Advice for self-funding your business
Even entrepreneurs who secure external financing may have to add their own money
THE GOVERNMENT has recognised entrepreneurship as a key driver of economic growth, but the reality is that many budding entrepreneurs rely on their personal savings to start and build their businesses.
Referring to the 2018 Real State of Entrepreneurship Survey, which found that 88 percent of South African entrepreneurs are self-funded, Gugu Mjadu, a spokesperson for the 2019 Entrepreneur of the Year competition sponsored by Sanlam and Business/ Partners, says it is no wonder that a lack of funding remains one of the primary barriers faced by young entrepreneurs.
“Despite there being various institutions with finance available for local entrepreneurs, young entrepreneurs are often unsure of how to go about the application process, or lack the collateral required to obtain adequate business financing,” says Mjadu.
She says even those who do secure funding may have to supplement it with their personal funds. Either way, this should not deter you, as a young entrepreneur, says Mjadu. She offers the following tips for self-funding your entrepreneurial dreams:
1 Draw up a detailed business plan.
Just as you would be required to do if you were applying for external funding, Mjadu says the first thing any self-funded entrepreneur should do is to draw up a comprehensive and well-motivated business plan.
“From a financing perspective, pay specific attention to the risks and rewards associated with the total investment required. To do this, it helps to focus on four key areas: the business itself; the management of the business (the entrepreneurs involved); the market in which the business operates; and the financial plan and projections.”
2 Define realistic funding requirements.
Once a detailed financial plan is in place, Mjadu says you should set realistic funding requirements, based on the business’s needs.
“Based on your business plan, you need to determine the level of funding the business requires at each stage of operation. These funding needs will vary depending on many factors, including the nature of the business and how much own capital the entrepreneur has, but they should be kept as realistic as possible.”
This helps to put things into perspective, says Mjadu, as the funding needs of entrepreneurs are often not as high as we may think. “The 2018 Real State of Entrepreneurship Survey found that 28 percent of entrepreneurs needed less than R10 000, while 30 percent needed less than R50 000.”
3 Separate and formalise your business savings.
From the onset, Mjadu says entrepreneurs should keep their business savings separate from their personal savings and investments.
“The funds you are saving for your business should be geared for maximum growth. This could be a highyield, fixed-term deposit account, a long-term investment product, or a dynamic and interest-bearing savings account, through which you could save business profits to yield growth in interest,” says Mjadu. “The type of vehicle you choose to use depends on things such as the time horizon you have to save, how risky you can afford to be, and how quickly you may need to access the funds.”
4 Be consistent.
While there are guaranteed to be some bumps along the way, Mjadu says that consistency is key when it comes to saving money towards self-funding your business.
“Just as you would with your retirement savings, you need to put away a set portion of money each month for your business dream. Setting up a debit order may be useful in this case, to avoid the temptation of spending the money elsewhere.”
5 Seek professional advice.
When starting a business, it is important to surround yourself with people in the know who can enhance your business. These range from an industry adviser who can be an experienced entrepreneur to show you the ropes within your industry, a financial adviser who can guide you on saving money, adhering to your financial plan and providing guidance on applying for external finance. Having a mentor providing guidance and emotional support can also go a long way towards alleviating the loneliness of the entrepreneurial journey.