What we wish entrepreneurs knew about funding
JOHANNESBURG – The service sector continues to be the largest source of employment created by enterprise births, according to a report released on Wednesday by the Organisation for Economic Co-operation and Development (OECD).
The report states that highest job creation rates were seen in leisure-based activities (art, entertainment and recreation); professional, scientific and technical activities; and real estate and food and accommodation. The ICT also outperformed the average in most countries.
In the majority of OECD countries, venture capital constitutes a very small percentage of gross domestic product (GDP), often less than 0.05 percent, although shares were growing, according to the report. “The two major exceptions are Israel and the US, where the venture capital industry is more mature, representing more than 0.35 percent of GDP.”
Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential, according to Investopedia. It generally comes from well-off investors, investment banks and any other financial institutions.
In most OECD economies small and medium-sized enterprises account for more than half of all employment and value added of the business sector.
But the question is: How much do our potential entrepreneurs know about funding?
Riversands Incubation Hub’s chief executive, Jenny Retief sheds some light:
5 things we wish entrepreneurs knew about funding:
Truth 1: There is funding available
A recent report by the online funding matchmaker Finfind, shows that only 1 percent of SMEs access formal financing, and 87 percent do not access financing – many by choice, as they do not believe they will be successful. Yet there are more than 300 different business funding products out there, with a pool of capital available to entrepreneurs from both the private and public sectors. Even if you are not a match for more traditional finance vehicles, financial technology innovations such as Rainfin, Merchant Capital or Lululend, have introduced a number of new funding models that may work for you.
Truth 2: Becoming fundable is a process
Funders request various supporting documents from entrepreneurs in order to assess the business’s eligibility for funding. The funder needs to examine whether the business is bankable, if it can afford the funding it is applying for, and to determine the credit risk. This means there is a huge amount of effort involved in preparing a business to be funding ready. It’s really important to work on having sound financial habits – in both your personal and business life. Most funders will also run credit checks on the entrepreneurs themselves. Make sure you separate your business from your personal bank account, or find the right accountant to produce regular books. Getting funding ready is a process; most entrepreneurs need guidance to go through the steps.
Truth 3: Funding will not make your business a success
Yes, funding is critically important, but it is not the silver bullet that many believe it to be. If you receive the funding, how will you best spend it? How will you pay it back? Too often funding is used to support an entrepreneur’s lifestyle, and not to grow the business. If you need funding to pay yourself a salary, then there is something fundamentally wrong. Having regular customers is what is really going to transform your business, and they do not need a funding application to support you.
Truth 4: Too much funding is a bad thing
While an influx of money in the bank is very welcome, too much money with terms is a bad thing. It is possible to overfund a business, which can make the repaying terms difficult. Too much money can dampen the natural entrepreneurial appetite to drive growth, while also encouraging wasteful spending decisions.
Truth 5: You need funding to be an entrepreneur
There are many examples of substantial companies that were started with very little money in the bank. If you want to be an entrepreneur, the time to start is now. This can mean gaining work experience in an industry that interests you, putting in late hours to work on an idea, or stashing some start-up capital. You don’t necessarily need to be ‘all in’ and to leave employment in order to succeed. Perhaps a healthier way to look at it is to consider yourself to be on a journey to becoming an entrepreneur.
– BUSINESS REPORT ONLINE