How to get money for your small business in South Africa: Who gives money to small businesses, what do they want, and how to make your business qualify for funding?

Introduction:

In our last blog, we talked about five main reasons why businesses can fail. This post will focus on just one of those reasons: lack of adequate funding.

Small businesses are very important in South Africa because they create jobs and help the economy grow. Small businesses make up over 90% of businesses in the country and contribute to about 40% of the country's money. Helping small businesses grow can help more people find jobs and make the country's economy stronger.

It is clear that small businesses are very important for South Africa's economy. But sometimes, small businesses have trouble getting money to help them grow. A report by the Small Business Institute found that only 20% of small businesses in South Africa can get official money. This means it's hard for small businesses to expand, hire more workers, and help the economy.

In this blog post, we will talk about who gives money to small businesses, what they want to see from those businesses, and how you can make your small business eligible for funding.

Part A > Who gives money to small businesses and why?

Who gives money?

It's important for you to understand that the people giving you money for your business have their own reasons for doing so. They want to achieve specific results and will only fund you if they believe that it will help them reach their goals quickly. You should treat these funders like your customers and make sure they get what they want. This increases your chances of getting what you want. So, it's important to know who you are asking for funding and why they might be interested in funding you. If you know this, you can explain how funding your business can help them achieve their goals.

There are many places where you can get money for your business in South Africa. It is not just the government who provides funding to small businesses. The table below looks at some different places where you can get your business funded:

You can also try crowdfunding to fund your business. This is when lots of people give small amounts of money to help you. In South Africa, you can use websites like ThandaFund, StartMe and FundFind to ask for donations. People give money because they want to help small businesses and might get rewards or gifts in exchange.

What is return on investment? Angel investors and venture capitalists are interested in this.

Return on Investment (ROI) is a way to figure out if an investment made you money or lost you money. You can find out the ROI by subtracting the cost of the investment from the amount of money you earned, and then dividing the result by the cost of the investment. This gives you a percentage that tells you if the investment was profitable or not. A higher percentage means the investment made more money, while a lower percentage means it made less money.

To show an investor how much money they can make from investing in your small business, you should create a plan that estimates how much money your business will make and spend over a certain amount of time. This plan can include things like how much you plan to sell, how much it will cost to make your products, and how much you will need to pay for things like rent and salaries.

Using this plan, you can figure out how much money the investor can make by using the formula we talked about earlier. You should explain this formula clearly and also tell the investor about any risks or problems that could affect how much money they make.

The most important thing to know is that you are asking other people for money for your business. So, you need to know how your business makes and spends money. You also need to know how this money is shared among yourself, your business partners, suppliers, employees, and anyone else who has invested in your business. If you don't know how money works in your business, it will be difficult to convince others to give you money. They may not see their money again if you don't have a good understanding of how money flows in your business.

Part B: What are funders looking for when sponsoring a small business?

Funders have their own goals and are interested in different information for different reasons. They may ask for the same document but look at it differently. The funders we mentioned earlier may request different documents from you as a small business owner. This list is not complete, but it includes some of the information that is usually needed.

In reviewing the business plan, financial statements, and tax records, each of these funders has particular things they are interested in. Let's take a look at what they might consider on a business plan, financial statements, and tax reports:

What is potential for growth?

"Potential for growth" refers to a small business's ability to increase its revenue and profits over time. Investors are interested in businesses that have the potential to grow rapidly and become very profitable in the future.

To provide potential for growth to a potential funder, you should have a clear plan for how your business will increase its revenue and profits in the future. This could include expanding into new markets, developing new products or services, or improving your existing offerings. The plan should be realistic and based on research and data, showing how the business can achieve sustainable growth over time.

Additionally, you should be able to demonstrate your ability to execute your plan successfully. This means having a strong team in place, with the necessary skills and experience to achieve the business's goals. It also means having a solid understanding of the market and competition, and being able to adapt to changes and challenges as they arise. By presenting a clear plan for growth and demonstrating your ability to execute it, you can attract funding from venture capital firms and other investors.

 What is an investor pitch?

An investor pitch is a presentation where an entrepreneur tries to convince potential investors to give money to their business. They explain what their business does, how it makes money, and how the investment will be used to grow the business.

For the pitch to be effective, it must include these elements. This list only highlights 3 critical elements for your pitch - you can get many templates to use on Google.

1. A clear and simple explanation of the business idea, what problem it solves, and how it is different from competitors.
2. A realistic plan for how the business will make money and what it will cost to run.
3. A demonstration of the team's skills and experience, and how they are committed to making the business successful.
   

What to look out for when working with loans:

When considering getting a loan to fund your small business, it's important to understand the risks and responsibilities involved. You should carefully think about whether borrowing money is the best choice for your business. If you decide to get a loan, make sure you understand the terms of the agreement, like the interest rate and repayment schedule. It's also important to have a plan for how you will use the money and generate enough income to pay back the loan.

