Understanding business funding and finance for your start-up (2023)

There are two ways to launch a business: With funding, and without it.

99% of businesses in South Africa fall into the second category – they launch a business without any financial assistance

They then fund each month’s operations through sales – either of products or services. This is known as bootstrapping, and you can learn more about how to bootstrap your own business in our article, Launch your business without funding./

Some start-ups can’t be launched without business funding though, and most companies reach a point where they need some capital to help them grow or fulfil a large order.

This is where business funders come in. From banks to venture capitalist firms and even the government, there are substantial sources of financial aid available for you to boost your business venture. You just need to know what type of business funding suits your business best.

Business funding in South Africa

In this guide we unpack the difference between government grants, loans, equity funding, venture capital, angel investment and personal debt finance so that you can determine which funding or finance options best suit your needs.


  • Government grants
  • Loan financing
  • Equity funding
  • Venture capital funding
  • Angel investment funding
  • Personal debt finance

1. Government grant funding

What are government grants?

Government grants for small businesses are popular with start-up business owners because unlike bank loans that need to be repaid with interest, grant funding does not need to be repaid.

This doesn’t mean it’s ‘free money’. The hurdles you need to go through to access partial or full financial support can be intense:

· To access grant money, you’ll need to submit all the right paperwork (100% correctly)

· Your business will need to align with a specific project or initiative (this is listed on the agency or department’s website)

· Make sure you approach the best government agency for your business (they don’t work together or refer applications to each other)

· Because grants do not need to be repaid, there are strict guidelines for applications and the process is lengthy (so expect this to take a long time)

· Once you’re successful though, you will have the funds you need to launch and grow your South African start-up and change lives!

Top tip:
Government grants are there to support small business development and success. Your chances of securing funding will increase if you can show how your business will improve the lives of others. This can be through employment, solving a need or contributing to economic growth.

Who are government grants best suited to?

Business funding in South Africa that is backed by government generally supports black economic empowerment, job creation and developing the economy.

Most government grants are exclusively for previously disadvantaged individuals. This group includes black-owned, youth-owned and female-owned businesses.

How are government grants repaid?

You don’t need to pay grant money back (not even interest), but there may be certain conditions attached to the funding. For example, you may be required to hire local staff, as one of government’s goals is job creation.

Grants are designed to help you build your business, but also to pay it forward, so consider who else will benefit from your small business’s success.

What are the pros of government grants?

· It’s not a loan, so you don’t need to repay the money.

· Government wants to help you if you tick all the boxes.

· This means that the barrier to entry is low if you’re previously disadvantaged, young, or female and have a solid business idea or plan.

· The funding amount is substantial if you meet the requirements.

What are the cons of government grants?

· The funding criteria is specific and you may not qualify.

· You may be required to use the money under certain terms that benefit your local government.

· It’s a long process involving paperwork, interviews and more paperwork. This can take months or even years if paperwork is not properly completed.

South African government grant funders

The South African government’s grant funding options favour business ventures that aim to make a difference to the local economy. These business start-up funding institutions include:

National Youth Development Agency (NYDA)

The NYDA provides business funding for start-ups and established businesses run by young entrepreneurs between the ages of 18 and 35 years. Funding ranges from between R1 000 to a maximum of R200 000. Before you can access funding, it’s mandatory to get involved in the NYDA mentorship and voucher programme for a minimum of two years.

Youth Pipeline Development Programme

This programme is run by the IDC and is designed to help aspiring applicants understand the funding process and fine-tune their request for funding proposals. This increases their probability of being considered for IDC business funding as the business (and entrepreneur) matures.

Isivande Women’s Fund

Available only to women, the intention of this fund is to empower female-owned business ventures. In addition to funding, education and training is also offered.

Black Industrialists Scheme (BIS)

The BIS offers business funding on a cost-sharing basis. In other words, this grant awards funding to a maximum of R50 million, depending on how much of the business is black-owned or managed. It supports businesses that will make a greater impact on society, job creation and empowerment.

Tourism Transformation Fund

Supports companies that provide services directly to tourists and are 51% black-owned. The grant funding portion is capped at R5 million.

Technology Innovation Agency (TIA)

The TIA has a number of grants available to fund start-ups based on research conducted in partnership with a higher education institution or science council. The funding amounts average R200 000, but up to R1 million can be awarded.

Small Enterprise Finance Agency (SEFA)

SEFA is affiliated to the IDC and government and has access to R1.4-billion, which it is mandated to invest in South African small businesses over the next few years.

Improve your chances of accessing grant funding

· Research each grant fund thoroughly before approaching them.

· Find out: What they stand for, what they are trying to achieve, and who they have awarded grants to in the past. This should all be on their websites.

· This is a long process with a huge amount of paperwork, so you don’t want to waste your time on funds that don’t invest in businesses like yours.

· If there is an export council in your industry, approach them as well – they will be able to assist you in the entire process.

2. Loan financing

What are loans?

A loan is a line of credit offered in exchange for interest payments on top of the loan repayments. The lender does not take any form of ownership (known as equity) in the business, although some surety is generally required in order for the loan to be approved.

