Starting a business can be very expensive. From buying equipment to paying employees, starting and operating a business can be almost unaffordable for most people on their own. There are different options for entrepreneurs and businesses to acquire funding. Businesses have the option to approach banks for business loans or they can collaborate with the government for a grant. Angel investors and crowdfunding platforms are also available to businesses. All of these options make it possible for businesses to operate, but each option has different costs and criteria in order for businesses to access funds.
Banks and Lenders
Banks and lenders are one of many ways small and micro businesses can access funding. Many banks have specific accounts for small businesses. These accounts often offer benefits to small business owners. These can include reduced transaction fees, business registrations, and access to loans.
Loans
Loans are sums of money businesses can borrow from banks and expect to pay back with interest. The terms of the loan and repayment are different for each loan and depend on what deal your bank offers. The problem with bank loans for small businesses in South Africa is that banks don’t offer flexible criteria and turn away more businesses than they help. What that means for small businesses is that they have to approach private capital to secure funding. These are the currently available finance solutions for small businesses:
FinCheck
FinCheck offers personal loans from R1,000-R250,000 with a maximum repayment period of 72 months and a minimum of 3 months. They offer an online loan application where they will fit your “financial profile”.
Lulalend
Lulalend is an online loan provider that allows businesses to access between R20,000 and R2,000,000. The applications are all online and the funds are released into your bank account within 24 hours. You can opt for either the 6-month repayment plan or the 12-month repayment plan. Their monthly costs are 2–6% of the advanced amount for the first 2 or 4 months, then 2% for each of the remaining months.
Fundrr
Fundrr offers businesses short term business advances and business funding without the need for collateral. They want to help businesses by giving them cash flow solutions. Businesses aren’t restricted in the use of the funds. They offer adaptive payments depending on business turnover.
Merchant Capital
Merchant Capital offers business capital to South African citizens or business owners with South African guarantors. To access this loan, businesses must have been operating for 12 months and have R80,000 in card sales or R150,000 in EFT transactions per month.
https://www.merchantcapital.co.za
Ikhona
Ikhona is a company that offers card machines and user friendly tools to make managing and business payments easier. They also offer cash advances to help run and grow businesses after 3 months of trading. This is a loan with no interest and is repaid with future card sales.
Banks and lenders won’t interfere with business operations and will leave the owners to running the business. With this form of funding, the business owners retain the control of their business which might not be the case with different methods of funding. The business owners can keep all the profits they make. Banks will just want their premium paid back and will not ask for a portion of the profits the business makes.
However, some banks and lenders may require collateral to secure a loan. With most small businesses failing after 5 years, it can be very risky for business owners to take loans out against assets they own. Additionally, banks and lenders may not give the business all the funding they require. Banks and lenders also usually charge interest on their loans, adding to the total amount that you would have to pay back as a small business.
Government
Small businesses are the key to economic growth. They stimulate the economy by encouraging spending and creating jobs. Governments receive tax revenue from businesses and also tax their employees and the products that they sell (through VAT). This is why governments want small businesses to grow and want to encourage business development. There are different ways in which the government can support small businesses. They can give small businesses incentives like tax benefits. They can also help businesses in their initial stages and later development stages with funding. Each of these benefits need to be applied for through different government departments. Businesses are also required to provide business plans and the correct documentation.
Small Enterprise Development Agency (Seda)
The Small Enterprise Development Agency offers qualifying businesses support for development. They have a network of partnerships that could be used as a resource for small businesses. The development is for businesses that are in operation who are wanting to expand. For more information on Seda check out www.seda.org.za
Small Enterprise Finance Agency (Sefa)
The Small Enterprise Finance Agency offers financial services to SMMEs. SMMEs must qualify for this funding and apply on the website. These are the conditions that must be met to be considered for funding:
- Be a South African citizen or a permanent resident
- Be a registered entity, including sole traders with a fixed physical address
- Be within the required legal contractual capacity
- Be domiciled in South Africa
- Be compliant with generally accepted corporate governance practices appropriate to the client’s legal status
- Have a written proposal or business plan that meets sefa’s loan application criteria
- Demonstrate the character and ability to repay the loan
- Have provided personal and/or credit references — if available
- Be the majority shareholder and the owner-manager of the business
- Provide relevant securities/collateral
- Have a valid Tax Clearance Certificate
Small Enterprise Finance Agency (SOC) Ltd (sefa)
Venture Capital
Venture capital is a form of private equity where investors fund a startup in return for equity. These startups are companies that have been evaluated and have high growth potential. VC firms typically take up to 25% equity in the company for funding. VCs not only provide monetary value to start ups but can also provide the expertise and skills the start up needs.
One of the advantages of joining a venture capital fund is that they will have experts to support your business. VCs have a lot of resources available to them to accelerate business growth. Being able to contact and work with an expert in the same field as your business could make all the difference. Another resource VCs have at their disposal is their network. They have a large network of investors who are able to fund businesses. The repayment system in VCs is also different to that of a bank. With a VC you would not be required to pay a monthly fee like with a loan.
However, there are also some disadvantages to joining a VC, one of them being a loss of equity. VC funds normally fund businesses in exchange for 25% of the business’ equity. This may be a large amount of equity if the business has already been divided between partners. There can be a loss of control due to the loss in equity. VCs also have a long process to acquire funding.
