Starting a business usually requires some money upfront. The amount you need will depend on the type of business, where it will operate, what equipment you need, and how long it will take before the business starts making enough income to cover its costs.
Before you approach a bank, investor, family member or funding agency, you need to be clear about three things:
How much money do you need?
Do not guess. Work out your costs carefully. Start by listing everything you need before you open your doors. Then estimate what you will need for the first few months of trading, especially if your customers will not pay immediately.
Your total funding need is sometimes called your capital requirement. This is the total amount of money you need to start the business and keep it running until it can support itself.
For example, you may need money for:
- Registering the business
- Buying equipment
- Buying initial stock
- Paying a rental deposit
- Setting up a website or social media advertising
- Paying staff before customers pay you
- Covering transport and delivery costs
- Keeping emergency cash available
If your business can be started with very little money, it is usually better to use your own savings first. This is often called bootstrapping. It keeps your risk lower, avoids debt, and allows you to test the idea before borrowing money.
What do you need the money for?
The type of finance you apply for depends partly on what you will spend the money on. Start-up costs usually fall into two main categories: capital costs and running costs. In your business plan, separate your start-up costs into capital costs and running costs. This will help you decide which type of funding is most suitable.
1. Capital costs
Capital costs are once-off costs for items that your business will use over a longer period. These are often called fixed assets.
Examples include:
- Machinery
- Tools and equipment
- Delivery vehicles
- Computers, printers and software
- Shop fittings
- Office furniture
- Manufacturing equipment
It is often easier to get finance for these items because they have value. For example, if you buy a vehicle or machine through asset finance and cannot keep up with repayments, the lender may be able to repossess the asset and sell it to recover some of the money.
Many South African banks offer business asset finance, and some also offer working capital and business expansion finance for small businesses. Absa, for example, states that it offers asset loans, working capital and expansion finance for start-ups and existing SMEs. (Absa)
2. Running costs
Running costs are the everyday costs of keeping the business going.
Examples include:
- Stock
- Rent
- Salaries or wages
- Petrol and transport
- Telephone and internet
- Electricity and water
- Packaging
- Marketing
- Stationery
- Insurance
- Repairs and maintenance
These costs are often harder to finance through a loan because they do not leave the lender with an asset that can easily be taken back and sold. For this reason, lenders may want strong evidence that your business will generate enough cash to cover these costs and repay the loan.
Cash flow is more important than you think
Many small businesses do not fail because they are bad ideas. They fail because they run out of cash.
Cash flow is the movement of money in and out of your business. You need to know:
- When money will come in
- When money must go out
- Whether there will be enough money available each week or month
For example, a business may make sales in January but only receive payment in March. In the meantime, it still has to pay rent, wages, petrol and suppliers.
This is why a simple cash-flow forecast is essential. It helps you see when you may need extra money and whether your business can afford loan repayments.
Loans or equity?
There are two main ways to raise money from outside the business: loan capital and equity capital.
Loan capital
Loan capital is money that you borrow and must repay.
You may borrow from:
- A bank
- A development finance institution
- A family member or friend
- A supplier
- A micro-finance institution
The advantage of a loan is that you keep ownership and control of your business. The disadvantage is that you must repay the money, usually with interest, whether the business succeeds or not.
Before taking a loan, ask:
- What is the interest rate?
- What are the monthly repayments?
- When must repayment begin?
- Is collateral required?
- Will I need to sign personal surety?
- Can the business afford the repayments if sales are slow?
Be especially careful about borrowing money for expenses that do not directly help the business earn income.
Equity capital
Equity capital is money invested in your business in exchange for a share of ownership.
This may come from:
- A business partner
- A private investor
- A family investor
- An enterprise development programme
- A venture capital investor, usually for high-growth businesses
The advantage of equity funding is that you do not usually have to repay the money like a loan. The investor shares the risk with you.
The disadvantage is that you give away part of the ownership. This means the investor may have a say in business decisions and will usually expect a share of future profits.
Equity funding can be useful if your business needs a large amount of money and will take time to become profitable.
Most businesses use a mixture of funding
In practice, many small businesses use a combination of:
- Owner’s savings
- Loans
- Supplier credit
- Asset finance
- Family contributions
- Grants or development funding
- Reinvested profits
Banks and funders usually want to see that you have contributed something yourself. This shows commitment and confidence in your own business.
Your own contribution does not always have to be large. It may include savings, equipment you already own, stock, premises, skills, or unpaid work you put into the business.
South African funding options to consider
South African small businesses can explore several possible sources of support.
Banks
Banks may offer:
- Business loans
- Overdrafts
- Asset finance
- Vehicle finance
- Invoice finance
- Credit cards for business expenses
Banks normally want to see a business plan, cash-flow forecast, bank statements, tax information, owner contribution, and evidence that the business can repay the loan.
Small Enterprise Development Agency / SEDFA support
Seda has historically provided non-financial support to small businesses and cooperatives, including help with starting and strengthening a business. Government information states that Seda supports small businesses and has branches in district municipalities. (Gov.za)
This kind of support can be valuable before applying for funding because a stronger business plan and clearer financial projections improve your chances.
SEFA / small enterprise finance
The Small Enterprise Finance Agency has been one of South Africa’s key small-business finance institutions. Government lists SEFA as a small-enterprise finance agency, and SEFA-related programmes have included lending and blended finance options for small businesses. (Gov.za)
IDC funding
The Industrial Development Corporation funds start-up and existing businesses, especially in sectors linked to industrial development, manufacturing, expansion and job creation. The IDC states that it funds start-up and existing businesses, with funding from R1 million up to R1 billion. (IDC)
This is more suitable for larger projects than very small informal start-ups.
Grants and incentive programmes
Some government or private programmes offer grants, blended finance, training, equipment support, or market-access support. These often focus on specific groups or sectors, such as:
- Youth-owned businesses
- Women-owned businesses
- Township and rural businesses
- Cooperatives
- Manufacturing businesses
- Export-focused businesses
- Green economy or technology businesses
Grants are attractive because they may not have to be repaid, but they are usually highly competitive and often come with strict rules.
Going it alone
Starting alone as a sole proprietor usually means relying mainly on your own money. This may include savings, equipment you already own, or income from another job while you build the business.
This approach can work well for businesses that can start small, such as:
- Consulting
- Tutoring
- Cleaning services
- Home baking
- Repairs and maintenance
- Online selling
- Freelance services
- Small-scale trading
The benefit is that you keep control and avoid debt. The risk is that growth may be slower because you have limited money available.
A sensible approach is to start small, test the market, keep costs low, and only borrow or seek investors once you can show that customers are willing to pay.
Before you apply for funding
Prepare the following:
- A clear business plan
- A start-up cost list
- A cash-flow forecast
- Quotes for equipment or stock
- Proof of your own contribution
- Business registration documents, if applicable
- Tax information, if available
- Bank statements
- Details of your customers or expected market
- A repayment plan, if applying for a loan
Funders want to know that you understand your business, your costs, your market and your risks.
Key message
Do not raise money simply because you can. Raise the right amount, for the right purpose, from the right source.
For many small South African businesses, the safest route is to start as lean as possible, use personal savings where practical, keep careful records, prepare a cash-flow forecast, and only take on debt when the business has a realistic chance of repaying it.