Startups need access to capital to kick start their operations and optimize their potential opportunities.
You have a fantastic business idea that solves a problem and is geared to add value to your customers. The main question on your mind is how to finance your business.
Identifying and accessing the right kind of funding is important from the word go. Funding options include: bank overdrafts, term loans and equity finance. We now have new forms of business finance such as crowd funding, accelerators and venture debt.
There are typically two ways to fund a business:
Equity financing involves the sale of a percentage of the business to an investor in exchange for capital.
Debt financing involves borrowing a money from a lender such as a bank. The money is paid back with interest.
Your Own Funding
Using your own funding for your startup company has its pros and cons. If you get your startup company up and running by using your savings, you maintain 100 percent ownership and 100 percent control. If the company goes under, your money goes with it – you lose your startup capital. If you partner with investors or lenders such as the banks, you share the risks and rewards.
Angel investors can be a great way of raising capital. Angel investors are individuals or groups that seek to grow their capital or funds by investing in startup ventures that they believe are viable. They learn about potential investments through websites, trade groups or referrals from other investors.
Strategic or corporate-backed investment funds are a growing force in South Africa and other countries in Africa. Some large companies have an internal venture investment unit. Partnering with strategic investment partners might be a great way to kick start your business. This can present a number of advantages. They include: potential access to low cost capital, industry guidance, market credibility and access to customers.
Government investment funds or grants
The government is trying to create jobs and promote economic development and prosperity through strategic government investment funds and grants.
You can access funding from key institutions/ agencies such as the following:
- The Department of Trade and Industry (DTI)
- National Youth Empowerment Fund (NEF)
- National Youth Development Agency (NYDA)
- Industrial Development Corporation (IDC)
- Small Enterprise Finance Agency (SEFA)
Taking on debt may be a more attractive option than diluting the ownership stake of the business through equity ownership. While traditional banks may not be a viable option for some startup companies, there are players in the lending arena who are willing to take more risk (usually for a higher return) to lend to startups.
Short and medium-term solutions
Banks offer a variety of business finance loans to support your start up needs and subsequent business sustainability and growth needs.
- Business term loans
You can startup and flourish your business by accessing a business term loan at a fixed or floating rate. A term loan is a loan facility from a bank for a specific amount. It has a specified repayment schedule.
- Business overdraft
Access funds to support your working capital requirements and improve cash flow. An overdraft is a flexible borrowing facility on your business current account. It is usually offered for a period of 12 months. The interest is calculated daily on the overdrawn balance.
- Vehicle and asset finance
This is a short to medium term financing facility for buying moveable assets such as motor vehicles. This is ideal for agriculture, manufacturing or other businesses.
- Property finance
You can access commercial property loans from reputable banks. The loans are designed to fund or refinance property for business purposes.
- Structured trade services
Banks offer structured trade services. They provide sophisticated trade solutions and risk-hedging instruments.
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