Small business owners often cite a lack of funding as the biggest hurdle in the way of their success. But the funding challenge is often a perceived, rather than a genuine one, and can be overcome through proper planning, preparation and research. This is according to small business and finance experts speaking ahead of the annual Small Business Expo.

Disruptive funding may be the way to go

Nedbank Group economist Busisiwe Radebe says many small business owners still see “traditional” funding – a loan from a bank – as the only option for business finance. “But traditional funding is not for everyone. It’s an older model, with an important place in financing, but for younger, disruptive players or those with no track record, disruptive funding might well be the way to go for start-up finance.”

Radebe notes that banks are built on risk management, and they are in fact custodians of other people’s money, therefore they will not always be willing to lend money to newcomers with no business plan, assets or credit history. “This should not stop people from asking, however. Large banks have business divisions, where even a potential start-up can get advice and find out what they need to put in place in order to qualify for a loan in future.”

“Many entrepreneurs are ill-prepared when they approach banks for funding,” says Thapelo Tsui, relationship banking manager and small business development expert at Nedbank. “In our experience, a certain amount of hand-holding is necessary to help would-be entrepreneurs prepare to apply for funding and manage their finances responsibly. As a result, Nedbank is working to help small businesses understand the processes and manage their finances more effectively.”

Darlene Menzies, CEO of Fin Find, says: “Too many people think banks are the only place to go for finance. They aren’t. There are numerous, VC funds, crowdfunds and grants available to small businesses in South Africa.” The Fin Find platform aggregates over 450 funding products available to local small businesses.

Do you know what funders are looking for?

Megan Dedekind, senior investment manager at Business Partners, echoes this view: “In addition to the challenge of finding the funders, many new businesses do not understand what funders are looking for. In addition, many are inclined to over-extend themselves in terms of debt.”

Disruptive funder ProfitShare Partners is one example of new models for business financing available in South Africa. Founder and CEO Andrew Maren explains that the model aims to close the gap between start-up finance and growth funding for those businesses struggling to secure traditional loans.

ProfitShare Partners offers small businesses 100% funding on valid purchase orders, allowing them to compete for larger contracts. This transaction-based loan does not incur interest, but rather a share in the profit from the transaction. It’s a low-risk model for the lender, says Maren, and it also reduces risk for the small business, since ProfitShare Partners carefully assesses the transaction before approving the funding.

“We are inundated with applications, but since our platform is tech-based, we are able to keep the costs of delivering the service manageable,” he says. “ProfitShare Partners has helped at least 40 clients grow from turnover in the hundreds of thousands to turnover in the millions, with one growing to over R35-million turnover in just two years. For many small businesses, this support bridges the gap and almost grooms them to become bankable, and once they have a track record and a financial history, they move on to traditional business banking models.”

Nokwazi Mzobe, Founder of Matoyana Business Solutions, author of the Small Business Handbook and driver of the Fearless Women campaign, adds that disruptive funding options also include stokvels and crowdfunding. “Platforms such as Thundafund or even smaller initiatives through platforms like BackaBuddy are proving very successful in raising funds to empower and help people,” she says.

Beyond traditional lending and disruptive funding lies a model for sustainable business development that rests heavily on responsible, involved support for viable small business models. “You might term this model ‘responsible funding’,” says Eskom Foundation CEO Cecil Ramonotsi.

Eskom support for small business

Eskom Development Foundation, through myriad interventions, has invested heavily in small business development across the country in recent years. However, Ramonotsi notes that the investments were never traditional loans or disruptive funding – they were always strategic and fiscally responsible investments made with a view to delivering maximum socio-economic returns for the country.

Eskom Foundation’s business development efforts include the Simama Ranta Schools competition to spark entrepreneurial development at an early age, and its annual Business Investment Competition (BIC), for black-owned SMEs in the engineering and construction, trade and services, manufacturing and agriculture/agro-processing sectors. BIC, which was launched in 2008, has attracted entries from over 357 businesses in the past five years alone.  In addition, Eskom’s Contractor Academy has issued contracts to the value of R2.6-billion.

“We believe that simply allocating a loan or a grant to any start-up that applies for funding is not enough to assure their sustainability or economic development for South Africa,” says Ramonotsi. “Eskom’s responsible funding approach takes into account the fact that the four sectors we focus on in the BIC contribute the most to the GDP and play a very instrumental role in the country’s economic growth. In addition, entries are carefully assessed for their viability and sustainability, ensuring that the winners are truly capable of growth and job creation. And to help BIC winners deliver on their potential, we remain engaged and follow up with them, to ensure they have the best possible chance of business success.”