So you want to start your own business but need a small business loan. Where do you look? Who can help?
- Small business loans from government
The South African government is acutely aware that small businesses are integral to developing the economy and creating employment. As such, there are a number of initiatives for getting funding from the government. Whether you’re youth, women, previously disadvantaged, or involved in BEE, there’s government funding for you. Here’s a list of some:
The Small Enterprise Development Agency (SEDA)
SEDA has branches in each district municipality around the country.
It provides information, support and referrals for a range of activities such as tender applications, import and export training, trade information, business assessment, support and mentoring, technical support, market access and business linkages. .
The Co-operatives Incentive Scheme (CIS)
CIS provides successful applicants with cash grants to allow their co-operatives to build quality services and suppliers to improve and grow their business.
Cash grants are typically awarded to black-owned companies, initiatives helping overcome unemployment and poverty, and are registered co-operatives. More information is available at here.
2. Small business loans from banks
Several of South Africa’s national banks are involved in encouraging and supporting entrepreneurial activity.
They’re able to provide initial start-up capital, working capital, short-, mid- and long-term lending, as well as business support.
Like government funding though, banks have conditions that need to be met before lending occurs in order to lessen their risk in financing your business.
- Start by ensuring your house is in order. Make sure you have comprehensive records and documentation that shows your business has been profitable for a period of time, that your credit record is clean, and that you have collateral to borrow against.
- Make sure you have a sound business plan that you have written and understand, complete with financial records and projections to discuss with the bank.
- Have your financial statements ready, be able to detail how much money is needed and for what purpose, and foster a good track record with your bank before asking for a loan. If you’re in a good position to get a loan, shop around to see which bank can offer you the best loan terms.
3. Small business loans from family and friends
You may be in the position to ask family and friends for a loan, but be aware that while this may offer the most favourable loan terms and interest etc., it can come at a cost and can even seriously damage your relationships. Here’s what to pay attention to:
- Family and friends are more likely to invest in you because they love you, not because they have faith in your business idea.
- Loans create personal and emotional issues. If you borrow from a relative and aren’t able to repay it, it can cause feelings of guilt, embarrassment and resentment.
- Be clear on giving versus loaning. While a friend or family member may say they’re “giving” you the money, they rarely mean it in the legal sense of a “gift”. Make sure you and the lender are absolutely clear on the terms and conditions of the loan to avoid future conflict over misunderstandings.
- Debt can be better than equity. If you borrow money and pay back the loan with interest, it can be a better move than offering equity in the business in exchange for a loan – with debt, you’re still in control of the business.
- Try align your loan payments to cash flow. Consider cash flow obligation rather than fixed repayment schedules. That way, when you can spare the money, you can repay.
4. Small business loans from investors
When looking for funding from investors, consider the kind of investor you want. An angel investor is someone with significant funds to spare that will offer you finance in exchange for a piece of the action.
They typically want equity in the business or a fixed percentage ROI, and want to be involved in the business’s growth – offering mentorship, support and advice with business decisions.
Loans from venture capitalists are quite different to angel investors. This kind of lender is looking for a high growth business typically in the tech industry, and will want to pull out with a handsome ROI after just a few years.
Venture capitalists expect to be involved in management decisions, are strict on their terms and conditions, and expect you to adhere to the business plan you presented to them.
5. Small business loans from crowd funding
A new form of lending in the last few years, crowd funding provides businesses with the opportunity to attract funding through attracting a number of micro-lenders to the cause.
A business will post a profile and business pitch on a crowd-funding platform like Kick-starter.
Business owners are able to negotiate terms and conditions of loans ranging from a percentage of interest, to more creative rewards such as the lender’s name on a menu item.
Funders can also decide how much they’re prepared to invest, be it as little as R100 right up to the full loan requirement. Visit www.kickstarter.com to see how other small businesses are getting funding.