Starting a business: Structure and financing

Overview of Business Funding

  • Importance of Funding: Essential for starting and growing a business.

    • E.g., starting a clothing or shoe brand requires upfront investment.

  • Common Uses of Funding:

    • Resources (materials/supplies)

    • Inventory (stock to sell)

    • Equipment (machinery, computers, vehicles helps in operations)

    • Marketing (advertising through social media, billboards, etc.)

    • Staffing (employees to manage operations)

    • Operational Costs (fixing and variable costs related to running the business)

Business Funding Methods

  • Self-Financing: Using personal savings to fund the business.

    • Pros:

      • Retains full control of the business.

      • Careful management of expenses (owner's money).

    • Cons:

      • Risk of losing personal savings.

      • Opportunity cost: the potential returns lost from utilizing funds in business rather than investments.

  • Loans:

    • Types: Personal loans, business loans, peer-to-peer lending, and bank loans.

      • Personal Loans: Easier to obtain but linked to personal assets, hence, personally liable if not repaid.

      • Business Loans: Lower interest rates, but difficult to obtain, especially for startups lacking collateral.

      • Peer-to-Peer Lending: Platforms connecting borrowers with individual lenders.

Investors and External Funding

  • Angel Investors: Wealthy individuals providing capital in exchange for ownership equity or convertible debt.

  • Venture Capital: Investments from professionals or firms in exchange for equity.

    • Benefits:

      • Guidance and mentorship from experienced investors.

    • Cons:

      • Loss of some control over the business.

      • Must share profits.

  • Government Grants: Various programs available in regions to support startups (e.g., National Youth Development Agency in South Africa).

Alternative Funding Options

  • Crowdfunding: Raising small amounts of money from a large number of people, typically via online platforms.

  • Listed Equity: Selling shares of the company publicly.

    • Pros: Access to a larger pool of investors.

    • Cons: Complexity and cost of maintaining the listing requirements.

Equity Financing

  • Ordinary Shares: Regular stock; shareholders have voting rights but get paid only after preference shareholders in the event of dividends.

  • Preference Shares: Typically give shareholders priority for dividends but generally do not have voting rights.

Bank Loans & Development Finance

  • Bank Loans: Difficult for startups due to lack of assets.

    • Advantages: Lower interest rates.

    • Challenges: Lengthy approval processes.

  • Development Finance Loans: Specialized loans for specific types of projects (e.g., infrastructure).

Considerations When Seeking Funding

  • Control: How much ownership do you want to retain?

  • Cost of Funding: Analyze interest rates.

  • Timing: How quickly funding is needed.

  • Four Cs of Credit Assessment:

    • Capacity: Ability to repay the debt.

    • Collateral: Assets backing the loan.

    • Covenants: Terms and conditions of an agreement.

    • Character: Quality and track record of management.