Your credit score and financial history are also important when applying for a loan. Lenders will check your creditworthiness to decide if they should approve your application and what interest rate to offer you. If you have a low credit score, it may be harder to get approved or you may have to pay a higher interest rate. It's also important to know the risks of not repaying the loan, which can hurt your credit score and make it harder to get financing in the future. By being responsible with your borrowing, you can take advantage of loan financing and help your business succeed in the long term.

When you're looking at loan offers for your small business, having a good accounting system is important. Your financial records can help you figure out how much money you need to borrow, how much you can afford to pay back, and when you can realistically pay back the loan. By comparing the interest rates, repayment terms, and other fees of each loan, you can decide which offer has the lowest cost and best terms. Having accurate financial data helps you create a realistic cash flow plan and decide how much money you can use to repay the loan without hurting your business. In addition, you can use your financial records to create a statement that will show lenders how good you are at managing money and increase your chances of getting approved for a loan. By keeping good records and making informed decisions about borrowing, you can help make sure your business succeeds in the long term.

Stay prepared:

As a small business owner, you should always be ready to request funding in case they need more money for unexpected expenses or growth opportunities. To increase your chances of getting funded, you can separate your personal and business finances, maintain a good credit history, and have collateral or a co-signer. Being proactive and prepared can help you take advantage of opportunities and position themselves for success.

Part C > How to remain eligible for funding?

A small business that attracts funding:

Small businesses in South Africa that are most likely to get funded are those that demonstrate the following characteristics:

1. Scalability and growth potential: Funders prefer small businesses that have a clear path to growth and scalability. They look for businesses with innovative products or services that have the potential to capture a significant share of the market.
2. Profitability and financial stability: Funders want to see that a small business is generating revenue and has a solid financial footing. They look for businesses with a track record of profitability or a clear plan to achieve profitability in the near future. This means keeping your financial records up to date, reliable and complete.
3. Strong management and execution: Funders want to see a strong and experienced management team that can effectively execute the business plan. They look for businesses with a well-developed and comprehensive business plan that outlines the goals, strategies, and financial projections.
4. Market opportunity and competitive landscape: Funders assess the potential market opportunity for the small business and the competitive landscape in which it operates. They want to see that the small business has a clear understanding of its target market and how it plans to compete.
5. Social and environmental impact: Some funders prioritize small businesses that have a positive social or environmental impact. They look for businesses that create jobs, promote sustainable practices, or support disadvantaged communities.

This list is not exhaustive but covers the gist of what small business funders are looking for before they fund a business. But when you run your business in this fashion – you are not only eligible for South African sources of funding but you can get funding from international sources.

Yes, there are many international funds that are funding small businesses in South Africa. For example, here is a list of a few international funds that fund small businesses in South Africa.

What to avoid: some reasons why funders may avoid funding your small business

We have talked about how you can get money to start your small business from different places. However, sometimes it's not easy to get the money you need. Below, we will look at some of the reasons why banks and other investors may decide not to give you the money you need for your business.

The steps below can help you to address the issues raised above:

1. Improve your credit score: If you have a poor credit history, take steps to improve your credit score, such as paying bills on time, reducing debt, and disputing errors on your credit report.
2. Build up collateral: If you don't have enough valuable assets to use as collateral, consider ways to build up your collateral, such as saving money, investing in assets like real estate or equipment, or partnering with another business to share assets.
3. Develop a strong business plan: A well-thought-out business plan can demonstrate to lenders and investors that your business has a solid foundation and is worth investing in. Be sure to include a detailed marketing strategy, financial projections, and an analysis of your competition.
4. Minimize risk: If your business operates in a risky industry or market, consider ways to minimize risk, such as diversifying your products or services, building a strong brand reputation, and focusing on customer retention.
5. Improve cash flow: To improve your chances of getting approved for a loan or investment, focus on improving your cash flow by increasing revenue, reducing expenses, and improving your billing and collection processes.

Remember that these are not guaranteed solutions, and different funders may have different criteria and priorities. However, addressing these issues can help increase your chances of securing funding for your small business.

A good accounting system is your best friend:

A good accounting system can help you address most of the problems given above. It will help you keep track of your business's money and show you where you can save money, make more money, and improve your credit. It can also help you prepare a strong business plan that shows lenders and investors that your business is worth investing in. By using a good accounting system, you can make smart decisions about your business and show funders that you are responsible and trustworthy.

Conclusion:

As a small business owner, it can be hard to get funding. But if you understand what different funders want and show them how you can help them, they will be more likely to give you money. You can get funding from banks, governments, investors, crowdfunding websites, or venture capital firms. But each of these funders has their own rules and goals, so you need to learn about them and adjust your pitch to fit their needs. This might mean making your business plan better, improving your credit, reducing risk, or making more money.

Also, some types of businesses are more likely to get funding than others. For example, businesses that have a good plan for growth, special ideas or inventions, or a history of success might have an easier time getting funding. If you make your business look strong and promising, you will have a better chance of getting funding. With hard work and smart planning, you can get the funding you need to make your business successful.