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Finance for your start-up

08 April 2012 - 02:16 By Tina Weavind

There are numerous options to obtain funding to get a small business off the ground, writes Tina Weavind

A lack of funding is probably the single biggest excuse potential entrepreneurs use for failing to get their businesses off the ground. Funding isn't easy to find, but it's not impossible.

A thriving small and medium business sector has long been recognised as one of the answers to South Africa's unemployment problem, and a multitude of development finance institutions have been created from which risk capital may be sourced.

One of the problems with institutional funding is that it's tough to get through the red tape, and you could be bankrupt before you've complied with all the basic requirements.

But if you can get a good guide and refuse to give up, that might be a good place to start. It's not the only place, though. The commercial banks are still primary funders of new businesses, and venture capital, including "angel" investment, is becoming an important driver of early-stage businesses.

Then there is bootstrapping, which is how Richard Branson, Steve Jobs and Bill Gates went about making their fortunes.

BOOTSTRAPPING means funding your start-up with little or no outside capital. It's slower, tougher and less sexy, but growing a business by bootstrapping has numerous benefits, the most significant being that there is nothing to pay back . The business owner is completely invested, believes in the business and is prepared to sweat blood to get it off the ground. When the time comes to take it to a new level, investors or financial institutions will be more disposed to handing over cash to a proven, debt-free business than one that is bonded or has swapped equity for capital.

The trick to bootstrapping is to generate a cash flow. You could sell your car, as Jobs did; you could keep your day job initially; or you could refinance a property or rent out a room in your house. But paying customers are the best possible way to fund any operation, so getting your fledgling business operational as quickly as possible, with as few overheads as you can get away with, is paramount.

Try to convince your suppliers to let you order goods on 60- or 90-day terms to give you cashflow breathing space, but be fastidious about paying when you say you will. Free up cash by leasing equipment, rather than buying it; hire as few people as possible; and use your bedroom or garage as an office to keep fixed costs at a minimum.

Owners of bootstrap start-ups constantly manage their finances and must consider where every cent goes. Things like a chi-chi office and a secretary are needed only once the business is flying and the expense can be justified.

ANGEL INVESTMENT is becoming increasingly entrenched in South Africa, says Martin Feinstein, CEO of Traction Enterprise Development Consultants. The term describes anyone who is prepared to fund a start-up - and that technically includes your mom and dad, who just want you out of the house. But the reference is usually to people who will put money into an early-stage business with the intention of having exponentially increased their outlay when they exit three, five or 10 years later.

Funding is usually given in return for equity, and the risks are typically high, as are the returns. But it is this willingness to fund a high-risk operation that makes angel investing useful for the aspiring business owner - it's a place to get funding when financial institutions won't look at you.

Also, unlike venture capitalists, angel investors are typically quite flexible, because they are investing their own money or that of a limited syndicate, and they are often not under as much pressure to exit from an investment in a specified time frame.

A lot of angel investing is directed into industries and sectors that the majority stakeholder is involved in or has ties to. Often this is because the angels want to put money into projects they understand and believe in, but also because they want to be proactive in the running of the operation.

Go to www.investmentnetwork.co.za to find businesses seeking funding, as well as angel investors and syndicates looking for investments.

VENTURE CAPITAL is a method of financing in which funding is provided for anywhere between 25% and 75% of the business. Mezzanine financing is another funding construct in which funders provide a cash outlay for a combination of equity and debt. The fund managers often get involved in the running of the business to some extent, and exit after five to 10 years.

Venture capitalists are often specific about which part of a businesses life cycle they want to invest in. Some prefer the start-up stage, where the risk is highest, as are potential returns. But they might also deal only with second-stage financing to help grow the business once it's off the ground. There are also venture capital companies that will only fund buyouts of companies.

The South African Venture Capital Association (www.savca.co.za) has a list of names of funds, and minimum and maximum amounts that are available for funding, as well as industries the various funds are interested in.

VENDOR FINANCING is a way to get funding from your suppliers. One of the most common ways is through franchising, in which the franchise operator partially funds the franchisee for an agreed return.

Big distributors like a brewery or a fast-moving consumer goods company might decide to outsource distribution and so help a group of people become owner-drivers of branded vehicles that are used to distribute the wares.

A similar process might happen in a business with expensive equipment, such as telecommunications and mining, in which the supplier helps finance companies to buy their products.

COMMERCIAL BANKS: one of the most common ways start-ups are funded, according to Feinstein, is through personal loans and home loans. While this is frequently under the radar and not necessarily the intention of the commercial banks, the reality is that small business loans are notoriously difficult to get.

Feinstein says the irony is that if you are able to get a substantial overdraft or loan, your balance sheet is probably quite strong and you probably don't need the loan.

Where the banks are forthcoming, however, is where an enforceable contract is in place - for example, you have won a big tender and the bank is virtually guaranteed to see a return on its investment.

MICRO FINANCE is one of the fastest-growing areas of funding. In micro finance, recipients might get as little as R500 to start a small business like a hawking operation. There are several funding programmes locally that can be tapped to get such businesses off the ground, one of which is the DTI-affiliated South Africa Micro Finance Apex Fund (Samaf). One of its major aims is to create links with other community-based partner organisations like the financial services co-operatives , village banks and medium to large micro-finance institutions to help foster small businesses .

KHULA ENTERPRISE FINANCE is a development initiative that has been created to get small and medium businesses off the ground.

Khula has a variety of funding options, one of which is the Khula Credit Guarantee, a loan issued in association with the big four commercial banks. You can get loans of up to R350000, and Khula will back you for up to 90%. The 10% input that must be provided by the business owner is to ensure he or she is invested in the business and interested in making it work. To get funding, you will need to provide a reasonable business plan and meet certain other requirements.

Black entrepreneurs requiring a loan larger than R350000 can also look at Khula's small and medium enterprise fund or the Enablis Khula Loan Fund - associated with First National Bank - which enables entrepreneurs with approved viable and sustainable business plans to get funding of between R100000 and R2.5-million. Enablis fund loans are subject to approval by FNB's credit process.

The list of Khula loan offerings is far more extensive than this, and aspiring business owners could do worse than investigate the possibilities. Strict terms and conditions will need to be adhered to before funding is granted.

There are a variety of other development finance institutions , all of which are geared towards helping the small business get off the ground. These include the Small Enterprise Development Agency , National Empowerment Fund , Franchise Association of SA and a host of province-based organisations. Strict guidelines must be adhered to for funding to be made available. Viable business plans will need to be presented, and sustainability will need to be convincing.

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