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Sources of finance: Where and how do I find finance for my business?  
This factsheet:
  • Asks whether you should be applying for funding now
  • Explains the difficulties in accessing finance in South Africa if you are a business owner
  • Gives tips on enhancing your chances of success when applying for finance
  • Guides you through ways of managing without applying for finance
  • Gives a brief overview of the types of financial institutions you could approach if you do decide to take that route
  • For existing business owners: Is borrowing going to solve your problem?
  • For start-ups and existing business owners:
  • The South African business financing scene
  • So what do you do?
  • Who are the financial institutions?
For existing business owners: Is borrowing going to solve your problem?
  • What is causing the need for finance?Don't look for finance to fill a leaking bucket - if your selling price is too low or if your expenses are too high, the money will soon dry up again. Finance will not solve an inherent problem, and a clever financier will not risk his money on your business.
  • Are you growing too fast?Financial institutions will be wary of funding growth that is carelessly embarked upon, at the expense of profit margins or efficiency. A decision to increase the sales level in your business is a long-term commitment and requires careful planning. You need to show that you have invested in this growth yourself, before a financial institution would even begin to be interested.
  • Is this the right time for you to borrow?If you are looking for money urgently, it is probably already too late to borrow from a financial institution. One of the cardinal rules of borrowing is that you should borrow when the going is good - when you have a business plan, a working business with a steady turnover and a large margin of safety. Institutions very seldom lend money to someone in a crisis. Financial institutions are risk averse and apart form anything else, it will take on average about 3 months from the date of application before you get any money.
For start-ups and existing business owners:
  • How much money do you need?If you do not know exactly how much money you need, then no-one is going to lend anything to you. And nor should they, because it means that you have not thought through your business plan properly. (See 'What is a business plan?' and 'How do I compile a business plan?').
  • What do you need the money for?Rough estimates do not go down well when applying for finance. You need to be specific as to what you are going to buy, when you are going to buy it, what you are going to use it for, and how much money you are going to create through your purchase. Also, if you know exactly what you need the money for, you can think of ways of managing without borrowing. For example, if you need money for a particular machine, do you necessarily have to buy your own, or could you share the cost with a partner (or even a competitor)? If you need money to purchase extra stock, will your suppliers be able to help you out in the short term?.
As you will see from the paragraph below, South African banks do not lend money easily to business owners.
The South African business financing scene
If you are disappointed with the information so far, welcome to the world of financing your business. Applying for finance in South Africa as a business owner is a slow, frustrating and disappointing process. Financial institutions are averse to risk and many have had their fingers burnt by lending to small business owners who haven't managed to pay their loans back. Your chances of getting a business loan are not very good.
  • You need collateral
    Before lending you money, most financial institutions will demand that you have some form of collateral (or security). Collateral is any asset that you own that you promise to hand over to the lender if you cannot pay back the loan within the terms agreed upon. This could be a house, a building, investments, savings or any other asset. The smaller your business, the more collateral the bank will demand, because you are perceived as a high risk. Ironically, of course, the smaller you are, the less collateral you are likely to have.
  • There are long delays
    One of the most frustrating things about applying for finance is that there is almost always too long a delay - in processing your application (up to eight weeks), and if you are lucky enough to be granted a loan, in finally getting the money to you (about three months). Often by this time it is already too late, or you have made another plan.
  • Your credit record must be goodIf you have a bad credit record, even from a long time ago, it almost automatically disqualifies you from getting bank finance. Do everything you possibly can to settle your old debt and clear your name. Apart from that, the only thing you can do is to be totally open and upfront about it. Don't try to hide it.
So what do you do?
  • Given this situation, what are you to do if you don't have your own capital to fund your business idea or expansion? Now is the time to think truly entrepreneurially. Do not give up too easily.
  • All over the world, research shows that family and friends are the biggest sources of small business finance. Try to borrow money from your family and friends first. Also, you might have to rely on them to stand surety for a loan from an institution. Remember, as you become more established you can think bigger and re-apply for loans from institutions. Borrowing from family and friends should be done as professionally as possible - record the loans and repayments formally. This will reduce the chance of arguments.
  • Apply for finance at financial institutions, despite the problems mentioned above. You need to give yourself every chance of success.
