Funding can not be free. The model of funding relies on getting a return on the investment. Instead, models where funding is free are typically done through grants.
However, they also have a unique set of requirements to meet and don’t work on a one-size-fits-all basis.
In this article, we will help you understand why free funding isn’t practical and which other financing methods are free.
Understanding How Business Funding Works
In South Africa, most entrepreneurs start their businesses without outside funding, opting for bootstrapping instead. While this works for many, some businesses need external capital to launch or scale their businesses. That’s where funding options come in, offering different ways to grow your business depending on the stage, industry and entrepreneur.
Funders invest in businesses that show strong potential, financial discipline, and compliance to ensure a return on their investment. There are different types of funders, which are:
Government Grants
Government grants are popular because they typically don’t need to be repaid, but the application process is long and strict. These grants are usually impact-driven, targeting groups like youth, women and black-owned businesses that create jobs and economic growth.
Loan Financing
Loan financing is often quicker to get than grants. However, you have to pay back with interest. This type of funding is best for entrepreneurs with a good credit history, as lenders prefer borrowers who have shown financial discipline.
Equity Funding
Equity funding gives investors a stake in your business. The stake of your business is essentially in exchange for cash. Instead of paying back with interest, you share ownership. While it gives you cash without debt, founders need to consider how giving up part of their business affects control and future profits.
Angel Investors
Angel investing is also a type of equity financing. This form of funding is usually done through mentors, networks, friends and family who have a personal interest in what you’re doing.
Grant Versus Funding
The main difference between grants and other funding models is repayment. Grants don’t require you to return the money, but they demand compliance, reporting, and accountability.
Funding through loans or equity is more flexible in how you spend the money, but comes at a higher financial or strategic cost.
Do You Have to Pay Back a Grant in South Africa?
The short answer: no, you don’t pay it back in cash. But you do pay in effort.
If you fail to use the money for its intended purpose, or if you can’t show measurable outcomes like job creation, you risk penalties, exclusion from future grants, or reputational damage.
For example, the National Empowerment Fund (NEF) and the Small Enterprise Finance Agency (SEFA) both monitor how their funds are used. Mismanagement doesn’t just close doors; it can blacklist you.
What to Be Prepared for When You Get Funding
Whether you go the grant, loan, or equity route, there are critical realities to prepare for:
1. Compliance Is Non-Negotiable
Funders demand tax clearance certificates, financial records, and regulatory compliance. Entrepreneurs without these in place won’t qualify.
2. Funding Takes Time
From application to approval, delays are common. Build a buffer period before expecting funds to reflect in your account.
3. Strings Will Be Attached
Every funder has conditions. This could include interest payments, equity shares, or strict reporting requirements. Read the fine print before committing.
4. Cash Alone Won’t Save You
Many businesses collapse even after receiving funding. Without solid financial management, operational discipline, and market traction, capital becomes wasted fuel.
Red Flags to Watch Out For
Even when funding seems promising, you must protect yourself by looking out for some warning signs. Here are funding red flags to watch out for:
Pressure to Decide Quickly: If the funder is legitimate and is genuine in their investment, they will give you enough time to review the terms of the agreement.
Overly Generous Terms: If something seems too good to be true, it probably is. If an investor makes many promises and claims that there are no strings attached, it’s worth questioning why. Always ensure you look at the fine print before agreeing to anything.
Unclear Reporting Requirements: Grants and loans come with rules. If a funder is vague about how you must report progress or use funds, it could cause issues that could affect the business.
Hidden fees and high interest rates: Some funders provide funding at the cost of a loan shark’s interest rate. Make sure you consult with a legal professional and a financial expert to gain a clear understanding of what is expected of you in a funding agreement.
