This article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in November 2011 and is posted here by their kind permission.
Entrepreneurs need to think creatively about their capital needs
My challenge is finding capital. I am a full time mom with no income or assets, so a bank loan is out. I’ve consulted family members with my business plan without success.
My business idea is to supply a niche market with, latest technology imported equipment. I’ve done market research this business seems very promising. But where do I obtain initial capital?
Getting finance to start a business is very difficult. Whether the investors are family members, finance houses, venture capitalists or angel funders, start up capital is scarce and difficult to secure. This gets worse if the would-be entrepreneur his little or no surety, has not previously run their own business or has no relevant business experience. But good entrepreneurs are a hardy lot, and used to finding solutions to intractable problems, so they do find ways to start businesses despite these problems.
Before answering this potential entrepreneur’s question I would like to pose one of my own: If she had sufficient money to start this business would she commit the funds, even if it was all she had? How sure is she that the business idea will work? If there are question marks then the entrepreneur should go back to the business plan and research more and test the concept to reduce the risk of failure. Few funders will finance a business where the entrepreneur would not risk her own funds.
The next issue to consider is whether in fact the business does require start up capital. Many successful businesses start with minimal funds and build up their working capital by starting small and building steadily – usually called bootstrapping. The entrepreneur should consider whether she could craft a suitable business model. For instance she may be able to take orders for future delivery and get advance payment or a deposit sufficient to pay the cost price. Or she could use irrevocable orders to apply for bridging finance from a bank. She may be able to get extended payment terms or consignment stock from her supplier to help her to build the business, she could sign up long term contracts for continuous supply of technology to customers and then use those as security for a loan. Or she could scrape together enough money to buy and resell just one item at a time and make it a hobby business until she has built up enough to import bigger quantities. Creative thinking will produce more possible models.
If, despite all these possibilities she still need to find external finance she needs to be equally inventive. As she has noted she will not get a bank loan, and the traditional approach to her family has not produced results. So what about a partnership of some form? She could find an importer of similar but not competing goods and offer them a margin to finance her imports, or search for a company or individual selling entirely different products to her target customers and offer them the opportunity of a joint venture. There are many interesting partnership models.
Crowdfunding is a growing source of entrepreneurial funds. This concept sees the potential entrepreneur floating their business idea on the internet, and inviting people to contribute small donations, loans or investment. As with everything on the internet, approach with caution. There are likely to be scams wherever money moves around in cyberspace.
In the BBBEE codes Enterprise Development is one of the seven categories. This means that to improve their BBBEE rating medium to large firms should provide material, financial or technical support to small enterprises. Rumour has it that billions of this potential funding and support are available, so the entrepreneur could learn about Enterprise Development in the BBBEE codes and then make representations to large and medium businesses in her area.
Finding the finance to start a business is one of the more difficult challenges entrepreneurs face, but it will not be the only one. Resourceful and creative entrepreneurs will get around this problem, and that experience will be very useful when the next difficult problem comes along, as it will.
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