Money is the life blood of business. Whether the business is a start-up or JSE listed conglomerate, capital is always an issue. Before embarking on the journey for a cash injection for a business, one must first decide what the money is needed for. Improving the business, replenishing stock or even starting up must be a well thought out process. For a new business or one that is expanding, a business plan is essential and normally an accountant can assist with this. The vital aspect of the plan is that it should show how the funds are to be spent and provide a clear explanation of the profit that is expected as a result of the new cash injection.
Generally, capital is either in the form of:
- Equity – that is your own capital or cash. It is contributed by your partners or shareholders
- Debit – This is borrowed money, often there is an interest aspect to the loan, and importantly your profits must generate enough funds to re-pay the loan as well as the interest portion.
- Donation – This may be an instance of a family member giving you money for your business or it may be in the form of a grant from government or other agency.
Where do you get the money from?
- Your own money
It could be your savings or from the savings of your partners. This money is invested on a long-term basis and is often not withdrawn from the business account. The owner is repaid with a salary or dividends.
- Family and Friends
This can be a good source of capital. A loan agreement in writing stating the terms is vital, especially if this is a friendly loan.
- Bank Financing
Banks are a common source to raise capital for small business. Various banks have many different solutions for various sizes of business.
- Mortgage Finance
Second mortgages tap into the locked up equity you may have in your home. Consider SA Home Loans and the big 4 banks.
- Credit Cards
Credit cards could be a temporary solution for your business. The interest charged on credit cards are very high and this is not an efficient capital source.
Your partner should have goals for the business that are aligned with yours. An agreement between the parties is essential to preserve the business relationship.
- Crowd Funding
Crowd funding is a brand new capital raising solution. Your project is funded by the public and they use their own private funds. The crowd supports ventures by pledging money, time or both. The pledge is typically done through the internet often using social media like Facebook, Twitter and Instagram. Generally, there is a reward for the capital contributors. These rewards include discounts, retail items, recognition and experience or access.
- Angel Investing
Refers to entrepreneurs that invest some of their wealth in start-up businesses. It is accompanied by sound business advice and connections. Examples include Shanduka, Black Umbrella and Angel Hub.
- Venture Capital
Typically, they are keen to invest in early stage businesses with strong growth potential. Sometimes they require a share in the business in exchange for funding it.
- Private Equity
Private equity is money invested in companies that are not listed on the JSE. The investors inject capital as a rescue or for expansion.
- Media for Equity
Media or advertising space is traded off for shares in a start-up business that often occurs when media companies have unsold advertising space.
- Soft Loans
Soft loans are low interest loans usually backed by government or international social enterprise funds. There are usually conditions attached or obligations to be met. Loans have lenient lending terms. Examples of banks that approve such loans are DBSA, IDC, DTI, Land Bank.
Many successful businesses went through the growing pains of looking for capital when they started. Business ideas must be sound and it may be ideal to speak to a trusted friend to measure if the business has merits before seeking capital. Protecting one’s unique idea or concept is often a challenge when raising capital. A solution may be to download a free non-disclosure agreement from the internet and ask capital providers to sign this as a way to protect yourself. Using capital whether it is personal or outside sourced, should be respected and always used for the intended purpose. Sober accounting records and reporting are a businessman’s best friend.