Articles & Features
NEED CAPITAL FOR YOUR START UP BUSINESS? HERE ARE PLACES TO LOOK…
Capital is doubtless one of the most essential needs of any business venture. Week in week out, we get requests especially from start-ups who are trying to access funds for their businesses. Unfortunately, most banks do not offer loans to businesses at this stage as they are high risk and there are no guarantees that money given out to these businesses will be retrievable when due back.
That is apart from the fact that startups are not likely to make the criteria for obtaining loans from commercial banks as they would not have sufficient financial records, revenue or even collateral to make the banks want to take the risk of parting with shareholders money.
Even if they do make the criteria, the borrowing rates are often so high that it will hurt start-ups to have to repay at the prevailing rates and so it would make no business sense to take such loans.
This leaves a lot of young businesses stranded as there are seemingly not too many options for them to raise the much required fund for their business.
So where should young businesses look to get funds?
1) Seed funding:
Start with your personal saving. A rule of thumb is that you should have 30% of the fund you are seeking. What assets can you convert to ready cash? It could be household items that you really don’t need, trinkets, an extra car, stock, etc. If the business means that much to you then you should be willing to make the sacrifice.
2) Family and Friends:
You can get people within your close circle to buy into your business and earn dividend in return or alternatively, give you a soft loan- with or without interest. It is easier if you’ve earned their trust and you are able to sell them a convincing business idea.
3) Supplier’s credit:
This is often overlooked but could however, be a crucial source of funding your business especially if you deal tangible goods. Having built a track record with Suppliers, it is easier get them to part with some volume of goods and you can repay after sales. This requires a lot of trust so you have to first invest in your social capital such that your words become bankable with your creditors.
Businesses can trade their products and services in exchange for other products and service that meet their business needs rather than paying for them. This would help to enhance business activities without necessarily spending money and so it is highly recommended for businesses with limited operational capital.
Co-operatives are a good source of borrowing for Start-ups. Co-operators can take a loan in proportion to their savings and repay at a reasonable interest rate.
6) Micro-finance banks:
They provide loans to small businesses that hold accounts with them at lower interest rates and flexible terms compared to commercial banks.
7) Thrift Associations (Esusu):
This is an informal but effective means of saving or raising funds towards starting a business. A group of individuals with common interest come together to pool funds (known as contribution), usually monthly and each member take the contribution in turns. Default rates are lower as it is easier to track each member to ensure remittance.
8) Bank guarantee:
Otherwise known as a bond, it is a promise by a bank or other lending organisation to indemnify a loan in case a debtor is unable to pay back. Usually, the bank or lending organisation will require that the debtor has saving, shares or collateral with them that is worth the value of the sum they are offering to underwrite.
9) Angel Investors:
Angel investors invest for a cause which could be social or otherwise. They are willing to take the risk to invest in Start-up businesses and earn interest or in exchange for part ownership of the business over a stipulated period.
10) Venture Capitalists:
VCs invest in businesses that provide novel products or services with high growth potentials and earn returns in form of equity ownership. You must be able to prove the potentials for high ROI to be able to secure investments from Venture Capital in your business
11) Specialised Loans:
Some Government parastatals provide loans to businesses within certain sectors e.g. Agriculture, manufacturing, textiles, exports, etc. as a growth impetus for such sectors, at lower interest rates (compared to banks) and more flexible payment terms: CBN, BOI, BOA, NEXIM, NISRAL, CACS, etc. In some cases, they also assist with equipment purchase, technical supports, et. There are however stipulated requirements for business that want to access such funds.
Grants are non-repayable funds to businesses by Governmental& non-governmental organisations as an impetus for sustaining economic interest in certain sectors. Grant makers are usually interested in investing in Businesses that are innovative, sustainable and solve certain problems- social, environmental or economic and usually also office business support and monitoring over a period of time to ensure that the fund is judiciously utilised. This gives startups a soft landing so they don’t have to grapple with repayments and interest at this stage of their business.
PS. It is advisable to consult with or employ the services of a good financial advisor to help appraise the right kind of matching fund for your business.
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Bukola is Founder, SMEBizInfo.com. She holds a B.ED in Economics and a Post graduate degree in Public and International affairs. She is passionate about helping small businesses harness opportunities to grow their business. She loves to write in her past time. You can reach her by mail- firstname.lastname@example.org