Banks versus alternative funders

Banks are risk averse. This means that:

· They invest in businesses, but they need to make sure it’s a safe investment

· Their ‘return’ or what they make from the investment is in the form of interest repayments

· A strong track record and usually some form of surety are required to access a business loan.

More recently, alternative funders have joined the lending space. Some of these funders are niche players who focus on specific industries that they are very familiar with. Others have repayment methods that do not require surety – something many start-ups and smaller businesses do not have to offer in exchange for a loan.

Top Tip:
According to Zizipho Nyanga, CEO of the Masisizane Fund, when you start your business, you should bootstrap it if you can. Begin the process of identifying and approaching the right funders with a goal of securing funding in 18 to 24 months, instead of a few weeks. Those are the businesses that attract attention. If you can show you’re a planner who is willing to go the distance, you’re already ahead in the game.

Understanding business funding and finance for your start-up (1)

Personal loans

Many start-ups are too new to have a strong track record. Others have nothing to offer as surety for the loan. As a result, many start-up founders apply for a personal loan based on equity and personal surety instead of a business loan.

Should you choose to fund your business using money from a personal loan, the lender will only consider your personal finances, and a credit score over 700 is required to qualify.

Who are loans best suited to?

If you have great credit, you’re one step closer to being approved for a business loan. Lenders usually look at your credit history and your personal finances before supplying you with business funding to launch your start-up. They want to make sure you’re good with money.

A small business loan is also a good way to ensure you have a cash cushion if bootstrapping isn’t an option.

Top tip:
Apply for credit before your business needs it. This shows the lender that your finances are in order, but also that you’re looking ahead. You’ll be more likely to receive finance. You also won’t be scrambling for cash if something goes wrong – you’ll already have it. Forecasting is an excellent tool that can be used to predict future cash-flow issues. To find out how to forecast, read our financial planning guide, Supercharge your start-up with a strong financial plan.

How are loans repaid?

If you’re borrowing from a bank, you will probably set up a payment plan outlining the term over which you will pay back the loan, usually in instalments. Generally, a business loan must be repaid with interest.

What are the pros of loans?

· You have a range of funding options available to you depending on your financial needs.

· It’s a relatively quick funding process compared to a grant application.

· The bank has no say in how you use the money in the daily operations of your business.

What are the cons of loans?

· Not everyone qualifies and you may only realise this after wasting a lot of time submitting various documentation.

· If you’re not fully informed on what options best suit your business funding needs, the loan may not benefit your business in the long run or could be too expensive for your requirements.

· First-time borrowers may face high interest rates and failing to repay according to your agreed-on terms could lead to business closure and personal loss, especially if you’ve signed personal surety for the loan.

Get assistance: Khula Enterprise Finance helps small businesses access bank loans. It does not lend money itself, but provides mentorship and guidance to entrepreneurs, particularly in how to access finance.

3. Equity funding

What is equity funding?

Unlike a business loan, the investor takes an ownership percentage of the business in exchange for funding. There are no monthly repayments or interest repayments.

Equity funders include:

· Venture capitalists (VCs)

· Private equity firms (PE firms)

· Holding companies that own a number of businesses.

Who is equity funding best suited to?

It’s easier for established businesses to secure private equity (PE) funding for expansion than it is for start-ups who are launching a business. This is because private equity funders are interested in growing their investments, which means they want to see a track record before investing in a company.

How is equity funding repaid?

Equity funding is not repaid like a bank loan. Instead, investors make money in two ways:

· They earn dividends when the business makes money. Your equity finance agreement will outline the percentage of profits your investors will earn and when they will earn it.

· They make money on the sale of their shares. All investors will eventually ‘exit’ the business. When they sell to another investor or holding company, the goal is to make more from their shares than they initially paid for them.

What are the pros of equity funding?

· The money received isn’t paid back to your investors with interest. And you only begin paying dividends when your business makes a profit.

· If your business isn’t a success, you won’t suffer financially in your personal capacity.

· You can use the investment funds to finance growth because you don’t need to worry about monthly loan repayments.

· Private equity investors aren’t necessarily looking for ten times their money back (like Venture Capitalists do) and they are comfortable with slower growth than VC firms.

What are the cons of equity funding?

· Equity investors are part-owners in your business. They have a strong interest in how well the business does and that their money fuels growth.

· This means they will sit on your board and will most likely be involved in key decisions going forward.

· If your equity funder is hands-on, you could face conflict and a possibly even lose control over management decisions.

· Landing equity financing takes a lot of hard work.

· This includes providing investors with detailed business plans and forecasts that prove a secure and profitable future for their investment; due diligence and many, many hours of meetings.

· While all of this is happening, you aren’t focusing on your business, which could suffer as a result.

Top Tip:
Equity investment is a partnership. Whether you approach a Private Equity Firm or Venture Capitalists, it’s important to make sure everyone has the same values and goals for the business. You will be working together for at least five to seven years, possibly longer, so make sure you get along.

South African equity funders

Business Partners

Business Partners funds entrepreneurs through finance, shareholder’s loans, equity, royalties, term loans or a combination of all of these.

4. Venture capital funding

What is venture capital?

