Funding with debt

Personally, I was really afraid of getting a business loan and from what I have seen not a lot of businesses do well after taking one. I think it becomes this thing hanging over you that stresses you out even more.

Siki Dibela

Business funding can be split into equity and debt funding. With equity funding, you raise money from investors in exchange for a portion of ownership in your business and with debt funding, you are borrowing money that you have to pay back (with interest) – without giving up ownership.

Most often a loan comes from a bank and it is difficult for a business that has just started to get one. Banks normally require a track record to prove your business’s viability. Before approaching the bank you will likely need:

  • A comprehensive business plan
  • A clear set of financials, including all start-up and running costs for the first five years
  • Your personal financials will also need to be in order. Banks will do a credit check on you.

Check your credit status via TransUnion (you get one free credit check a year) and make sure you are not running any business expenses through your private accounts.

What makes this great?

You can run your business the way you want to. Unlike many investors, the bank does not require a say in how or what you choose to do on an executive level.

The pitfalls

High interest rates on loans, with strict repayment schedules and terms. And you won’t be getting any advice and support. Banks also tend to look purely at the figures and not at your vision. An investor is more likely to see the bigger picture, whereas a bank will invest based on your finances.

What next?

Crunch your numbers, get on top of all personal and business finances, and research your options at reputable banks only: ABSA, FNB, Nedbank, Standard Bank, Capitec … you know who they are. But be aware that for someone starting a business the banks may not be the best partner. Their loan terms are strict and can kill a small business that is not yet on its feet.

In the next section we discuss how an investor can provide more than just money…