By Peju Kukoyi
While I dont necessarily share the sentiment that funding is the number one challenge small and medium scale businesses face, the fact remains that funding is a major impediment to their growth and expansion aspirations.
Typically, SMEs rely on the traditional funding sources like savings, contributions from family and friends, and bank loans to start a business or expand the business. Savings and contributions from others are cheap sources of funding but they can only take a business so far hence the need for facilities from financial institutions and others.
Unfortunately, getting a facility from banks has remained challenging for SMEs for a number of reasons. First, banks are in fierce competition to grow their numbers and make healthy returns to shareholders and investors. Thus, banks are more inclined to invest in big businesses and ventures that will yield quick and sizeable returns, something they believe they cannot achieve by given facilities to SMEs. Banks want to finance LPOs and make good and quick turnaround of their facility.
At a time during the fuel importation regime by many petroleum marketers, banks were given loans to marketers who could secure fuel importation licences. Banks put billions of naira into electricity companies, DISCOs (electricity distribution companies), hoping to get huge returns when the countrys power utility company was privatised. Also, at some point banks were investing heavily in government papers to take advantage of high yields. The point is SMEs were and remain at the bottom of the ladder when banks consider who to give facilities to. Coupled with this is the fact that the cost of capital has remained high and interest on loans is in double digit. Banks are sceptical SMEs can handle that.
On the other hand, SMEs often make it difficult for banks to give them facilities. Many SMEs are not properly structured in terms of proper bookkeeping and records of transactions and their cashflow situation. Many use personal accounts to conduct business or run their business accounts like a personal account. So, it is difficult for banks to assess their liquidity position, the cashflow, and the spending patterns, and thus the viability of the business. No bank or even a serious investor will invest in a business that has no proper bookkeeping or record of its transactions.
As a business, before you take the steps to source for funding you need to ensure you have the proper structure in place. Engage a professional accounting or audit person to set up your accounting unit and initiate regular audit of your books. Once you have that in place, you can then consider your funding options. There are traditional and new ways of sourcing funding for your business. A business must first assess its needs, the best possible way to get a facility and where to turn to for a facility.
Now, let us consider some of the available funding sources open to a business today.
We have talked about savings and contributions from family and friends. This is limited. We have also discussed banking loans. The interest rate on a bank facility is so high that an SME may struggle to pay back. So, what other options are opened to the business owner?
Angel investors
These are individual investors who have the deep pockets to finance your business. But they want a share of the business; they want to be a partner or an equity holder in the business. The problem here is that many Nigerian entrepreneurs or business owners are unwilling to share a stake in their business with another person. They want to own the business 100%. SMEs must have a rethink of this attitude as it is so old fashioned. There are numerous opportunities now that smart entrepreneurs can take advantage of by bringing others onboard. A business can ride on the angel investors extensive network and connections to grow, it can gain access to markets it ordinarily couldnt access by going it alone, and most importantly it can quickly scale its business to tap into a growing market. What is important is to draw out how much stake you are willing to share and then source for an investor.
Venture capitalist
These are private equity investors, people who have pooled resources together to invest in startups and early-stage businesses. And like the angel investor, they want a slice of the business. Like any investor, they would only invest in a proper business plan or a well-structured business. Venture capitalists put their money in a business with an exit timeframe in mind, usually five years; they dont want to be your partner for life.
Crowd funding
This is a growing source of funding for individuals and businesses. This is raising small amounts of money from many people online. Equity-based crowdfunding is also growing; here, unlike a venture capitalist, numerous investors invest in your business without asking for control of the business. If a business has an initiative or project that needs funding, it can use the crowdfunding opportunity. There are several crowdfunding sites online. An online search will lead you to many of these sites. Another advantage when you crowdfund is that your product or project garners visibility and is exposed to so many potential leads.
Grants
A grant is another funding line for SMEs. A grant is money given by a government, an organisation, or a foundation to small business owners to help them grow or expand. A grant does not usually require repayment. Those that require repayment are usually interest- or collateral free. A typical example was President Buharis TraderMoni given to small business owners across the country. Also, a quick online search should point you to credible entities where you can access a grant for your business.
If a business is well structured and has a solid product line, getting funding should not be so difficult. Apart from bank facilities, there are many funding sources now such as grants, crowdfunding, angel investors, and venture capitalists that serious businesses can take advantage of.
