Right Type of Funding for your Startup

Funding for a business can, broadly speaking, be divided into three categories; Grants, Capital and Debt. If you need to raise funding, it will most likely be in of the forms mentioned above or a combination of them. Many people struggle to raise capital for their businesses, precisely because they don’t this simple distinction For example, it may seem obvious to most that a “just graduated “student who has no business experience, no capital and no col - lateral, is probably not the ideal customer for a bank loan. But most people would be horrified by the number of funding applications that are turned down by banks for this reason, from people who do not realise they are not good candidates for a loan.

Startup enterprises that are small scale community based operations, should look more towards grant contributions for their initial funding. The Department of Trade and Industry together with Department of Small Business Development provide a variety of small business grants which are geared to fund; business plans, marketing materials, standards accreditation and the like.

Development agencies such Small Enterprise Finance Agency do provide assistance with finance, if the business plan proves to be viable. Family .friends and briefcase investors are quick and easy source of startup finance. This is what you should be thinking as a startup business. Forget big banks loans and “angel investors”. You are more likely to succeed if you focus your efforts on bootstrapping your business. By this we mean financing your company and its growth with your own finances or with assistance from others, which means less money has to be borrowed and as a result, interest costs are reduced.

Raising money for business, at any stage of development, is an in - credible complex undertaking. There are many factors to consider when deciding on the right type of funding. Do you require working capital ( the money needed to fund the normal day -to -day operations of the business) or asset finance ( assistance in buying new equipment and / machinery.

Do you need a short term, unsecured facility or will you require long term collateralized funding (Collateral is a form of security provided as a guarantee to credit grantor for a loan given to you. Will it be equity (the sale of ownership interest in exchange for capital or debt (borrow and pay back the funds with interest) ? These are some of the questions you have to be mindful of. Not only must you know exactly how much you need and for what purpose. You also need to understand the type of funding most suitable for your specific requirements. Tshepo Phakathi is the Chief Executive of Phakathi Capital. Contact him via email at tshepo@phakathicapital.co.za or follow him on Twitter@thisiskaello.