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Finances

Small Business Funding

By Leigh de Jamaer

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December 13, 2018

Business Financing

One of the biggest challenges facing small and medium sized business owners is the ability to access finance when it’s needed.

Virtually every small business owner has cash flow problems. If you’re wondering how you’re going to be able to solve your business funding issues, you’re certainly not alone.

Smaller business, smaller funding amounts

Big businesses with established brands may need larger amounts of funding, but they actually have more options available to them when it comes to securing finance. Banks will be more willing to lend to a large business with a long track record and substantial assets than a smaller business still finding its feet. What’s more, a large business can look at selling shares or even listing on the stock exchange to access deep pools of capital.

Smaller businesses generally don’t need massive amounts of funding. They would be looking for anything from a few thousand Rand to close a cash flow gap, up to a few million Rand to help their business seize an opportunity for growth.

Finding funding for a small business is no easy task. While there are many avenues that you can explore, not all options will be viable or beneficial for your business. We take a look at some of the most common avenues for securing small business funding in South Africa.

These are some of the options for small business funding in South Africa:

  • government funding options
  • bank funding options
  • angel investors and venture capital
  • invoice financing from Bridgement

Government funding options

If you’re looking for business funding in South Africa, there are a number of government grants, loans and tax incentives that you can apply for, although you will need to meet certain criteria to get this funding:

  • The Department of Trade and Industry (DTI) promotes economic development and BEE. They offer incentives for specific industries like the automotive and textile industries.
  • The Industrial Development Corporation (IDC) provides funding for certain industrial projects that help create jobs and serve previously disadvantaged communities.
  • The National Empowerment Fund (NEF) promotes black economic participation in the economy by providing loans of between R250 000 and R75 million across all industry sectors.

Bank funding options

Banks offer a range of funding options for small businesses in South Africa, but in the current economic climate, it can be hard to secure the funding you need:

  • A bank overdraft can be a useful line of credit, but it is often charged at a high interest rate, and you pay a fee for it, even if you don’t use it. Overdrafts limits are usually not very high, so it’s only convenient for smaller funding needs.
  • Banks also offer short and medium-term loans, with repayment periods of two or more years. You normally need some form of collateral to take out one of these loans and they typically have to be quite large – in the millions and upwards.
  • If you need to purchase a specific type of business equipment you could take out asset finance from a bank.

When applying for finance through a bank, expect to provide a full business plan and detailed set of financials. Remember that a bank can take months to review your application and approve your loan, so it’s not ideal if you need business funding in a hurry.

Angel investors and venture capital firms

An angel investor is generally an individual who wants to provide start-up capital in small and up-and-coming businesses in exchange for equity in the business.  These investors can become very involved in your business, which may not appeal to some business owners. It is essential to get a formal agreement with an angel investor in writing. A detailed contract can protect you and your business if issues arise.

Venture capital firms also offer funding in return for a stake in the business, and often insist on taking a controlling hand in managing your business.

Invoice Financing from Bridgement

Bridgement offers an alternative way to apply for business funding in South Africa with a simplified invoice financing solution for businesses.

Invoice Financing involves advancing you funds on payments you’re expecting from your invoiced clients.

The application process is quick and painless. You simply connect your accounting package (e.g. Xero, Sage, etc.) and we’ll do the rest. Apply in minutes and get approval within hours, without having to submit any paperwork.

Once approved, you can start getting funded. You can look through your invoices and select which ones you would like us to provide funding for. You should receive the money in your bank account within 24 hours.

Bridgement invoice financing vs traditional invoice financing

There are two main types of invoice financing:

  • invoice or debtor factoring
  • invoice discounting

You may have heard of invoice factoring, which involves selling your invoices to a factoring company in exchange for an immediate payment. Your clients are notified that the invoice you sent them has been sold, and they would then pay your invoice factoring company and not you. Factoring is normally only offered for large amounts, so you would need a debtor’s book in the millions.

These are some of the disadvantages of traditional invoice factoring:

  • You will need to disclose your need for finance to your clients, which may harm confidence in your brand.
  • Your clients will now be paying a factoring company, which may chase them for payment putting your client relationships at risk.
  • You will most likely need to sign over your whole book to the invoice financing company, even if you only need a small amount of funds.
  • The factoring company will not advance 100% of your invoice value, they usually only pay out 70-85% of the value of your outstanding invoices.

With invoice discounting, you usually don’t actually sell your invoices. You can think of it as taking out a loan using your invoices as collateral. You might remain in control of your relationship with your clients and don’t need to disclose the invoice financing to them. Invoice discounting is only offered for large debtor’s books, over a million Rand. The discounting company will not advance 100% of your invoice value. You usually receive between 70-85% of the value of your invoices.

Bridgement is different. You can think of Bridgement as a hybrid between invoice discounting and invoice factoring. You sell your invoices to Bridgement, but it is completely undisclosed so your clients won’t be aware of it. Additionally, you remain responsible for collecting payments from your clients so there is no need to get them to direct payments to Bridgement. Your clients never need to know about your funding arrangement, and you remain in control of your client relationships.

Unlike traditional discounting and factoring, Bridgement advances 100% of your invoice value.

You can also select which invoices you would like to have financed. You can even select a single invoice for as little as R10 000 if that’s all you need.

With Bridgement, the entire process takes place online, in no time at all. You receive funding within hours instead of months. Our fees are very fair – there are no facility fees or lock-in periods and you only pay a fee per invoice you get advanced. We offer flexible automated repayments, and we’ll even reward you for settling early.

The fees involved in using Bridgement Invoice Financing

Bridgement charges one simple fee per amount advanced. Our fee starts from as little as 1.7% per month. The fee you will be charged will depend on a number of factors including your business situation and the quality of your invoices. You know exactly how much you will be paying upfront, so there are never any hidden surprises. In fact, if you choose to settle early, we will even give you an early settlement discount.

How to apply for business funding

You can apply for business funding right now, free of charge. It literally takes just minutes. You set up an account and connect your accounting software or bank account. Our back-end technology will quickly assess your application and let you know how much you qualify for. No commitment, no paperwork, and our application process is 100% free.

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