Five Ways to Fund your First Small Business
Starting a small business is the dream of many an entrepreneur, or for those who simply want to work for themselves.
However, as anyone who has tried it will tell you, getting a small business off the ground can be quite a challenge, particularly from a financial perspective. Most businesses of any nature tend to require a substantial amount of capital as a startup fund, and this initial cash injection can prove somewhat difficult to come by. Fortunately, there are a number of different ways to fund your small business at the start that can help to set it up for a prosperous and successful future.
Privately owned and operated businesses tend to rely little on external funding, and can get themselves started with a relatively small amount of capital (provided the initial investment is a smart one). As a result of this, many new small business owners make the risky decision to finance their new business using their own personal bank accounts.
While this does offer the most direct access to money, complications can arise in the long term, especially with regard to defaulting on credit card payments (if the business does not do as well as hoped), keeping tax records for the business as a separate entity, and maintaining a good personal credit record that is not directly related to the business. For these and other reasons, it is often a better idea to create a new account for the business from which finances can be drawn.
Venture capital or angel investment
One of the most common ways in which small business are initially funded is popularly known as ‘angel investment’. In this situation, a wealthy investor provides the capital needed to start the business, usually in exchange for a stake of the profits, or as a loan to be repaid with interest. Angel investors can be individuals or come in the form of a network of investors.
Some investors may also prefer to remain un-involved with business operations, while others may want to take on the role of a mentor or otherwise have a hand in management decisions. Whatever the case, it’s important to make sure that any agreement made with angel investors is clearly set out in writing to ensure that all parties understand and are comfortable with their roles, investments, and returns.
Bank loans and lending instruments
If it’s not possible to find an angel investor willing to take on the risks of funding your small business, the next place to turn is often the bank. Banks provide many options for financing startup companies, but require a comprehensive set of information before they will agree to provide the funds. This includes a well-formed business plan that includes financial projections and a full set of current financial information, among other documents, that helps the bank determine the chances of your business succeeding and therefore being able to pay back the borrowed amount.
Many different types of loans are available, some of which are geared specifically toward small businesses and the resources they may require to get off the ground.
- Overdraft agreements – these allow you to draw more money than is currently in your account, helping with cash flow.
- Medium-term loans – such loans are a good way to get initial capital to purchase supplies or equipment, and can have different interest and repayment rates depending on factors such as the current prime rate, collateral, and the value of the asset being financed.
- Business revolving credit – this kind of credit is available whenever it is needed, and can be repaid in fixed monthly installments
- Mortgage or property finance – this kind of financing option is most useful for the purchasing or renovation of business premises
- Vehicle/asset finance – a variety of options exist to provide finances for the acquisition of specialised equipment or vehicles for your business
A relatively new and interesting financing option that is becoming popular with the internet generation is crowdfunding. Many startups make use of this scheme, whereby many individuals are able to contribute varying amounts of money to small business founders, often in return for equity in the company, or future products or services should the target amount be reached.
A number of websites, such as Kickstarter and Indiegogo, facilitate this kind of crowdfunding and help to attract potential funders. If you market your future business well, this can be a great way to make lots of little donations add up to a substantial amount of capital, getting your business off to a promising start.
If you happen to come from a previously disadvantaged background, there are a number of government-mandated grants, loans, and tenders in South Africa targeted at small businesses that have the necessary BEE accreditation, as well as certain other requirements such as a tax clearance certificate.
Finally, the best way to get your small business off to a good start without relying outside funding is known as ‘bootstrapping’. Maintaining financial independence in this way requires that you get the business operational as quickly as possible, and keeping overheads to a minimum. Steady growth is favoured over speedy growth when using this approach – but it can certainly pay off in the long run.
Regardless of which approach you choose to finance your small business, thorough knowledge of your own finances as well as the financial world in general can help to ensure that you manage your own business’s finances well from the start, setting it up for a prosperous future.
It’s important to be aware of the limitations of the current economic climate – such as low lending rates – as well as recognising and making use of all opportunities, assessing and using your own resources accurately and effectively, finding practical solutions to problems, and, perhaps most importantly, being confident in your decisions and the potential of your small business. In a country with a growing economy and an ever-increasing number of small businesses on the rise, there has never been a better time to follow the dream of founding your own company.