Like the terms ‘capital’ and ‘funding’, ‘startup’ and ‘small business’ are often used interchangeably. While it’s correct that a startup is a type of small business and that capital and funding both refer to money used to grow a small business, that’s where the similarities end.
Roughly speaking, startups want to grow with the goal of disrupting the market. Small businesses are established for the purpose of entrepreneurship and serving a local market, and therefore aren’t necessarily concerned with growth on such a large scale.

Customers don’t demand equity, nor do they demand interest repayments or security and personal surety. All they ask in return for their money is your product or service.

This takes time and it’s not always feasible. Depending on the nature of your business – whether an SME or a startup – you can go one of several funding routes.

A small-business owner seeking funding typically already has demonstrable revenue and cash flow, and may also need money to expand their shop – or even to tide them over a rough patch.

Startups, on the other hand, tend to require capital when they’re in the pre-revenue or pre-profit phase, especially in their earlier years. Funding a startup requires more risk from an investor or lender because it involves equity, and they’re joining an unproven early-stage startup.

Different types of funding and who they’re for

1. Overdrafts
Overdrafts can be used to relieve short-term cash-flow problems when you have to pay your suppliers before your customers have paid you, for example. You would not – or rather should not – use an overdraft as growth capital.
Often, banks are comfortable granting overdrafts to entrepreneurs who have passed their credit test and have a history of good cash flow into their business account. They don’t usually require security.

2. Structured loans
These loans are typically used to grow a business, for example by purchasing equipment or a vehicle. Structured loans involve larger amounts than overdrafts, and come with structured repayments, which means they may require surety.

The most obvious reasons why such loan applications are turned down is because the business in question does not have:

• A proven track record over a long, observable period
• Security or collateral
• Reputable debtors
• Proven sales cycles and/or
• Demonstrable cash inflows.

3. Seed funding and angel investors
When a founder has an idea that they want to bring to market, but hasn’t yet proven that a market exists for their product or service, they will need capital to develop it and test the market.

Initial funding for this is usually obtained in seed rounds, consisting of smaller amounts raised from family and friends. This is informally called the Friends, Family and Fools round, as they are the early believers who stand to lose the most when an entrepreneur doesn’t yet have a product or customers.

Once there’s proof of concept or a market opportunity has been identified, the next round will involve angel investors. They are generally experienced business owners and investors of a high net worth, who can contribute significantly larger amounts.

Funding rounds

Series A

A Series A round follows once a business has identified a market and gained some traction in the form of customers, and a defined and tested revenue model. Investors are likely to be venture capitalists looking for companies that have a sound strategy for turning their idea into a successful, profitable business.

Series B & C

Funding obtained during Series B rounds is intended to grow the business and meet demand, possibly by expanding its technology or team. Series C funding is used to scale by moving into new territories and new markets, or by buying another company.

High-growth startups thrive on scale, and funding obtained in these rounds is earmarked for growth capital. They typically participate in funding rounds when they are four to nine years old, and in the medium- to long-term cycle of the startup.

At this point, a business may be bought by a much bigger organisation, or may start to prepare for an initial public offering on a securities exchange, such as the Johannesburg Stock Exchange or Nasdaq.

If you’d like to reach several funders with one application, go to SMEgo.co.za