What’s the difference between an established business and a startup in South Africa?

South Africa's business landscape is characterised by a diverse range of enterprises, including both startups and established businesses. While these terms are often used interchangeably, it is crucial for SMEs to understand the key differences between the two, especially when they are wanting to apply for business finance. In this piece we’ll walk you through understanding what startups and established businesses are in the South African context, highlighting their unique characteristics, challenges, and opportunities.

What is a startup? 

In South Africa, startups are typically defined as newly founded businesses that are in the early stages of their development. These enterprises are characterised by innovative ideas, disruptive potential, and a high growth trajectory. Startups often focus on creating and scaling new products, services, or business models to address unmet market needs. They are driven by ambitious entrepreneurs or founding teams who are willing to take risks and embrace uncertainty. Startups are typically associated with a strong emphasis on technology, digital platforms, and scalability.

What is an established business?

Established businesses, on the other hand, are companies that have progressed beyond the initial startup phase and have achieved stability and longevity in their operations. These enterprises have established market presence, a solid customer base, and often operate in traditional sectors. Established businesses tend to have a track record of profitability and sustainability. They focus on maintaining market share, improving operational efficiency, and fostering customer loyalty. Unlike startups,established businesses have established systems, processes, and organizational structures in place.

What are the challenges and opportunities for startups?

Startups face a unique set of challenges in South Africa. Limited access to capital, especially in the early stages, can impede their growth and sustainability. Additionally, startups often confront regulatory complexities, a lack of experienced talent, and fierce competition. However, South Africa's startup ecosystem has witnessed significant growth in recent years, with numerous support mechanisms emerging. Incubators, accelerators, and venture capital funds provide mentorship, funding, and networking opportunities to startups. The government has also launched initiatives to foster entrepreneurship and innovation, further boosting the startup ecosystem.

What are the challenges and opportunities for established businesses?

Established businesses in South Africa encounter their own set of challenges. Economic volatility, changing consumer preferences, and disruptive technologies pose constant threats to their market position. Adapting to evolving market conditions, embracing digital transformation, and staying competitive are critical for their long-term success. However,established businesses have advantages such as access to capital, established networks, and economies of scale. They can leverage their brand reputation, customer trust, and market knowledge to explore new opportunities, expand into new markets, and diversify their offerings.

How long is a startup considered a startup?

Typically a startup is a company no older than 3-5 years. When we think about startups, we usually picture small businesses in their early stages with big dreams. These companies tend to be modest in size, even if they have grand ambitions. However, as a business grows and becomes larger in scale, it becomes clear that it can no longer be categorized as a startup. 

Determining the scale of a business involves looking at different factors like revenue, number of employees, and the age of the company. While there isn't a specific threshold that definitively marks the end of the startup phase, it becomes evident when a company's scale surpasses that of a typical startup. 

According to Alex Wilhelm from Techcrunch, he proposed what is known as the 50-100-500 rule. This rule suggests that once a company's revenue exceeds $50 million, it employs 100 or more people, and its valuation reaches $500 million or more, it can no longer be considered a startup.

What are the similarities between startups and established businesses?

Collaboration between startups and established businesses can yield mutually beneficial outcomes. Startups can benefit from the resources, infrastructure, and market reach of established businesses, enabling them to scale faster. Established businesses, in turn, can tap into the innovative ideas, agility, and fresh perspectives offered by startups to enhance their own growth potential. Partnerships, acquisitions, and joint ventures between startups and established businesses are increasingly common in South Africa, fostering a dynamic entrepreneurial ecosystem.

While both startups and established businesses contribute to the South African economy, they have distinct characteristics and face different challenges. Startups are driven by innovation, disruption, andgrowth, whereas established businesses emphasize stability, market presence,and sustainability. Understanding these differences is vital for SMEs in South Africa, as it allows them to identify their own stage of development, evaluate their specific challenges, and make informed strategic decisions.

What are the key differences between startups and established businesses for lenders in South Africa?

For lenders in South Africa, there are several significant differences between startups and established businesses that influence their approach to lending. These differences are crucial considerations for lenders when assessing the creditworthiness, risk, and terms of financing for each type of business. The following are key things that lenders look at when determining whether a company is a startup or an established business:

Risk Profile 

Startups are generally considered higher risk compared to established businesses. They often lack a proven track record, have limited assets, and face uncertain market conditions. Lenders may perceive startups as riskier due to their higher likelihood of failure or inability to generate consistent cash flow.Established businesses, on the other hand, have a history of financial performance and assets that can be used as collateral, making them lower risk in the eyes of lenders.

Financial Stability 

Established businesses typically demonstrate financial stability with a track record of revenue generation, profitability, and cashflow. They may have established relationships with suppliers, customers, and other stakeholders. This stability provides lenders with a clearer picture of the business's ability to repay loans. Startups, however, often lack a stable financial history, making it challenging for lenders to assess their creditworthiness and repayment capacity accurately.

Collateral and Asset

Established businesses often possess tangible assets,such as property, equipment, or inventory, which can serve as collateral for loans. This collateral provides lenders with a form of security in case of default. Startups, in contrast, may have limited or no significant assets,making it harder for lenders to secure their loans. Lenders may require alternative forms of collateral or seek personal guarantees from startup founders or owners.

Documentation and Information

Established businesses typically have a comprehensive financial track record, audited financial statements, tax records, and other documentation that lenders can use to evaluate their financial health.Startups, being in the early stages of development, may not have the same level of documentation and financial transparency. Lenders may need to rely more heavily on business plans, projections, and the personal financial background of startup founders or owners.

Loan Purposes 

The purposes for which startups and established businesses seek loans can also differ. Startups often require financing to fund research and development, product development, market entry, and scaling operations. They may need capital to support early-stage growth, acquire technology, or expand their team. Established businesses, on the other hand,may seek loans for working capital, equipment purchases, inventory management, business expansion, or acquisitions.

Loan Amounts and Terms

Lenders may offer different loan amounts and terms based on the risk profile and financial stability of the business. Startups may find it more challenging to secure larger loan amounts or favourable terms due to their higher risk and limited financial history. Lenders may be more cautious,impose stricter repayment conditions, or require personal guarantees.Established businesses, with their proven track record and assets, may have access to larger loan amounts and more favourable terms.

What is FundingHub’s lending criteria for startups vs established businesses?

Startups

Generally speaking, FundingHub doesn’t assist startups with their funding journey,  however there certain cases where they will qualify. A startup that has been trading for more than six months, and generates revenue more than R360 000 annually, or R30 000 monthly. Other funding instances, can include Purchase Order Funding, where a startup has received a purchase order from a client they have an existing relationship with. In this case the PO can be used collateral to secure the loan, and the startup won’t necessarily need to generate R360 000*. Some lenders e.g. The People’s Fund you might be able to qualify for business finance if your client is on their preferred list. Another partner that may be able to accommodate startups is Profit Share Partners, who will assist a startup if their PO is valued at more than R250 000.

Established businesses

We classify established businesses as SMEs that have been operating for over a year,  have a good credit standing and have solid client relationships. We have a number of lenders who finance established South African businesses. These include Genfin and Pollen Finance, their lending criteria is that you’ll need a turnover of R1 million annually. If you are wanting to apply for a Merchant Cash Advance, then Merchant Capital will be able to assist you if you earn more than R50 000 a month. Other lenders that can assist established SMEs are Bridgement, Lulalend and Geddes Capital, their minimum turnover requirement is R500 000 annually.

Full disclosure: these amounts vary from lender to lender and are for example purposes for this piece.

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