Many small and medium-sized enterprises (SMEs) tend to overlook or underestimate the reasons why businesses may require funding.
They also overlook the available credit options offered to them by banks and other funding providers, according to Louise Naidoo, product head, FNB SME Lending.
Naidoo said that business owners have variant perspectives for the usage of credit or capital.
Some business owners may use credit to alleviate immediate financial pressures, while others may never consider using business credit at all due to the perception of high fees and interest rates, fear of debt, or a preference for self-funding.
Naidoo shares some reasons people require funding for their businesses:
– To fill cash flow gaps when you need it, covering day-to-day operational expenses, such as inventory, payroll, and utility bills.
– To grow or expand your business, by opening at a new location, entering new markets, or launching new products or services.
– To invest in technology infrastructure, software, or customised systems to improve your business productivity, automate processes, or enhance your customers’ experiences like enabling e-commerce capabilities.
Here are six ways business owners can get funding for their businesses:
Government funding
The South African government will offer funding to entrepreneurs for their businesses if they can impact the economy.
Government offers five types of grants:
Grants - Grants from government offer 100% of the funding required; however, the money does not need to be repaid.
Cost-sharing grants - This type of grant usually finances a percentage of the money required, and the entrepreneur will have to raise the rest of the money.
Incentives - An incentive grant will only payout the money once the contract, service, or project that the entrepreneur needs the funding for is completed.
Tax incentives - This will allow a business to pay back a percentage of the funding it owes by deducting the money from the tax it pays the government.
Equity funding - Government will offer the entrepreneur finance for the business in exchange for a percentage ownership of the business or a share of profits.
An entrepreneur will need to meet the following criteria to be eligible for government funding: a registered company, B-BBEE certification, tax clearance, a company profile, and a business plan.
Bootstrapping
The business funds itself. Bootstrapping, also known as financial bootstrapping, is when an entrepreneur starts a company with little capital, relying on their own funds rather than outside investments to build the business. As the business grows, they use the profits for further growth.
Crowdfunding
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.
Crowdfunding has grown in popularity, largely because of the Covid-19 pandemic in 2020. In South Africa, there are a variety of crowdfunding platforms that entrepreneurs can use to get funding for their businesses.
The three primary types of crowdfunding are:
Debt-based crowdfunding: An entrepreneur seeks to borrow money from individuals or groups to fund their business and promises to repay the amount borrowed.
Equity-based crowdfunding: entrepreneurs raise money for their business by selling off part of their company in exchange for capital. Equity-based crowdfunding is also known as investment crowdfunding.
Rewards-based crowdfunding - crowdfunding that involves people contributing to a business in exchange for a reward, such as the product or service that the company offers.
Venture Capital
An entrepreneur who is just starting a business can go down the venture capital route when seeking funding.
Venture capital is offered to early-stage enterprises by companies that show potential for growth. However, in exchange for funding, the venture capital firm may require certain decision-making powers or an ownership stake in the business.
Angel investor
An angel investor is a high-net-worth individual (HNWI) who offers an entrepreneur’s start-up funding in exchange for a piece of the business.
Angel investors are more likely to invest in firms that are recommended by trusted individuals. Therefore, it is important that an entrepreneur network in the business community to get a referral.
Traditional financing
Entrepreneurs can look to the traditional and more common ways of getting funding for a business: a business loan from a bank.
In South Africa, entrepreneurs can apply online to qualify for a business loan, and one of the requirements for the business loan can include that the business has been successfully trading for 12 months.
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