  • Apply to a number of financial institutions at the same time. Don't wait for the one to say "no" before you go to the other, or this will take years.
  • Prepare your business plan for presentation and make sure you understand and can defend every aspect of it (see "Preparing your business plan for presentation to a financial institution").
  • Be specific in your request for finance. Finding finance for one machine with a carefully calculated output and return on its purchase price, is much easier than finding finance for a whole factory based on your grand plan.
  • Even if you do everything right, do not hold your breath - expect long waits in the processing of your application and a possible rejection in the end.
  • Meanwhile, find alternative ways of carrying on. As your business becomes established, lending institutions will become more interested in you, so you can always re-apply later on. People are much more inclined to support something that has been proven to work (whether this is a start-up or an expansion). You will also be building collateral as you carry on, making you a much safer bet for lending institutions.
  • You might have to scale down your ideas and start much smaller than you intended. Instead of taking the world by storm with a new range of spices available in every supermarket, you might have to stock only in your local café or sell at the local flea market. Do not make the mistake of under-capitalising, that is, starting too big with too little funding.
  • If you have won a big contract or tender and need the money urgently to execute this work, there might be other alternatives - partner up with someone who has the necessary capacity (it could even be the person you tendered against, if there is something for them in the deal). Remember for the future that first winning the contract and then looking for finance is a dangerous game. Pre-arrange finance as much as possible before tendering.
  • Talk to your suppliers - they may be willing to give you a longer time to pay for supplies, especially if you have been good at paying your accounts in the past. Now you see how important it is to treat your suppliers, business contacts and even your competitors fairly and professionally - you never know when you might need them.
  • For some large contracts you can negotiate progress payments - the clients can be asked to put down a deposit and make proportional payments as each phase of work is completed.
  • Think creatively about sharing assets or premises with other business owners.
Who are the financial institutions?
The banks
The four banks have started special divisions for small businesses. Even though they regard small business lending as very risky, they are under pressure from the Financial Services Charter to be seen to be promoting small business. There is a lot of hype around supporting entrepreneurs, but in reality the banks are in a difficult situation. Apart from the high risk involved in lending to small businesses, the administration and screening involved in processing a small loan costs the bank the same as that needed for a large loan amount. Small businesses do not represent good business to the banks, but it still may be worth a try.
Asset finance houses
These are actually just the same old banks. Standard Bank has Stannic, Absa has Bankfin, FNB has Wesbank and Nedbank has Nedbank Vehicle and Asset Finance. You may find it slightly easier to get asset finance for your business than a general business loan. The banks feel safer if they know what the money is spent on. Also, they sometimes regard the asset itself as part of the collateral. If you fail to pay it back, at least they have something to take back.
Small business loan organisations
There are two types of organisations specialising in small business finance:
  1. Organisations lending directly to small businessesThese organisations consider loans to businesses that would not normally qualify for a bank loan. They are prepared to give out smaller loan amounts and are less strict about your margin of safety when judging the viability of your business, about bad credit records and the type of collateral you can offer (they may accept second-hand equipment, for example). These loans are normally more expensive than bank loans, however. Notable organisations at the moment are Khethani Business Finance (a non-profit organisation) New Business Finance (itself a commercial small business) and Business Partners (ex-government, privatised, although recently they have moved into the direction of becoming a venture capital fund - see below).
  2. Organisations that make access to bank loans easierSome organisations do not lend money directly to businesses, but guarantee a portion of your bank loan. You have to provide collateral for the remaining portion. Khula, the government's agency for small business finance, is currently the most significant. Other organisations make it easier for banks to lend to small businesses by taking over the cost of screening applications and reducing the risk of lending to small business owners by providing mentorship programmes to borrowers. Sizanani specialises in accessing loans of under R100 000 from banks.
Venture capital funds
Venture capital funds invest money in businesses in return for shares in the business. The venture capital company becomes involved in the business, usually at board level. After a period of three to seven years, the venture capitalists sell their shares, either to the original owner, or to another investor. Venture capitalists normally expect a 30% return on their investment and your chances as a small business of being financed in this way are very slim.
Khula, the government's agency for small business finance, has also started a venture capital fund.