Funding Your Smaller Business in South Africa
Most businesses don't manage to secure start-up funding. That doesn't mean you should give up though – just change your strategy to achieve success.
Sourcing funding is one of the significant challenges cited by entrepreneurs starting or growing a business in South Africa. 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.
The next assumption is that they can't launch without money, and so all their energy goes into sourcing a loan or an investment.
These are both dangerous fallacies:
- Many business ventures don't start as the funding is never obtained. Funders prefer to provide growth rather than start-up finance, and so early-stage entrepreneurs who can't secure funding give up on their ideas.
- All your energy goes into getting the loan rather than developing the opportunity, thus the start-up still fails, even when financing is successful
- It increases your risk – if the business fails and you can't repay the loan, you are negatively listed with credit bureaus with all the terrible things this brings with it.
So, what are the alternatives?
Bootstrapping your business
Bootstrapping is all about organically growing your business with your own cash.
Starting very small and investing your profits back into the business has fewer risks and lets you learn the rules of the game. You'll also be developing your skills in a less complicated business.
Even more important, you'll have the 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.
Family, friends and partners
Because they have an interest in the success of your business, family and friends become an essential part of your network of useful people that increase the likelihood of success.
Alternatively, you can 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 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.
Growth through loans
Once you have successfully started a business with alternative sources of funding, which are much easier to get then loan funding as a start-up, you can turn to more traditional options.
You now 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.
Pulling it all together
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 few people start businesses here.
While it is true that South African 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.