These are the venture capital firms available to small businesses in South Africa:
The South African Angel Investment Network
This is a company that allows entrepreneurs to make profiles and pitch their businesses which are then spread to their network of over 200,000 users to acquire funding. This service is not free: there are different tiers to the funding starting at their basic account called the Novice. It offers the basics such as the pitch being listed on the South African site and access to the contacts who show interest in your pitch. The drawback of the basic account is it only has basic listing which means no logos or branding are included on pitches. This plan costs R799 for a 30 day listing. The exclusive package costs R20,000 and includes all their Pro account benefits (Higher listing pitches, email marketing to matching investors, and the ability to add logos) plus expert support for the pitches. It is also a 120 day listing.
https://www.investmentnetwork.co.za
Kgatelopele Venture Capital and Private Equity Pty (Ltd)
This is a black owned firm that seeks to invest in various businesses. They primarily target businesses that are under black ownership. They also target businesses with large growth potential. They support businesses by managing them both in the short term and long term. They have a 3–5 year exit for their investments. Their approach is equity based at the early, expansion, and late stages of growth.
Rising Tide Africa
Rising Tide Africa is a venture capital fund that engages in the education and training of women to become angel investors and offers them an opportunity to create a diverse portfolio. They have two successful investments. Oze and Bankly are fintech companies. Both of these companies reached seed funding level and raised $700,000.
Knife Capital
Kife Capital is a micro venture capital fund. Although they have a small team of 4, they have been able to raise $10 million. They have 17 investments and 3 exits. They focus on the late stages of funding.
Vumela Fund
Vumela Fund is another micro VC. They have 12 investments and 1 exit. They have two funds with the combined value of R388 million. They fund businesses that are in the seeding and early stages.
Kalon Venture partners
Kalon Venture partners is a VC that is run by between 11 and 50 people. They invest in high growth technology companies. They have 10 investments and their most recent investment is of R35 million in iXperience.
Angel investors
Angel investors are high networth individuals who back businesses and entrepreneurs in the early difficult stages of business. They can be friends or family. Unlike a venture capital fund, angel investors normally use their own funds rather than a pooled fund. Being an angel investor is extremely dangerous, as if the business fails they may lose their investment completely. Angel investors can invest once off to get the project off the ground or have an ongoing support structure in place with the business. Angel investors may also be more appealing to startups rather than other forms of funding due to repayment agreements. Angel investors will normally diversify their portfolio and spend no more than 10% on startups.
There are a number of benefits to using an angel investor. For example, the pay back terms are better suited for business operations, as the business’ cash flow stays intact. Additionally, if the business fails, the business owners may not have to pay back the angel investor, depending on the terms they set. Angel investors also consider the long term: they usually invest for a longer period of time than a standard loan.
Having said this, there are some drawbacks to angel investment. Business owners could experience a loss of control in their business, as angel investors can take a large amount of equity. Angel investors may also have the power to make decisions for the company.
Here is a list of angel investors available to South Africans:
Jozi Angels
Jozi Angels is a network of angel investors based in Johannesburg. They invest in early stage companies and help them grow with their resources (network, knowledge, and capital). They take an average equity of 15–20%. They also expect a return of 20x to 25x the initial investment for each company they fund. They have made over 15 investments at an average R400,000 per investment. Their investors will want on average at least R8 million return from each investment.
Crowdfunding
Crowdfunding is when a group of people fund a project or business by pooling an amount of money together. Micro businesses and startups can use crowdfunding to raise funds for their business. There are four kinds of crowdfunding campaigns: donations, equity funding, rewards based funding, and debt based funding.
Donations
Donation based crowdfunding is where individuals donate small amounts of money to a specific charitable cause. Donators do not receive any financial or material return. Backabuddy is a good example of donation based crowdfunding in South Africa. Users can easily register and donate to a cause. They collect 5% + VAT, an administration fee, and a transaction fee that covers the costs of third party bank payments.
Backabuddy.co.za
Equity based funding
Equity based crowdfunding is very similar to how company shares work. A stake of the business is given to the investor as a return for the investment. An example of equity based crowdfunding available to business owners in South Africa is Uprise. Uprise is a platform where businesses can offer equity in exchange for funding. They have a 67% success rate and over 10,000 active users. They charge an initial fee of between R25,000 (for R3M — R5M of funding) and R75,000 (R10M and above), depending on the size of the campaign. This fee covers internal consultation, due diligence, and legal due diligence. They then charge 8% on successful campaigns. Users are also recommended to factor in R150,000-R200,000 for legal costs, video production, and financial advice. Transaction fees are 1.5% — 5.5% depending on the method used.
Rewards based funding
A rewards based crowdfunding campaign is one where investors do not expect to receive a financial reward for their investment, but rather a good or service that the business offers. Thundafund is an example of reward based crowdfunding. The costs of successfully funding projects is 5% for certified NGOs and 7% for individuals and organisations.
thundafund.com
Debt based funding
Debt based funding uses peer to peer loans to raise capital. Money is borrowed with the understanding that it will be repaid with interest. It is similar to borrowing from a bank. The difference is the funds are from many different individuals. The benefit for the individual lenders is that they receive a higher level of interest, however, they are investing at a higher risk.
