N4 Entrepreneurship & Business Management 1.2.1 Forms of equity fi nancing


1 Personal funds This is the most common source of funding in a business. It consists of money that you have saved over a period of time. The benefit of this type of financing is that ownership stays with you. Committing some of your own money to your business will help you if you need additional finance (loan) later on.


2 Friends and relatives


As the name suggests, this form of financing is derived from the support of family and friends. This is known as love money. It comes from people who know you, your capabilities and trust your business concept. However, there are a few potential pitfalls to be aware of. Money, friends, family and an unsuccessful business do not go hand in hand. Friendship can also take a turn for the worst and influence your business. The best is to draw up a contract with the assistance of an attorney, stipulating such aspects as share of ownership, repayment terms, management role or any other relevant stipulations. This will provide security for your business’s financing and probably keep family and friend relationships intact.


3 Equity shares This form of financing normally refers to partnerships and Close Corporations. This option provides an opportunity to obtain additional capital for the business by accepting a partner or a member who possesses the financial means, but lacks a sound business concept. The downside of this method is that you will have to sacrifice a percentage of ownership to gain the benefit of additional capital.


Activity 1


Go to a financial institution near you or visit their website, and ask them for the following: • Interest rate on a bank overdraft • Requirements for opening a current account • What you must know and do before applying for a loan to start your own business. • What advice would they give an entrepreneur who is about to begin the search for start-up capital?


1.2.2 Debt fi nancing – loans


A loan refers to the money that the entrepreneur has borrowed and must repay within a certain period of time with interest. Very few entrepreneurs have adequate personal savings to finance the complete start-up costs of a small business, so virtually all of them engage in some form of debt financing. The following are the different categories of loans:


• Short-term loans


1 Bank overdraft The most popular short-term loan is a bank overdraft. Bank overdrafts are normally used to supplement cash-flow for a few months and to purchase stock. Care must be taken to ensure that overdrafts are not used for medium-term financing. Anything beyond a year must not be regarded as short-term. Overdrafts are a very expensive form of financing and must always be treated as a temporary measure. See section on “financial assistance for small businesses”.


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