A Venture capitalist is an equity investor and their main focus is making money from their investment in your business. This means that they are likely to invest exclusively in businesses that can provide good returns on their investment.

Who is best suited to venture capital?

Businesses that are specifically built for growth are most suited to venture capital. A VC will typically want to exit or sell their shares within five to seven years. At that stage, they will ideally sell their shares for 10 times what they paid for them.

A venture capitalist is therefore looking for three things:

- Can the business be scaled at a low cost, without increasing overheads as you add customers? Read our growth guide, 6 Growth accelerators to transform your small business into a big business to supercharge your growth.

- Do you have a specific growth plan that includes how you will increase their investment ten-fold?

- Do you have the team, product, market experience and customers to accelerate your growth?

Make sure you can answer these three key questions for funders: Will they make money on the deal? Do you and your team have the experience in your market to drive growth? Have you considered where the business is at risk and planned for this to protect your funder’s investment?

To learn more about what funders are looking for, read our article, Build a business that funders will back.

What are the pros of venture capital?

  • Venture capitalists are usually experts in their fields and can offer valuable insights, mentorship and advice in addition to funding.
  • VC funding boosts your business’s credibility, inviting other investors and their networks to take an interest in you and even invest in your business.

What are the cons of venture capital?

· In many ways venture capital can be very expensive funding. If your business is still in start-up phase with a low valuation, you may end up giving a high percentage of ownership away in exchange for funding.

· Venture capitalists may want to be actively involved in running your business, based on their experience and their desire to see your business succeed.

· The better your company is managed, the higher the return the VC is likely to get. This could interfere with how you want things to run.

· VCs are interested in growth. Many businesses are better off with slow, steady and organic growth.

  • The more money you need, the larger the portion you may have to give up to the VC.

· If your venture isn’t successful, investors may recover their funds by liquidating your company.

List of prominent venture capitalists

AngelHub Ventures

This VC is a seed and early-stage investor that focuses on business funding for lean, disruptive start-up businesses.

Edge Growth

When investing, Edge Growth seeks out “investment readiness” in start-ups. So, you’re going to have to put a little more work into your business before applying for finance from this firm.

Kalon Venture Partners

This VC company is one of a few firms that invest specifically in tech start-ups.

Knife Capital & KNF Ventures

Headed by respected venture capitalists Keet Van Zyl and Andrea Bohmert, Knife Capital’s reputation in the VC industry has enabled it to host KNF Ventures, an early stage fund with a target of R100-million.

Newtown Partners

Dragon’s Den funder Vinny Lingham teamed up with Llew Claasen to launch Newtown Partners, which was founded on the set of the start-up funding show.

5. Angel investment funding

What is angel investment?

Angel investors aren’t financially motivated. They are usually friends, family, mentors or people from your network who believe in your business or in you personally and want to assist you. Many are business owners themselves who are ‘paying it forward’ by assisting young entrepreneurs get started.

Who is angel investment best suited to?

Angel investors usually go the extra mile when offering business funding to small businesses. If you need assistance bringing your products to market, recruiting the right people or access to a larger network, the right angel investor can be a great partner.

How is angel investment repaid?

Angel investment is a type of equity funding. In exchange for the capital you get to kickstart your business, the investor gets an ownership stake in your company. The success of your start-up means you’ll both benefit from the investment. If your venture doesn’t succeed though, you won’t necessarily need to repay the funding, unless previously arranged.

What are the pros of angel investment?

· Seasoned angel investors will have a lot of insights to share, which could be helpful when you’re starting out in the business world as a first-time entrepreneur.

· Angel investors want you to focus on getting your business off the ground, so paperwork is kept to a minimum, with most funders opting to use the Simple Agreement for Future Equity, or SAFE.

· Your cash flow can be reserved for use in your business, instead of being used to repay a business loan.

What are the cons of angel investment?

· Angel investors who aren’t friends or family may need a full audit of your business before providing you with start-up funding, and the outcome may not be what you were hoping for.

· Finding an angel investor isn’t easy. It could take up to several months before you find someone willing and able to back you.

6. Personal debt finance

What is personal debt finance?

Personal debt finance is when you use personal means, including credit cards, home loans or even your pension fund, to fund your business.

Who is personal debt finance best suited to?

Most businesses are self-funded. This means you’ve either been able to save a substantial amount of money, or you can access funds through personal debt. This method of business finance doesn’t require you to convince others to back you and you’re able to maintain full control of your business.

How is the funding repaid?

Whether you’ve used your personal credit card, accessed funds in your home loan or drawn from your pension fund, the money needs to be paid back.

What are the pros of personal debt finance?

· It’s your money and no one has a say over how you use it in your business – you have full control over the capital.

· If you’ve borrowed in your personal capacity, the repayment terms may be more manageable than with traditional methods of business start-up funding.

· You don’t have to share your profits with investors.

What are the cons of personal debt finance?

· Business failure will be a big blow to your personal finances.

· Business investors can be a great asset to the company – a good investor shares valuable business advice and brings a network to the business.

· You may end up in more debt if you continue to self-fund your venture before it has made enough money to sustain itself.

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