How small businesses raise capital

How small businesses raise capital

Babatunde Fajimi

Capital and how to find it in a recessed economy pose a major challenge to most people who want to own small businesses as entrepreneurs.

These people are also depressed like the ancient mariner of the English poet, Samuel Taylor Coleridge, who lamented that “water, water, everywhere, and all the boards did shrink; water, water, everywhere, nor any drop to drink.”

Fat cows ate up the lean

The Asset Management Corporation of Nigeria has said its 400 debtors owe over N4.5 trillion.

Recently, the administration of President Buhari disclosed that it recovered N78,325,354,631.82, $185,119,584.61, £3,508,355.46 and €11,250 from looters of public treasury from May 29, 2015 to May 25, 2016. The funds awaiting return from Switzerland, UK, UAE and USA amounted to $321,316,726.1, £6,900,000 and €11,826.11.

With such staggering figures floating around in the hands of few people legitimately or illegitimately, small businesses should have no problems raising capital which is money or wealth needed to produce goods and services either through debt or equity.

Where is the money?

International Finance Corporation estimated that 84% of small and medium-sized enterprises in Africa had limited or zero access to capital.

The ‘Accelerating Entrepreneurship in Africa’ report by Omidyar Network and Monitor Group stated that 71% of entrepreneurs considered raising capital as the biggest handicap.

The report reveals that personal and family loans constitute 45 per cent of the main sources of financing in Africa.

It puts private equity at 19 per cent, bank debt at 18 per cent, government funding at five per cent, venture capital at five per cent, angel seed at four per cent and other sources which include corporate funding, lease/receivables financing or stock options as four per cent.

You may not be alone

Shalom Okunade is a young career woman whose attempts at starting her small business have been hampered by her inability to raise capital.

An entrepreneur journalist, Franklin Bayen, listed finding capital as the toughest hurdle start-up businesses face in Cameroon. He said it was easier to ascend the Fako Peak on Mount Cameroon than finding investors.

The executive director of Phemzo Integrated Services Limited, Femi Akindele, said raising capital for his start-up was his baptism of fire.

The untold story

In spite of entrepreneurs’ experiences in small business, experts argue that finding money for start-ups and growing the business should not be a mission to find a needle in the haystack if entrepreneurs can focus on the end of the tunnel.

A US-based certified public accountant, Koyejo Arulogun, said people should stop using money as an excuse for not becoming an entrepreneur.

Accelerating Entrepreneurship in Africa report opined that financiers and investors claimed many of the new ventures and small businesses were simply not fundable. It attributed the lack of fundable business plans to quality and feasibility of the business idea as well as the commitment of the entrepreneur and the team to success.

A consummate scholar and entrepreneur, Richard Ikiebe, pointed out that if entrepreneurs could think and come up with ideas for business, they should also be able to think of ways to attract money to fund the ideas. The two are intertwined and not independent activities.

“Money is not going to show up simply because you have a business idea. You have to devise a strategy to raise money to fund your dream. If you are a smart person who can think, you will know where to find the money,” he said.

Ikiebe added that entrepreneurs which succeed at finding money are those with originality of idea, bankable business plan and persuasive presentation to convince investors and the market about their value propositions.

Arulogun wanted entrepreneurs to have skin in the game. Investors want to see how committed the entrepreneurs are, how much of themselves (personal investment or equity) have been invested in the business and what little wins have been secured before staking their funds.

Serious-minded entrepreneurs should de-emphasise seeking hundred per cent loans for raising money for their start-ups, and certainly not from banks. Experts suggested that bank loans were not tailored for start-ups and small businesses. Banks see such investments as high risk, low reward.

Entrepreneurs must create self-belief in their ventures. Arulogun argued that if a person cannot sell his car to raise funds, move to a smaller house to conserve funds or become creative with his cash flow to start up a business, it may be difficult to persuade an investor to put down money into such business.

He said that the problem of capital can be solved with small steps. Capital is not raised in a day. Entrepreneurs can start small, raise capital and recoup that first. They can test the market and make small mistakes before thinking of raising large funds. Investors disburse capital in tranches when they see progress.

If borrowing is an option, entrepreneurs should avoid high interest rate so that they will not perpetually be working for the lender. They can find resources from those that believe them such as family, friends and colleagues. They should be committed and seek for partners because it is difficult to go it alone.

Source: The Punch Newspaper