I liken the process of accessing funds for your business to shopping. When shopping, you’re browsing different options, checking which is most suitable; you’re negotiating prices and trying to get the best product or service for your need. It’s the same process with a business seeking for funds. Speaking with various entrepreneurs, individuals and businesses, I’ve found that one of the quick wins to make finance more available is to ensure that information regarding funding sources and the disciplines required to access them is readily available.
The previous Central Bank governor had once alluded to the fact that commercial banks have become sort of a monopoly in the local financial space. If someone is looking to fund a start-up business, he approaches a commercial bank, if he’s looking to fund infrastructure projects, he approaches a commercial bank. If he’s looking to fund a ten year project or a three month project, he approaches a commercial bank.
Whilst commercial banks may have different areas of expertise, focus or strategies, it is important to have other financial institutions and vehicles that fund businesses at different levels and different stages. More importantly though is for those that require the funding to realise that these other institutions exist. For example, if a business is looking to acquire fixed assets that have residual value, it might be better to approach a leasing company as opposed to commercial banks.
If businesses are looking for small loans with very short tenors, then a microfinance bank is probably the best institution to approach. The key argument against microfinance banks though is their high rate of annualised interest. Whilst this assertion maybe justified in some cases, I counter this by saying that microfinance loans are not necessarily to fund 2-3 year projects, but for 3 -9 months businesses that have a short cycle.
For longer tenured loans of larger amounts, then commercial banks would probably be most suited. Even then, commercial banks have their areas of strengths and focus. Some banks are traditionally strong in some sectors of the economy. For instance, if you were looking to raise funds to expand your school, some banks that have experience in funding this sector would be more favourably disposed to advancing you credit that another bank that has no educational related loans on its books. So it’s important for businesses to put on their shopping hat and find the bank that’s most suitable for their request. Then, for longer tenured projects spanning above 3 years the stock market would be a veritable option.
The Nigerian Stock Exchange launched an Alternative Securities Market (ASEM) for small sized companies to raise funds from the stock market. The listing requirements would not be as stringent as those required for the main exchange, but would still ensure a minimal level of professionalism and compliance by listed companies. For early stage and start-up firms, and closely held businesses looking for longer term funding, the private equity and venture capital firms would be the best firms to approach.
Commercial banks however are the most developed financial institutions in the country and their ubiquity makes them bear the brunt for the minimal level of funding to the MSMEs. The other institutions in the financial system mentioned, like the leasing firms, private equity industry, and microfinance banks are not as developed as the commercial banks, but there are various initiatives to develop these sectors so that they offer some sort of competition for commercial banks as sources of funding for firms and projects. In any case, regardless of which sort of financial institution one approaches for financing, it is pertinent to imbibe some key practices that would increase the possibility of raising finance for your business.
•Look to raise funds internally. It’s unlikely that other firms will money into your business if you haven’t taken the first step. Rather than complain about lack of external funding, businesses and individuals should make some sacrifices, like scaling down their current lifestyles, selling off jewellery or extra cars in a bid to find start up or growth capital. Firms should be able to demonstrate some form of stake in the business or venture before approaching external sources.
•You should be able to convince others of your vision and business ideas. Small businesses should look to partner with other businesses or individuals in a bid to boost their credibility and ultimately access to capital. If you are able to get prominent individuals on your board or able to secure contracts with prominent companies, either to supply you with raw materials or to receive your goods, then It shows a level of convincing and belief in your firm. The thinking is that if you can convince these highly placed individuals or companies, then there’s probably value in your business.
•Explore trade credit and upfront payment. Before looking for funding from financial institutions, explore the possibility of getting goods on credit from suppliers and or payments for services upfront. You could throw in a sweetener, asking clients to pay upfront to receive discounts or in return for a steady supply of products. The important thing here is your integrity and your track record. These are really important for small businesses, especially since some banks make enquiries from your trade partners if they want to enter lending relationships with you.
•Structure your business. One of the major reasons why banks will not touch small businesses is because there is lack of transparent information on their activity.
As a small business, try to invest in a financial accounting system that enables you know your financial position regularly. It even helps you to keep track of your activities. Even if your business is making a loss, it always pays to have audited accounts and documented policies and processes in place. This also aids growth of your firm even of you don’t require external financing.
•Finally, but certainly not the least is that businesses need to ensure their credit information is clean. You certainly don’t want to have a negative credit report as a result of defaulting on loans with some other financial institution. This virtually eliminates your chances of receive funding via the formal financial markets.
The firms that incorporate this into their business practices will be in good stead to attract capital even in the current environment. They will even be better placed when the various reforms to the financial system kick in and the tap of credit begins to flow to small businesses.
Oguche Agudah
