3 Lessons For Raising External Finance Grow Your Business
Access to finance is critical for business growth. Research has shown that businesses that have access to adequate finance are more likely to grow their revenue and increase the number of people they employ. Yet small and medium enterprises (SMMEs) across South Africa struggle to access the finance they need. The journey of seeking external finance can be fraught with difficulties. The following insights can help you improve your odds of a successful finance application.
1. Be clear on the business need and the purpose of seeking external finance
The idea of having access to additional funds could relieve the anxiety of having enough cash for day-to-day business expenses or fund an internal project to take your business to the next level.
However, external finance comes at a cost. Before applying for finance, weigh up the cost of finance against the potential benefits for your business. Accessing external finance without being clear on how you will use the funds to generate business value finance can be detrimental – you run the risk of misusing the funds or being left with excessive debt.
Be clear on why external finance is critical for maximising the value that you derive when using the additional funds.
2. Different forms of finance are not made equal
External finance comes in various forms, each with specific application requirements and costs. Equity-based finance options such as venture capital finance require you to give up a portion of your business ownership in exchange for finance. While the loss of control may be concerning, this form of finance is the cheapest in that it is often offered together with non-financial support in the form of business advisory and mentorship. Equity-based finance is usually provided to businesses with high growth potential, and it is paid out when specific milestones are achieved.
Debt finance, on the other hand, is offered as a lump sum or a revolving credit facility. The capital amount that you borrow must be repaid with interest. Fundamentally this is based on cash flow and collateral. However recent developments in the financial services industry have seen an increase in the different types of finance available to small business.
- Supply chain finance leverages the financial strength of partners in the supply chain to unlock access to finance for participants in a supply chain.
- Online marketplace lending uses alternative data sources such as the value of card sales or digital payments to provide external finance with flexible repayment options.
Crowdfunding presents an opportunity for you, as a business owner, to raise funds from many investors via an online platform or your personal network. How this takes a lot of planning and campaigning Different requirements, costs and conditions apply to various forms of external finance. Do your research and ensure you select the type of finance that is most suitable for your purposes. Maybe it will be the right and available combination of several options.
3. Applying for finance requires preparation and takes time
Depending on the type of finance you wish to apply for, having the required documents in place will improve your odds of a successful outcome. Business registration documents, shareholders certificate, tax clearance certificate (where applicable), audited financial statements, as well as a clear business plan are some of the documents that may be requested when you apply for funding.
Have these documents ready before you submit your funding application to avoid unnecessary delays. Getting approval on your funding application can take time.
So, do not wait until you are in a desperate position to apply. Submit your application well in time and have a clear plan on how you will fund day to day business operations while you wait for the outcome of your funding application.
Have you considered applying for external finance?
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About the author: Belinda Rathogwa is a PhD student at the Wits Business School, conducting academic research to learn ‘How entrepreneurs THINK about external finance’.