Starting your own business can be challenging, especially if you don’t have the capital to get it off the ground. Fortunately, there are many ways to fund a new business in South Africa.
One method is to secure government funding, or a government grant. These are awarded to worthy start-ups, and they don’t need to be paid back.
JustMoney found out more about these kinds of grants.
The different types of government funding
Darlene Menzies, CEO of Finfind, notes, “Government funding has specific objectives to meet. Government may wish to encourage businesses to build specific sectors, so their funds will be sector specific. It is important to understand why they are making the funding available, so that you can prepare your business plan and pitch accordingly.”
Menzies mentions five specific government funds that are available to start-up businesses.
These are usually once-off and are provided to startups that are owned by previously disadvantaged people. In some cases, grants are linked to specific sectors. Menzies does note, however, that there are not many grants available.
- Cost-sharing grants
In the case of these grants, the government only provides a portion of the required finance. While this does not need to be repaid, the owner of the startup must raise the remaining capital.
These are similar to cost-sharing grants. However, incentives are only paid after the funded project has been completed. This means that startup owners need to have the money to execute the project first, and then claim back from the government for agreed costs.
- Tax incentives
In the case of tax incentives, your business can deduct agreed costs from the money it owes in tax. This is less useful for startups that need cash to get their business off the ground.
- Equity funding.
Certain government funding agencies will offer equity investments in return for shares, a share of the profits and a lump sum on exit.
Advice for small business owners
According to Karl Westvig, CEO of Retail Capital, there is never a perfect time or a perfect plan for starting a business.
"People wait for these moments. It's like having a child, you’re never ready for it,” Westvig says. “So, when you decide you want to do something, you need an 80% plan because you'll never have the perfect plan."
Westvig believes there's nothing more important than an entrepreneur's survival instinct, which will kick in when the chips are down.
"Once you decide what to do, put money into a bank account and start spending it, because once you do, there's no turning back and any problem you hit, you'll find a solution as your survival instinct kicks in. It's amazing how much you can solve that you never thought you could," he explains.
It's impossible to be an entrepreneur part-time according to Westvig, and he recommends pursuing your entrepreneurial dreams full-time. In addition, there's no such thing as overnight success.
"You need to be looking at a minimum of three to five years before you've got a sustainable business, so you need to ensure you have enough capital to tide you over. Keep your cost structure down and spread it as long as you can," says Westvig.
According to Nelly Mofokeng, finance director at Junior Achievement South Africa, small business owners should trade on the power of collaboration, and not limit themselves to their own capabilities.
“Do your best to see beyond your business’s capacity, as this is something that’s often overlooked,” says Mofokeng. “A lot of small business owners struggle to see beyond what they’re capable of and it can become limiting for their businesses.”
Mofokeng notes that understanding your industry and value chain plays a major role when selecting potential partners and suppliers.
“Just as important is an appreciation of the often-tedious process of accessing government funds, and the obligations for delivery that will ensure sustained income,” says Mofokeng.
“Cash flow management becomes critical, and an entrepreneur’s resilience and creativity is tested by having to wait for income. They need to be able to adequately cover project costs while drawing a reasonable salary for themselves,” she explains.
Mofokeng suggests diversifying funding pools so that you don’t rely on a single source. This can often help a great business idea to get off the ground.