Finding business finance for your business can be straight forward if you know your way around the business finance landscape. You have come up with a great business idea, have done your market research and feasibility study, you have a great business plan and you may even have already put together a management team to get your idea of the ground. Its time to find finance for your, currently small, business.
Finding finance for a new business really can be a mine field. Yes there may be plenty of sources of finance, even you might not be aware of it yet, but the trick really is to find the finance that is right for you and your business.
Most businesses will start at the bank. This process will normally be easier if you already have a list of clients willing to buy, or who have bought your product or service. High street banks will be e very weary of financing equity, but if you need a certain amount of trade finance, they will see you through. Or it may be that you have certain assets that the bank may lend against.
If a bank is not an option what next?
It depends how much money you are looking to raise. If it is over R1m, there are a number of financial institutions which may be able to help. Typically, they will not invest amounts of less than R1/2m because the amount of work they will have to do to make the investment makes it uneconomical. If it costs them R100,000 to make the investment and R20,000 a year to monitor the investment at the end of five years the investment has cost them the amount invested plus R200,000. A R100,000 investment will therefore need to treble just to break even for them!
You may approach the funds directly yourself of course, but it tends to help if you employ the services of a corporate financier. A good financier will check your business plan for you and help target the right institutions. They will typically charge around 3% of all funds raised (for amounts over R1m) and they may charge a monthly retainer. You may find yourself paying R10,000 a month for three months with no guarantee of success whatsoever.
If you are looking to raise less than R5 000,000 you should consider Business Angels. In South Afirca they can be found through organisations such as Investors Network.
As a start, find companies that are similar to your business without being a competitor. Find out who the shareholders of that business are and approach them directly. Anyone involved in marketing will tell you that the most powerful predictor for consumers is past purchasing behaviour. If someone has already invested in a sector (and done well from it) they are likely to do the same again.
Your pitch to them needs to understand what they are motivated by. You will be surprised; it is rarely about money. If you pitch to them at the right level you will succeed.
You can also ask business directors to recommend Business angels to you. As a whole, entrepreneurs are a good bunch and we do tend to do what we can to help people.
If you are going to use a financier please do ask the following questions
1) Who have they raised money for in the last 12 months?
2) How much have they raised?
3) How many people/ organizations have they raised it from?
4) Are there any projects that they have not succeeded on?
5) What were the lessons from those failures?
6) What do they think of your business?
7) Would they invest? Would they invest some of their fees back into the business (Apart from two cases, I always invest my corporate finance fees back into the business. I think this shows confidence and tells other investors that you really do believe in the business)
Can they give you two references? (Please do take up the references. You will be amazed at how much people will tell you!)
Finally – just be wary of financiers with lots of time on their hands In my experience all of the best financiers I have worked with tend to be too busy to take on new projects.
Networks are often a great place to meet investors, as long as you know what you are looking for. Keep an open mind and of you do meet someone don’t be afraid to ask questions and be choosy. Investors are looking for good business ideas to invest in, in the same way that you may be looking for business finance.
Hope this helps.
