This is Part 3 of our How to Start, Run, Grow & Fund a Business in South Africa. Please read How to Start, Run, Grow & Fund a Business in South Africa (using what you currently have) before reading this. This is part of the Funding a Business section.
You have to read up part 1 and part 2 before reading this page to get a primer as you won’t fully grasp what I am saying.
In Smuse the initial funding needed to start, the working capital needed to run and the debt and equity that may be needed to grow the business.
I covered initial funding to start a business in part 2. Now we look at the funding to run and grow the business.
Funding to Run a Business
Working Capital / Business Funding Unsecured
If you’ve been reading I already covered this, South Africa’s working capital industry. Working capital is used to run a business, maybe a big order came in and you need some bridging finance until that client pays you.
However, if companies need working capital they often find themselves in a catch 22 situation: banks want collateral but working capital is used to run the business and not purchase assets, this creates a situation where the only option companies have is high interest “fintech” shops.
The first thing you have to ask yourself is should I use bridging finance? South Africa’s working capital industry has very high-interest rates, and the job that you get has to pay enough to cover interest rates. The local working capital interest rates are so high that you may be better off in some instances to simply walk away from the job and continue.
I personally do not use this form of finance and don’t recommend it. But if you need it then only use it on income-generating activities or in emergencies like if you have a road freight company and a truck broke down.
So under what circumstances will you get this capital? Here is what I said last time:
If you want to know when is formal capital available for a business. There is an easy way to read the local environment. Go and look at the slew of local “working capital” shops (some calling themselves “fintech”) that have popped up recently Lulalend, Business Fuel, Merchant Capital and a dozen others. Look at how they operate, look at their requirements, a certain period in business and a certain amount of revenue (around 1 year / R1 million). Some of these guys have interest rates that will make loan sharks proud. Ask yourself, why is a business with at least R1 million in annual turnover (R83333 a month / R4166 a day in a five day week) lending from people that charge the same interest like Georgie Zamdela? That is because even if you making R1million a year the banks will still bullshit you. Can you imagine how they treat startups? But don’t take my word for it (or the word of Lulalend, Business Fuel, Merchant Capital etc. clients) you are more than welcome to waste your time going from pillar to post looking for finance for your startup.
If you are making R1 million a year and been in business for a year, then you may quality for this form of unsecured finance. But remember these interest rates are so high that you have to compare it to the profit you are making from the purpose that you are using this finance for.
Corporate finance to grow business
I’m always surprised by South African entrepreneurs desire to raise capital. You should start a business with what you have and then run as far as possible without formal finance. Access finance only to grow the business, or if you really need to working capital or bridging finance. Raising capital comes with consequences. None of them good. Here I will discuss the two main instruments: debt vs equity.
A corporate loan is taken out by the company as its own legal entity. If you take out a loan to grow you almost always need collateral to put up which you will lose if you cannot furnish the loan. This money also comes with interest. Once you are a going concern usually the equipment that is financed will be in the form of a notarial bond (which I will get to on its own). If you don’t pay the equipment gets repossessed and auctioned off. No different than when you financing a car.
This to me in South Africa this is the strangest of all. When entrepreneurs are looking for equity partners to fund their business startup. It can due to that point of desperation. In the early stages, partners can bring more problems to the table than solutions.
When you sell equity to an investor, you are basically taking on a partner. When you start out, you own 100% of the business if you are the sole owner. That business is essentially worthless. As you grow it and have cash flow, profit, assets etc. You can now sell a piece of that business both to fund growth or to take some money off the table.
Now besides money, an equity partner can bring in their own expertise and connections but they can also bring in a lot of problems for you. This is not something that should be considered lightly. The sooner you take money for equity, the sooner you can lose control of your company.
If the business cannot qualify for finance and you have to go back to investors for money, you will eventually lose control ( example if you sell 30% you are then left with 70%, sell another 21% and you are left with 49%.) or even pushed out of the company that you started.
If you’ve been in a relationship with another person, you know the first impression of that person is not necessary how that person is, you know how personalities can clash, the same can happen with investors you can end up with a big headache. No different than with a personal relationship, at the start you’ll go through the honeymoon phase and things are going well. Then problems start to crop up.
Partnerships are so complex because as humans we are complex, we have our own emotions and temperaments. And it’s weird because you can’t predict anything; you can start a business with a stranger and you will get along well and become successful, but you can also start a business with someone you knew for decades or a family member and you suddenly won’t get along well and the business will fail.
That is how unpredictable taking on a partner is. And I don’t say thins lightly some partners have hired hitmen to take the other out. There is just so many things that you can end up disagreeing on, strategy, putting in work, and you may not see each others point of view. If you are a new entrepreneur, no skills, no money and need mentoring then you in no position to access this kind of funding. As I said before government programs should have helped you in that case. Often investors get flak for this, if you voted ANC you should look in the mirror if you are looking for someone to blame and if you need a helping hand you should look to the end of your own arm because they not going to help you. It’s a macro matter. You have until 2024 to chew on the consequences of your actions.
Both debt and equity can lead to major stress and create more problems than they solve. If you can run alone, do so for as long and as far as possible.