The entrepreneur journey

. 8 min read

What is the first step to securing finance for your business? You must understand what you need. There’s a basic checklist to follow: • Do you need money for working or operating expenditure vs capital investment? • How much do you require? • How long do you need the money for? • What is the cost of capital you can afford to repay? How do you identify the right fund for your business? There are four key steps in the process. Step 1: Know your business phase Each phase of business attracts a different type of funder, so it’s important to be clear about which phase you’re in. • Seed: Your business is just a thought or an idea. • Start-up: Your business now exists legally. Products or services are in production and you have customers. • Growth: Revenues and customers are increasing, profits are strong, competition exists. • Established: Your business is thriving with a place in the market and loyal customers. • Expansion: Characterised by a period of growth into new markets. • Decline: Decreased sales and profits. • Exit: Either the opportunity to cash out on all the years of hard work, or it can mean shutting down the business. Step 2: Identify the funders/financial institutions and their target audience This information is available on each funder’s website. Read each funder’s mandates to determine: • What the funders are looking to achieve (black/youth/female ownership, jobs, profitability, rural vs. urban business, contracts etc.) • Priority industries • Business phase/size • Minimum and maximum funding available • Collateral requirements and personal risk • Valuation methodology in the case of buying into or selling a business • Operational involvement of previously disadvantaged individuals. Step 3: Research the funds within the relevant institution Funders will, on average, have between two and 26 different funds, each with their own mandate, eligibility criteria, funding type (loan or grant), costing, things they will and won’t fund and other specifics. Read the mandates to find your fit. Step 4: Reach out to the funders Call and speak to the funders and be fund specific. Speak to a consultant at the fund to clarify your eligibility before starting the application process. Ask questions around: • Their timelines • When the credit committees or panels sit for adjudication • What is considered for your application to get adjudicated. Arming yourself with this knowledge will exponentially increase your chances of being considered for funding. Many applications do not reach the adjudication phase because the business doesn’t match the fund or the application is incorrectly filled in. You cannot receive funding if your application is not even considered. The correct content and format is vital. Are Government grants only for small enterprises? Not at all. Where a large business is looking to expand its network through distributors, agents or franchisees, wholesale loans from the likes of SEFA, NEF and IDC as well as some developmental grants such as the Jobs Fund, Incubator Support Programme and Social Enterprise Fund are attractive funding models for previously disadvantaged individuals to be included in your value chain as business owners. This is also a way that businesses are able to leverage funding for growth. Funders approve funding based on different criteria: • Turnover: mainly grants • Profitability: loans and grants • Balance sheet: loans and grants • Ability to scale: venture capital Checklist Before you apply for funding, do you have the following documents? • Business plan or relevant application • Formal contracts directly with a blue chip company or government department • Letters of engagement with clients • Tax clearance certificate • CIPC company documents • BEE certificate • Audited financial statements Management accounts. The 9 different kinds of SME funding 1. Self-financing SME funding This is when you use your own personal savings to finance the business. Be careful though, mortality rates of new businesses are high and if the business doesn’t work out you’ve lost both your business and your personal savings. 2. Money from friends, family and business associates SME funding Often the first place to turn to if they’re able to provide, family, friends and individuals you know will often invest in your entrepreneurial venture because they have confidence in you and your abilities as much as they have confidence in the business idea. Unless your family and friends are particularly loaded though, they can get you through the start-up and development phase but you’ll need to look into other forms of finance when needing a substantial capital injection. 3. Angel investors SME funding If an entrepreneur isn’t able to source funds from people they know or their own personal savings, angel investors are another option. These are individuals are often business people themselves or have significant funds and are looking to assist aspiring entrepreneurs in conjunction with a return on investment. In exchange for the funds, angel investors often require equity in the business. 4. Angel funds/alliance SME funding This is a collective of angel investors who contribute money to a fund. From there they’re able to make a number of individual investments helping diversify their risk. A typical angel fund will have a submission process in which your business plan will be reviewed, you will present, and a vote will be cast whether to invest or not. 5. Venture capitalists SME funding This is a well-known form of funding, but it’s by no means the easiest. As a professionally managed fund, they’re looking for a high return on investment and have strict procedures to follow. Equity is given to the VC and if a business is not able to live up to its expectations the VC is able to have the company sold in order to recoup its investment. 6. Bank loans SME funding These institutions lend money to entrepreneurs and charge interest on the loan. They will not fund what they deem high risk ventures however, and they typically have strict, well-defined guidelines to determine suitability. These include positive cash flow for more than two years, a demonstrated history of paying off debts, sound financials, and the entrepreneur and business have clear credit histories. 