The important question to ask is – what do you need the funding for? – before you start choosing the type of funding required or whom to approach for funding support. Reasons could be start up capital, expansion capital, temporary relief, asset or property purchases, working capital support and so on. Each type of funding has a different risk and therefore a different cost and security requirement. Also, each type may have different repayment periods.

Often each type has a specialist funder, but there are some larger institutions that can act as an ‘One-stop’ shop for funding.

How do I match my funding requirement and funder to my reason for funding?

Let’s assess this by funding reason/requirement:

Start-up Capital – usually the new business owner would fund this personally, but if you are unable to do so and need additional funds, then various types of funder can be approached. As the business has no track record of its ability to make a profit or have a positive cash flow to be able to repay the funder, this would be seen as high risk and would require lots of security to be provided to the funder or the funder would have to be a higher risk taker. The repayment period would usually be longer term (3-10 years).

 In most cases this would require some form of equity in the business to be given in return for funds granted. Most equity investors will want to see the owner have a contribution of their own (to have some skin in the game), so that there is an element of risk sharing. However, assuming that the business will yield a better return than another type of investment, this is the highest cost to the business owner and you may be restricted in your freedom to make decisions. However, this reduces risk to the business significantly as it does not burden it with debt and related interest costs and requires less guarantees to be given.

Institutional investors may also be willing to fund here, usually in industries with high growth/returns, or where there are significant assets in the business (eg: manufacturing) that can provide security, or even certain franchise businesses that have proven track records of success. This could be in the form of a combination of debt and equity.

Expansion Capital – here usually the business has a track record of positive income and cash generation, but the owner would like to expand/grow faster, so needs additional funding. Based on the merits of the expansion plan, a wider diversity of funders may want to participate in providing funds but should have less onerous conditions and costs attached.

Asset purchases – Property or equipment. Usually, the Assets provide good security for funders, so less personal security will be required but more often this is funded through some form of loan funding. Property can be funded over longer periods (10-20 years), whereas productive assets will be much shorter (3-5 years). In some cases, leasing or rental can be more effective than a loan.

Working Capital – the nature of your business will determine your business needs here. Some businesses are very working capital intensive (Stock and debtors net of creditors) and have long turn cycles (time it takes to turn stock to cash) and others (service focused) have less intensive and shorter cycles. An effective resource planning system and strong controls will also improve cashflows. Repayment periods are linked to the turn cycles and usually this is considered higher risk by funders and thus more expensive to fund, so additional security, strong controls will be required.

Temporary relief funds – the reasons for this may vary and as such the requirements and costs attached will vary. Where it is a result of circumstances unforeseen and beyond the business owners’ control, hopefully they have a contingency plan/funds or insurance to assist. If not the cost and requirements will be onerous.

Whichever format of funding is chosen, it immediately places an additional burden and responsibility on the business owner and it is critical that the owner understands and accepts this. Someone else is partnering with you and is taking a risk on you the individual more so than the business, so it is important that you respect this and treat each stakeholder in the manner you would like to be treated in similar circumstances. Unfortunately, very few businesses are able to start or grow their businesses without some form of funding support, so it is just another requirement in being able to successfully own a business and should be acknowledged and accepted as such.

How can we help you? (www.pathfinderssa.co.za)

Pathfinders is exceptionally qualified to advise Business Owners and Managers alike! Alongside our business advisory services and mentorship services, we dive deep and focus on all aspects of your business strategy and performance, which creates the magical winning formula for success. We have a wide network of funders and solid track record of good quality relationships with equity investors and institutional investors alike. We will work with you in determining the most appropriate funding mechanisms for your business and support you through the search and fund acquisition process.

Contact us via info@pathfinderssa.co.za or via our website www.pathfinderssa.co.za to find out more.