In Africa, apart from the known business challenges such as the decrepit infrastructure, inconsistent government policies, double taxation, increasing inflation, regulation irregularities and the COVID-19 pandemic consequences in recent times, overwhelmingly, lack of capital or funding issues contribute majorly to business failures. According to findings of several surveys, one of the top challenges faced by entrepreneurs and businesses in Africa today is access to funding. Without doubt, funding is the bloodline of any form of business, therefore, whether it is a start-up, nano, micro, small or medium-sized business, or an established large firm, knowing how to raise capital can often make the difference between business success and failure. In fact, funding is important at all business stages and cash which is most time referred to as “capital” in business terms majorly dictates the pace of performance in any business.
Invariably, without funding or capital, it will be extremely difficult to get any enterprise off the ground. However, the structure that exists in the business significantly affects the access to the choice of fund options. Recall, every business has a different structure and needs; it is, therefore, imperative to state that no financial solution is one size fits all, fund options usually require different rules and steps. Consequently, businesses will be required to carefully plan, research, learn, and understand the necessary funding option in order to come up with the right decision.
So, the big question for businesses is what are the ways to adequately raise capital for seamless operations?
Capital comes into any business particularly in two ways: as equity or as debt. However, donations, grants, incentives, interventions, or subsidies can also be employed in certain aspects of a business to encourage activities in particular industries or sectors by government. Just like other forms of capital raising options, these grants and subsidies can be initiated for either short-term or long-term purposes. That said, equity capital involves exchanging a portion of the ownership of the business for financial investment in the business, most times it involves selling shares of the company in exchange for funding. The ownership stake resulting from this equity investment allows the investor to share in the company’s profits. Equity capital is usually a cheap form of funding and is an important source of capital on a long-term basis. However, sometimes it involves going public, getting listed on an exchange, and also giving up partial or major control of the business.
On the other hand, debt capital is when a business borrows fund from individuals or institutions and agrees to pay them back later. Debt capital simply means loans and borrowings. The main consideration in debt capital is the ability of the business to generate sufficient returns to service the debt (interest and capital repayment). A typical mode of raising debt capital is through the bank loans. Banking institutions provide loans to individuals or businesses who approach them with a solid business plan, and good business structure with capacity for repayment. Bond is equally a debt instrument, and a way of raising debt capital as well. It belongs to debt capital categorization because the authorized issuer (business) owes the bondholder debt and it depends on the terms of the bond issuance. The most significant difference between equity and debt is that, unlike debt, equity capital does not require an amortization schedule for repayment. More so, equity capital involves the investor taking an ownership position in the business.
The easiest and starting point for small businesses from context observation is usually with self-funding and personal investment, where entrepreneurs leverage their financial resources to support business operations. Self-funding can extend to family, associates and friends for capital, otherwise referred to as bootstrapping. Both self-funding and bootstrapping lets business managers, operators, and entrepreneurs leverage their financial resources to support the business operations. Further to this is angel investment, where investors who are generally wealthy individuals or retired business executives invest directly in a business or startups owned by others. These angel investors are often leaders in their field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Most times this form of capital raising is in exchange for equity ownership in the business and an active management role.
Also, trade credit is another significant form of capital raising option where business suppliers are willing to transact or sell on credit. Such credit may range anywhere from one month to three months or as agreed. This is a very good method for businesses to fulfil short-term funding needs. It is an inexpensive method of funding for any business, I must say. Further to this is private equity investment, where private equity firms raise equity capital that is not listed on any Stock Exchange for investment purposes. Invariably, these firms raise funds from investors and then invest these funds in promising start-ups and businesses that require capital. The drawback of this funding option is that a controlling position or substantial minority position in the business is usually acquired and then look to maximize the value of their investment. Thus, the entrepreneur might not have sole control over the business decisions, which may lead to conflict. Looking at another capital raising option is retained earnings as a way of raising finance; it simply means businesses can reinvest any set-aside profits for business operations for expansion, equipment purchase, and development purposes.
Business owners, managers and entrepreneurs do not have to get discouraged if one does not work out; other options can easily be explored. To find the right fit, in-depth research and adequate due diligence are imperative, having in mind these following questions- how much is really required for the business? When is it required? How long will it take to raise the funds? What are the specific requirements to access the fund? What will the fund be used for? What are the associated risk with the fund type? From whom is best to raise the fund? How expensive is the fund? How and when is repayment? Is the business actually fundable or bankable? Because some fund options may be a perfect fit for a business situation, while others may be completely impractical, therefore due diligence is absolutely required.
Aside from every business having unique funding needs, each funding option also differ in availability, terms, funding amount option, and eligibility criteria. Therefore, each fund option needs detailed attention ahead of time. Whether a business opts for a bank loan, an angel investment, or a government grant, note that each of these sources of financing has specific advantages and disadvantages.
- Dr Olubiyi is an Entrepreneurship & Business Management expert.