7. Bridge loans SME funding Commercial finance companies or non-bank commercial lenders can also offer finance to an entrepreneur in the form of short-term loans to “bridge” the gap between needing cash to grow while continuing to operate. These loans are different to a bank loan though because they will often finance businesses where banks have refused. The business and the entrepreneur’s assets are assessed and, provided there is sufficient liquidity to repay the loan in the instance of default, a bridge loan will be granted. Bridge loans must be paid back in a certain time frame and accrue interest. 8. Government grants SME funding This funding is supplied through government channels and often has lower or no interest compared to banks and commercial lenders. The truth about getting funding from government is that competition is fierce and the requirements for qualifying are strict, including full B-BBEE compliance. 9. Bootstrapping SME funding A company owner generates funds for the business without relying on an outside source. The advantage of this form of self-funding is that the business remains 100% in the ownership of the business owner(s), but does require strict adherence to budgets and discipline in reducing expenses where possible which at times can mean a foregone salary – also known as ‘sweat equity’. Financial Focus For Your Business In Different Growth Stages By Luis Aureliano - Aug 26, 2016 Every business goes through five major stages and grows from the seed stage to maturity over its lifetime. However, not all businesses manage to go through all the stages. Some die at the early stages due to lack of a viable business model or lack of a product or service that is solving a problem or filling a gap in the society. Other businesses die at the later stage of their life cycle due to poor resource management; key among them being poor financial management. The Seed Stage Financial management challenges increase as your business grows, expands its operations and widens its geographical reach. At the seed stage, you are focused more on developing your product and testing it to see whether it actually meets the standards you had in mind. At this level you are not yet receiving any cash inflows and so you have less financial management challenges. All you need is cash for research and development of the minimum viable product; which can easily be done at a minimum budget. The Start-Up Stage Next is the start-up stage where you are now shifting your focus to customer acquisition. Initially, you are more concerned about getting the first few customers to use your product and give you feedback on whether it meets their needs in a specific and most satisfying way. The increase in operations in your start-up also comes with increased budgets for pilot phase production as well as a minimum budget for marketing your products. With the rising expenditure, you now start facing cash flow issues and cash flow management begins to crawl in as a very essential element of your business for it to succeed. The Growth Stage When your business gets to the growth stage, everything changes for the better except for cash flows management. Before you get into the growth phase which is characterised with rising numbers of customers and sales, you were testing your products or services with a small number of people. Now you have several orders from different clients and you need to meet them. This is coupled with an increase in publicity for your business as more customers get to know about your products and demand for them. The bottom line for your business grows very first and in this stage you reach your break-even point. All is good except that you are now handling too much money than you are used that; such that you might end up confused if you do not have strong internal control systems in your business. With a lot of cash in your bank account during the growth stage of your business, you need to be financially prudent in order to avoid having idle money that is losing value as a result of inflation. At this point you will need to look for options where you can invest your money in the short-term in order to earn a return. Among the most preferred short-term investment avenues include treasury bills, fixed deposit accounts as well as online currency trading for the adventurous entrepreneurs. The Expansion Stage After the growth phase, your business gets into the expansion phase due to market saturation in your local market or due to competitors cropping up to eat into your growing market within your locality. At the expansion phase, you will find yourself focused on market research in order to understand your new markets as well as in development of new distribution channels into the new markets. Expanding into new territories is a very complex and capital intensive affair and if you had not saved enough money during the growth stage, your expansion plans may be hindered. Strict financial management is required at this level of growth in order to ensure that all branches or your business affiliates in other geographical locations are running smoothly. The Maturity Stage Finally your business will get to a maturity level and again cash will start piling up in the bank account since you are having loyal customers and sales are more regular and predictable. At this stage, you are not so much worried about the day to day working capital requirements and your free cash-flow can be invested in mid-term investment vehicles. Investing in commodities is a common alternative for the large corporates with large piles of money in the banks. Especially in times of political or economic uncertainty, you can invest your money in gold as a safe haven since the gold price moves in the opposite direction when markets are falling. Other options available include investing in government medium term bonds as well as in equities.