Big Match Temperament, the ability to perform well under enormous pressure, is a pre-requisite for any entrepreneur. However, when it comes to financial decision-making, research and insight go a long way in conquering the fear and succeeding in eminence. Every business needs funds to operate and one of the largest financial decisions to make as an entrepreneur is around the capital required to launch and/ or operate a business.
There are three ways to inject funds into your business: dipping into your personal savings, borrowing money or getting a funding partner. Here are some insights from extensive research to help you navigate the choices available and make the best one for your business:
In light of the many different ways your savings could be working for you otherwise, the main consideration here is around the expected return on the investment.
Other ways your savings could be working for you include safekeeping in the bank, where it will earn between 5-6% interest, and invested in the JSE, where it can be expected to return between 12-15% over the long term.
Entrepreneurs who invest their own money into their own businesses can generally have an expected return in excess of 25%. This is inclusive of the risk investing the money in your own business comes with, as well as the effort of managing it. You need to be confident that your business can yield a suitable return. Furthermore, herein are two choices: putting the money in as equity (share capital) or loaning the money to the company.
To take out share capital, you will need to declare a dividend at 15% dividends tax, making this a more expensive exercise. You can also not charge any interest on equity invested.
When you structure it as a loan, the money can be taken out again without paying any tax thereon, and interest paid is deductible for tax in the company.
There are many unsecured lenders offering loans to young companies and, therefore, the main consideration here is whether or not the funds be borrowed at a reasonable rate.
When investigating taking out a business loan, it is important to consider what securities are required, what the repayment terms are, and what the penalty clauses for early repayment are.
When a suitable borrower has been found, make sure that the loan is structured as a loan to the company instead of to the owner. This way, interest paid can be deducted for tax purposes.
Having a funding partner introduces the complexity of another human being and, as such, the main consideration here is around the non-financial implications of bringing a funding partner on board.
When investigating the introduction of a funding partner, it is important to consider whether they will be actively involved in the management of the company or just supply funds for a fixed return. If it’s the first, consider whether they have the right personality and skill set for the role they intend on playing carefully.
When taking on a partner, take the time to set up a detailed Memorandum of Incorporation and Shareholder’s Agreement stipulating all the details of how these relationships to the company will work. This can save you a lot of time, energy and money should it come to someone exiting the company.
On the financial side, consider the cost of having a partner on board: the actual salary or interest to be paid for their involvement with the company and the long term effect of the percentage given-up in return for the funds they bring on board.
Every option has its own unique pros and cons. It is important to weigh these against the nature of your business carefully. Explore these options well and you will feel confident in your decision.