Types of business funding

The first type of funding most people think of debt finance; in other words, borrowing from a bank or another institution and then repaying the loan, with interest, over time. However, this is far from the only type of funding that’s available to small businesses.

Bank finance

Bank finance can take different forms. For example, your business may qualify for an overdraft, provided you can show the bank a viable business plan and supply some form of asset or guarantee.

Debtor finance is typically offered for growing businesses that make a certain turnover, and asset finance is offered for the purchase of moveable assets or equipment, such as computers or vehicles.

Venture capital

Venture capital is private equity capital offered to early-stage enterprises, often to those in high-risk, hi-tech industries. It is first-stage financing for companies that show potential for growth. This is ideal for start-ups.In exchange for funding, a venture capital firm typically requires certain decision-making powers, as well as an ownership stake, in a business. Local examples of companies that offer venture capital are GroVest Venture Capital Company and Redwood Capital.

Impact investing

Impact investors invest in companies whose activities are likely to have positive social or environmental, as well as financial, returns. Examples of impact investment funds in South Africa are the Mango Fundand the Acumen Fund.

“Angel” investing

So-called “angel investors “are high net-worth private investors who offer funding to ventures they believe are worthwhile or likely to be successful, usually in exchange for ownership equity or convertible debt. In South Africa, examples of networks for finding such angels include Angel Hub Ventures and the Angel Investment Network.

Crowdfunding

Crowdfunding involves appealing to the public for funds via virtual networking. Generally, the goal is to secure small contributions from a very large number of people. If you have a business idea that could attract public support, this may be worth taking seriously. According to Wikipedia, crowdfunding raised over $5.1 billion worldwide in 2013. Examples of crowdfunding platforms arecrowdfunding.co.za, open tenders and IDEATE.

Private equity

Private equity is money pooled from third-party investors, usually for long time frames. Private equity funders tend to be conservative. To qualify for this kind of funding, a business typically has to show innovation and rapid growth and have a solid financial track record.

Government funding options

In addition to other funding sources, there are several government funding options for entrepreneurs and SMEs in South Africa.The South African Department of Trade and Industry (DTI) operates several funds designed to boost business enterprise. These include:

  • the Incubation Support Programme (ISP), which helps develop successful enterprises aimed at revitalising communities and local and national economies; it supports partnerships between big and small businesses
  • the Small Enterprise Development Agency (SEDA), which supports small enterprise development through funding, as well as mentoring
  • the Isivande Women’s Fund, which focuses on accelerating “women’s economic empowerment through affordable, usable and responsible finance”
  • the Co-operative Incentive Scheme (CIS), which offers cost-sharing grants for registered primary cooperatives of five or more people
  • Khula Enterprise Finance Ltd, which offers debt funding or help in securing bank loans to SMMEs.

Various industry-specific grants are also available. Examples are the Automotive Investment Scheme (AIS) for the motor industry; the Support Programme for Industrial Innovation (SPII) for technological industries; and the Aqua-culture Development and Enhancement Programme (ADEP) for marine and freshwater operations.

In addition, the government offers various types of business funding to support South Africans from previously disadvantaged groups. Examples are:

  • the National Youth Development Agency (NYDA), which mentors and funds young entrepreneurs (age 18 to 35)
  • the Small Enterprise Finance Agency (SEFA), which offers loans to SMEs run by women, as well as entrepreneurs in rural and peri-urban areas
  • the National Empowerment Fund (NEF), which focuses on accelerating black economic empowerment.