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3 financing options for small businesses

Entrepreneurs need capital to get a business off the ground, or to fund expansion, improve cash flow, or buy inventory to meet consumer demand. But they consistently rank access to finance and cash flow as major challenges, and without this capital a small business will remain just that. Small.
Bradley Wattrus
That's because it is almost impossible to secure a business loan from a commercial bank or lender to fund a business startup. Not only is starting a business from scratch a high-risk endeavour, but often the business doesn't have any assets or income to provide security against the loan. While entrepreneurs can offer personal assets as collateral, this is often an ill-advised strategy to fund a business.

Even if a startup gets off the ground, accessing a cash advance via traditional financial services providers remains challenging. Long and complicated application processes are characterised by tons of paperwork and painful waiting periods, with no guarantees of success. For those that secure loans, high fees and interest rates with big monthly debit orders strain cash flow and heap unnecessary financial pressure on the business.

This lack of funding from traditional channels has created a real need, and a gap in the financial services sector, because small businesses generally flourish or flounder based on their access to capital.

Thankfully, this funding gap has been addressed by a spectrum of alternative lending options, offered from an array of providers. Entrepreneurs therefore have a wider choice of options than ever before when looking for financial support, each of which offers a unique value proposition.

  1. Government-assisted funding and business development initiatives

  2. Funding for small businesses, which are the undisputed drivers of the local economy, is playing an increasingly more prominent role in achieving government's job creation, empowerment and economic growth objectives.

    Several initiatives are administered by the likes of the Department of Trade and Industry (dti), the National Empowerment Fund (NEF), the Industrial Development Corporation (IDC), and the Small Enterprise Finance Agency (SEFA).

    While application requirements can be onerous, and demand for funding from these initiatives is high, business owners that secure financial support through these channels often benefit from low or no interest rates. Also, loans offered in the form of grants often don't need to be repaid.

  3. Venture capital funds and business incubators

  4. Venture capital (VC) funds are generally private investment funds that pool investor capital to acquire private equity stakes in small businesses that demonstrate an innovative business and show strong growth potential.

    Venture capitalists generally have a higher risk tolerance, as they're after big returns on their investments. As such, they are often more willing to engage with entrepreneurs and small business owners.

    In addition to funding, VCs also provide guidance, advice and resources, be it business coaching, strategy input, or access to business premises or operational support through business incubation initiatives. However, securing finance via this channel does mean that you are signing over a portion of your business in return for the cash injection.

  5. Specialised fintech and platform lenders

  6. The convergence of big data, data analytics and automation has helped to create a new breed of alternative lender. These fintech financial services providers have developed innovative digital solutions that create frictionless access to loans and small business funding.

    For example, digital platform lenders have emerged as reliable funders of small businesses by offering unsecured short-term loans, albeit at higher interest rates. Funding applications via online platforms are usually quick and easy, with approvals often provided within seconds. Funds are also accessible within 24-48 hours, and the use of this capital is unrestricted.

    Merchant loans are another fintech-enabled option that offer small business owners fast, efficient access to a cash advance. Providers leverage smart technologies to grant loans based on a merchant's account history and the volume of sales processed through a merchant's card payment system.

    While this is not a new form of financing, the merchant loan funding model has seen significant innovation recently.

    A small portion of the loan is then paid back with each swipe they process through their card payment device. Deductions are automatic and are calculated based on a fixed percentage of every card transaction that is processed, until the balance is paid off. This means that when business is good, customers pay their loan off quicker, but when business is slow, business owners are not burdened by a fixed, monthly fee. And, there is no fixed term-repayment period.

    This kind of technology-enabled solution effectively addresses two of the most significant challenges small business owners face, by offering easier access to funds, while also ensuring minimal impact on business cash flow.
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About the author

Bradley Wattrus is the co-founder and CFO of Yoco.