Some forms of funding start-ups can look at
From angel, to love money and more
Starting a business requires significant funding to cover startup costs and initial operations. This week, Chris Hani Joe Gqabi Seda business adviser Bayanda Mpahlwa explores the different types of funding available for new businesses.
Mpahlwa said credit loans were the most popular form of financing for small and medium-sized businesses.
“Every lender provides a different set of benefits, such as tailored repayment plans or individualised service,” he said.
Another type of funding is personal investment, which involves the business owner putting their own money into the business.
This can be in the form of cash or collateral on personal assets.
This demonstrates to the banker that the business owner is committed to the long-term success of their project.
Another type of funding is known as “love money”, when money is borrowed from a spouse, family member, or friend.
Bankers may view this type of financing as “patient capital”, which is money that will be repaid gradually as the business becomes profitable.
Mpahlwa raises cautions with “love money”.
“Friends and family don’t usually have a lot of money.
“They could desire ownership in your company; be careful not to give it away.
“It is important to never treat a professional relationship with relatives or friends lightly,” Mpahlwa said.
Another form of funding that entrepreneurs may consider is venture capital.
This form of financing, however, was not suited to all businesses and entrepreneurs, he said.
Venture capitalists look for startups with high growth potential and a solid business plan.
This is because venture capitalists search for companies that are driven by technology and have the potential for rapid growth in industries such as biotechnology, communications and information technology, he said.
“Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project.
“This involves giving up some ownership or equity in your business to an external party.
“Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public,” he said.
Mpahlwa advises one to look for investors who bring relevant experience and knowledge to their business.
He said the Small Enterprise Finance Agency (Sefa) had a venture capital team that supported leadingedge companies in strategically positioning themselves in a promising market.
“Like most other venture capital companies, it gets involved in start-ups with high-growth potential, preferring to focus on major interventions when a company needs a large amount of financing to get established in its market.”
Sefa also has a funding option called the Township and Rural Empowerment Programmes (Trep).
As part of the programme, Sefa reserves the right to supervise the company’s management practices.
This typically includes a seat on the board of directors, reporting requirements and an assurance of transparency.
Mpahlwa said these measures ensured that Sefa was informed about the company’s progress and that the money was being used responsibly.
Another source of funding to consider is angel investment.
Angel investors are typically high net worth individuals such as retired company executives who invest their own money directly in small businesses.
These individuals, Mpahlwa said, usually had experience in business or technology, and could offer guidance and mentorship in addition to a capital injection.
“They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and management knowledge.
“Angels tend to finance the early stages of the business with investments in the order of R50,000 to R100,000.
“Institutional venture capitalists prefer larger investments, in the order of R1m,” Mpahlwa said.
In the next article, we will take a closer look at three other forms of funding that owners of start-up businesses can consider exploring: crowdfunding, business incubators, grants and subsidies.