Essentially, there are seven (7) principal types of financing available to entrepreneurs when they’re thinking of starting or expanding a business. These are:
- Private loans from family, friends or other interested parties
- Bank loans in the form of either overdrafts or fixed period personal or business loans
- Invoice discounting
- Term financing such as hire purchase or leasing
- Private- or quasi equity investment
- Government loans
- Crowdfunding
Private Loans
In the case of private loans, entrepreneurs often find themselves limited by the amount of money a family member has available. These loans are also often unstructured, leaving the entrepreneur open to uncertainty and even abuse, or there is an expectation that they will be paid back within a very limited time period and/or at a rate of interest higher than that available through a financial institution.
Many small businesses are started with private loans, but a major inhibitor for this source of funding can be the requirements by the family member or friend providing the funds to be “hands-on” and even “hands-in” involved in the business.
Bank Loans
In the case of overdrafts, bank loans and term financing, the amount available to the entrepreneur is limited by the security he or she is able to offer against the loan. This usually takes the form of property, fixed assets and insurance policies, or in the case of term-financing of moveable assets it will be the underlying asset item that is funded.
Also, when making use of these forms of financing, the financial institution in question has no vested interest in the business’ ultimate success or failure and so provides no on-going business support. The collateral and deposit (or own contribution) requirements often make this an option that is out of reach of many aspiring entrepreneurs.
Invoice financing
This is where you’re owed money from customers and you either sell your invoice to an invoice financier (at a reduced fee – there has to be profit in there for them) who will manage it for you or they will lend you money against unpaid invoices (again, be mindful of the fees).
Term finance (Leasing and asset finance):
This is essentially where you rent or lease assets as opposed to buying them outright.
Quasi- equity investments
Private and quasi equity investments are made on the basis of two main criteria: Firstly, the potential for success in the market sector as contained in the applicants’ business plan and, secondly, the skills and business management abilities of the entrepreneur or entrepreneurs. Quasi equity investments are not made on the basis of security. The funders usually assess the entrepreneurs, examine the viability of the business and consider the portion of the required investment the entrepreneur may or may not have to contribute to the venture, either in the form of cash or assets. This enables SMEs – run by solid entrepreneurs – with limited security or own contributions, but with a viable business plan, to obtain financing for their ventures.
The funder has a vested interest in the success of the business venture since it will be sharing in the profits of the business, depending on the structure of the funding transaction. In a certain sense, this type of finance can be similar to the funding provided by a family member or friend, but with the difference that the investor will be an outside, professional and disassociated entity.
Before acquiring finance for a business, an entrepreneur should carefully assess his funding needs, what he or she has to offer in terms of own funds and collateral and then target the best funder based on these facts.
When you think of places where you can access finance, your first thought might be to consider the private sector. But in fact, a very good option is to look at the government grants, incentives, equity and loans that are available. Depending on the fund option, the greatest benefit of accessing one of the finance options is that you may not need to pay the money back.
Government and Developmental Agency funding
To help understand how government and developmental funding works, let’s explore the difference between a grant, a loan, an incentive and equity. The section that follows outlines these differences and then provides a summary of each government funding option.Government finance generally comes in 4 forms:
Grants: Finance from 35% to 100% of the application. Grants that are less than 100% require you to fund the balance of finance required for the project at hand.
Incentives: Payment is received in tranches according to agreed upon implementation milestones. This means you will not receive the funds in a lump sum. Rather, payments are received at set times and subjected to an audit from the funding agency.
Equity: The fund purchases shares in your company. This provides you with the finance to complete the work as per the approved plan.
Loans: Either a slightly lower interest rate is offered or funds are made available to selected companies that have had their finance application rejected by private sector lenders.
Bank Loans
In the case of overdrafts, bank loans and term financing, the amount available to the entrepreneur is limited by the security he or she is able to offer against the loan. This usually takes the form of property, fixed assets and insurance policies, or in the case of term-financing of moveable assets it will be the underlying asset item that is funded.
Also, when making use of these forms of financing, the financial institution in question has no vested interest in the business’ ultimate success or failure and so provides no on-going business support. The collateral and deposit (or own contribution) requirements often make this an option that is out of reach of many aspiring entrepreneurs.
Summary of Funders
Read to see a brief synopsis of the various types of funding available from the various funders.
List of funders available
This is a brief synopsis on the funders currently provided by regionally and nationally.
Please read through the funders carefully to see the full range of their offerings as many funds have multiple components that are not necessarily reflected in the name.