5 alternative funding options for entrepreneurs
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Funding has proved to be a challenge for entrepreneurs, an industry increasingly encouraged by government in the past few years, according to Private Client Financial’s Head of Department – Monthly Compliance, Tania van Zyl.
Small-scale entrepreneurs are underfunded due to the large demand for capital, and that new entrepreneurs need to demonstrate their likely ability to stay afloat before any cash injection is directed their way. These two considerations are critical in a country where 70 – 80 percent of small businesses fail within five years.
Van Zyl said that there are alternative funding options available to small businesses other than the conventional method of going to the bank.
“If you’re struggling to get a bank loan, or you don’t like your current options, there are alternatives to traditional loans that are likely available to you,” van Zyl said.
Van Zyl offers a list alternative funding options:
1. Agency funding
These are available to small businesses with the objective of meeting certain quotas, including gender, race, regional and industrial transformation.
Examples of agencies that offer funding:
- National Empowerment Fund (NEF) services business loans across a variety of industry sectors.
- Small Enterprise Finance Agency (SEFA) has a programme called the Township and Rural Entrepreneurship Programme (TREP), among others, where it finances SMMEs in townships, rural areas and farms with working capital in a form of a grant.
- Isivande Women's Fund is a BEE and gender equality programme that provides funding.
- The Small Enterprise Development Agency (SEDA)
- Department of Trade and Industry
2. Bootstrapping finance
Bootstrapping, also known as financial bootstrapping, describes a position in which an entrepreneur starts a company with little capital, relying on own funds rather than outside investments to build the business. Bootstrap financing techniques are often favoured by smaller businesses.
3. Crowd funding
Various crowd funding platforms are available online in South Africa, with the general touch points being a funding goal project description, audio visual presentation, rewards structures for backers, “jump starters” profiles and project deadlines.
The size of the crowdfunding market in South Africa is yet to be determined, even though regulators are said to still be trying to get a full understanding of the increasingly popular trend.
Although crowd funding is not specifically regulated in South Africa, certain activities may fall under various financial services regulatory provisions and legislation.
Crowd funding classes are:
- Debt-based crowd funding, which is basically a loan where the investors provide funding to the recipient, which is then repaid over time with interest.
- Equity-based crowdfunding, whereby the investors provide funding to a start-up company by subscribing for shares and these funders sign-up to only to receive dividends when the project becomes profitable.
- Rewards-based crowd funding has characteristics of bartering as investors generally make an “investment” into a business with an undertaking that allows for them to receive goods or services in return for the funding once the business has been launched successfully.
4. Make space for a partner
Getting a business partner comes with both advantages and disadvantages and should not be embarked on without professional advice.
5. Venture Capital and Angel Investment
Venture capital or angel investments are individuals or firms that are willing to pump funds into start-ups. They are typically looking for a return (you would need an exit plan or growth plan) or a share of your business.
This kind of funding is very applicable for specific industries and usually require your business to be somewhat disruptive and primed for growth. If this route seems like a good option for you, then a solid business plan and pitch deck are vital here.
No matter the funding, be prepared with your business plan
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