Risk and reward are the fundamentals of every business. In the small & medium business segment, this cannot be more true.
For start-ups and existing small entities that need to grow, capital or cash flow funding is often what’s needed to make sure the business can either get going, survive or flourish.
Before knocking on a potential funder’s door, they need to answer a few questions. How much money does a business actually need? The rule of thumb is that less is best. A business owner also needs to evaluate factors such as revenue, their willingness to use personal assets as collateral, gearing business assets and the option of selling equity in the business.
Once the business owner has understood the implications of these decisions, there are a few funding options that can be considered.
1. Explore an overdraft facility with a bank
Securing an overdraft is a quick, easy and flexible way to access cash. The downside is that the interest rate is not always very competitive.
2. Investor funding (selling equity)
These loans are not based on the entrepreneur’s equity, but rather on a feasibility study that looks at the potential success of the business, an audit on the current management skills, and whether or not funding this business is a risk worth taking. The downside is that investors seek out an equity stake in the business and may want some managerial control.
3. Invoice factoring
In any business cash flow is king, and when there are many outstanding invoices and the bank account is drying up, selling these to an invoice financier, who will assume the debt and pay the value of an invoice minus a fee, is an option. This will not only give a business owner access to cash in the bank, but also reduces the profit on these invoices as there are fees involved.
4. Government support
Government grants for small business development are available and there are also other departments like SETA who offer rebates for skills development projects and internships. The advantage of these is that small businesses don’t need to repay the financing received. The potential challenge is that there is a lot of competition in the market from other entrepreneurs who also want to access this funding. In addition, the criteria for accessing these grants may be onerous.
5. Small business loans
The value of loans offered by banks and financial institutions are limited by the security which the business owners can offer. These are usually property, fixed assets, and insurance policies. The downside is that the financial institution who provides the loan has no interest in the success of the business, so traditionally no ongoing business support is provided.