allocated to purchasing assets that will help the business generate a larger income. This can include anything from manufacturing equipment to office equipment.
Bootstrapping
Bootstrapping is taken from the idiom of pulling yourself up by your bootstraps. Just as this saying has become known for, it means to fund your business through your personal finances.
People who bootstrap can use savings, funds from a bond, or previous investments.
Venture Capital
Start-ups may choose to investigate venture capital funding. This type of business funding is considered a form of private equity funding, and investors expect shares instead of loan repayment.
Venture capitalists invest in businesses that launch innovative products or services so that entrepreneurs can grow these offerings.
Crowdfunding
Crowdfunding relies on raising money through a public platform. Businesses that are crowdfunded on platforms like GoFundMe or Kickstarter use donations from any member of the public who wants to make a contribution (of any amount) to starting the business. Family or friends may also contribute to the fund.
Although crowdfunding has more risks involved than loans, for instance, it still has a lower barrier to entry than most types of funding.
Bridging Finance
Bridging finance is funding that helps build a bridge over the gaps in your cash flow. Where you might be a bit strapped for cash, this financing is a short-term loan to help inject capital into your business to enable it to cover the gaps between funding coming in. A good example of this is temporary funding until an asset is sold.
Working Capital Loans
Working capital loans are also a form of short-term loan, but it is specifically designed for covering day-to-day expenses such as paying salaries or buying stock.
This type of funding is beneficial when you find that your business has a quiet season, or that you need to increase your workforce before they are able to generate enough income for your business.
Bank Loans
When business owners think of financing, they often think of loans. The truth is that loans are just one type of financing for your business.
Two types of loans exist: secured and unsecured loans. Secured loans refer to the fact that you have assets to borrow money against, whereas unsecured loans mean that you have no collateral. In both instances, the loan needs to be repaid with interest.
Equity Capital
Equity capital, or equity financing, offers private or public stakes in a company in exchange for investment capital. This means that a business will be sharing profit with the investors, rather than repaying debt with interest.
As an entrepreneur who has identified their need for funding, you will also need to understand what type of funding you are looking for. Not only does this help you find the right type of funding that will meet your needs, but it will also help you find the right funder.
