Most small-business owners start companies because they want to pursue a personal passion or be independent. For many, this opportunity is created late in life by money that is part of a pension or provident fund payment, or even a retrenchment pay-out. But there are other ways of finding finance if your entrepreneurial dreams can’t wait.
Here, we examine the advantages and challenges associated with the more traditional methods, suggest tips, and reveal what you should avoid.
Family and friends:
Though popular, turning to your nearest and dearest for loans should be undertaken with caution, because:
Money is often borrowed on the understanding that it will be repaid, but no repayment date is set, leading to disputes.
If loans are accepted from a number of family members or friends, keeping track could be challenging.
Pro tip: When using ‘family money’ to launch a business, all agreements should be in writing.
Looking for a partner to invest can be a viable financing alternative, but the following should be considered:
For a good chance at success, your partner must share your values, passion and determination.
Pro tip: All aspects of the partnership agreement, share allocation and profit sharing should be in contractual form, so misunderstandings are avoided.
Debt equity (business loan from a bank):
This is most often the way to go, because:
A banker can assess business plans, point out potential pitfalls and suggest finance solutions to meets specific needs.
Structured facilities can be arranged specifically for your business.
Repayment terms and interest rates are agreed upon upfront. This helps regulate cash flow.
Pro tips: When approaching a bank, realise that:
The bank will not fund 100% of the start-up finance. The more money you have committed to your venture, the more likely it is that you will get a loan.
Security is important. Providing security for the loan in the form of assets or sureties (people who agree to pay debt on your behalf) make it more likely that it will be extended.
What to avoid:
Raising money by maxing out your credit card, then using this money as the basis for a business loan: By doing this, you will increase your indebtedness, as interest will be paid on two loans – a business loan and your credit card.
‘Cashing in’ by using money paid off on your home loan: You could erase the equity on your house, extend the repayment term, and pay a higher amount on your mortgage.
Micro-lenders: Their rates are higher than those of banks.
Running a business is a major responsibility, but it’s difficult to be successful with massive debt hanging over your head. To avoid this situation, do your homework and speak to a Standard Bank advisor; they will be happy to determine the best plan and products for your business needs.
Click here for more information on business banking options that are available to you.