One of the most crucial and difficult steps once you have decided to embark on a new venture and drafted a business plan is the issue of securing finance. Get this wrong from the onset and you will probably fail in your new business venture. Securing the right finance for you and your business is vital to your long term success.

What finance options are available to prospective South African entrepreneurs and business owners?

The easiest and cheapest source of finance is to use your own capital , this can be savings , investments , retirement savings. Few individuals are fortunate enough to be able  to finance a new venture entirely on their own and in most instances in is probably not the best course to follow in any event. Most finance providers will require that you invest some of your own capital usually between 10 and 30% in the new venture.

Many prospective business owners also approach friends and family members to assist in financing a business venture. This is a risky approach as often all parties concerned don’t fully understand the risk factors involved and in the event of the business failing these relationships will be ruined as well.

Most business owners seeking finance typically use finance provided by financial institutions like banks and development finance institutions like the IDC or Business Partners. For a detailed listing of institutions please consult our resources page. Financial institutions would require that you present a business plan detailing whe proposed business and also require financial deatails from you and your partners. The application will be subject to the financial institutions standard credit vetting procedures and dependant on the financial viability of the business they will approve/decline the financing. In addition the financial institution could make the loan dependant on meeting additional requirements , like taking out life insurance etc.

It is highly likely that the financial institutions will require that you provide a significant cash investment of your own typically in the range of 10 to 30% of the toatal amount. In instances where you are running your business through a structure that provide limited liability like a close corporation or a private company they will also require that you stand personal surety for the loan amount.

Repayments are structured like any loan amount usually over a period of five years and it is important that you factor these repayments in your financial projections that are incorporated into your business plan.

Another source of new business funding is venture capital finance , venture capital firms usually take a equity stake in a new venture and when the business reaches a more mature phase they usually exit the business by selling their stake either  back to the founders or via an IPO on the market , if the intention is to list the business. This is more relevant for significantly larger businesses that require investments into the tens of millions of Rands.

The funding source will play an important role in the overall cash flow of the business as well as determining the business format. Financial institutions and venture capital firms will be comfortable investing in a business that is audited annually , they will also require more stringent accounting procedures and policies. Consult an expert on business finance as your initial funding choice will be with you and your business for a long time.

Tags: banks, buisness finance, financial institutions, funding, ipo, venture capital

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