BusinessDay

How to raise capital for your small business in Nigeria

Funding is one of the major challenges confronting businesses of all shapes and sizes in Nigeria and across the world. Finance is the lifeblood of every business. Without adequate cash inflow, businesses would not be able to procure raw materials, convert them to finished products, market or distribute the finished products and even pay their employees.

As a result of this, many financial institutions have sprung up to meet the financial needs of businesses. Once dominated by commercial banks, Nigeria’s financial services industry and business funding scene now boast of other institutions such as venture capital firms, private equity firms, fintechs and crowdfunding platforms. This highlights the maturity of the industry in the country and gives entrepreneurs and business managers a variety of funding options for their enterprises.

Despite this development, many businesses, especially startups and SMEs, are still unable to effectively raise capital to remain a going concern – or even take off in the first place. This is partly due to the stringent measures put in place by these fund providers to ensure that their limited capital is made available to organisations and invested in projects that will theoretically guarantee the best returns.

Unfortunately, many organizations, especially SMEs, lack the capacity to scale through these hurdles because of their weak structures and the managerial inexperience of their founders and operators. Listed below are some strategies that early-stage entrepreneurs and business managers can adopt to make their businesses more attractive to financiers.

The Preliminary Steps

1. Write down your business plan: The emphasis here is on “write.” It is not enough to have your business plan in your head; you also have to write it down somewhere. As we all know, information stored in memory can become fuzzy over time. Writing it down will prevent this and also make it easier for you to fine-tune your ideas and plans anytime the need arises.

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2. Register your business with the Corporate Affairs Commission (CAC) and other relevant bodies.

3. Open a business bank account: Running a business with a personal or individual bank account is one of the most common business management infractions in Nigeria. In spite of the numerous policies put in place by the government and the business-friendly account products rolled out by commercial banks to discourage this, many entrepreneurs still run their businesses with their personal accounts, mostly to evade taxes and, sometimes, for administrative convenience. Doing this will make it difficult for investors to figure out how well your business is performing because your business finance will become muddled up with your personal finance.

4. Build an online presence for your business to expand its reach and make it easier for your target audience to connect with you from anywhere in the world.

5. Acquire sound accounting and financial management skills or hire a competent accountant or financial manager: Most early-stage entrepreneurs are jacks of all trades, performing varying functions as their companies strive to gain traction. The finance function of business management is one that must not be joked with. For starters, investors will assess your company’s financial health before committing their funds to it. A financial manager or accountant or the sound knowledge of financial management and accounting will help you to properly allocate financial resources in your company for peak profitability.

6. Get the right co-founder(s) and/or management team: If you are seeking a big-ticket investment, it is important that you get the right management team on board. Investors want to be assured that there is more to your business than just you and that the company will continue to exist even if you exit. Get a co-founder(s) or management team that will complement your skills and experience. For instance, if you are good at software development, but bad at business management, get a co-founder who is good at business management.

Fundraising Proper

7. Determine your exact funding need: You can do this by projecting your business’ short-to-medium-term financial performance, which is also referred to as financial forecasting.

8. Know the types of funding available:

Debt financing – Debt financing is what readily comes to mind when most entrepreneurs think of funding. Debt capital is any money obtained that must be repaid, usually with an interest, at an agreed later date or interval. It is most commonly offered by commercial and microfinance banks. Debt capital is suitable for businesses with financial traction and collateral. It is not suitable for early-stage businesses or businesses with insufficient revenues and collateral.

Equity financing – Equity financing involves raising capital from investors in exchange for a stake or share in your business. It is more expensive than debt capital because it dilutes your ownership and requires offering regular financial returns (such as dividends) to investors or shareholders. Typical sources of equity financing are angel investors, venture capital firms, private equity firms and the stock market. It is mostly utilized by startups with high growth potential that need to scale very fast or large corporations that need to expand. It is not ideal for businesses that want to grow slowly and steadily.

Hybrid financing – Hybrid financing, such as mezzanine financing, combines elements of debt and equity financing. It is not as common as debt or equity financing in Nigeria.

Grants – While most types of funding involve some form of give-and-take, you are not expected to pay back a grant or give up a stake in your business for it. Grants are usually given to businesses that are already making or will likely make a positive social impact.

9. Identify the right funding source or mix of sources:

Bootstrapping – Most businesses take off by bootstrapping, which essentially entails funding a business with the entrepreneur’s personal income and savings, as well as contributions from her family and friends. This funding source cannot sustain a business with lofty growth ambitions in the long run.

Partnership – In this arrangement, an entrepreneur with insufficient funds goes into a partnership with someone who then provides the needed funds in exchange for a stake in the business and/or a share of the profits realized. This technique is fraught with numerous risks, such as disagreements between the partners over the direction of the business. Like bootstrapping, it is not sustainable when done on an informal basis.

Commercial banks, microfinance banks and merchant banks – These types of banks are the most common institutional sources of debt capital for small businesses and startups in Nigeria and around the world.

Angel investors, venture capitalists and private equity firms – Angel investors, venture capitalists and private equity firms are the major formal sources of equity capital for early-stage and growth-stage companies. They are highly selective, though, and would typically fund less than 10% of the companies that apply to them for funding.

Business incubators and startup accelerators – Business incubators are organizations that help entrepreneurs to refine their business ideas, plans and models, while startup accelerators are organizations that help businesses with already validated minimum viable products to scale rapidly. Both provide some form of financial support in the course of their intervention.

The stock market – No thanks to various regulations, raising capital through the stock market is almost the exclusive preserve of large corporations.

Crowdfunding – Crowdfunding involves raising business capital from a large number of people who each contributes a small amount of money, usually through crowdfunding platforms like GoFundMe and Indiegogo.

Business idea and business plan competitions – Entering a business competition can be a smart route to raising capital for companies with game-changing, highly innovative and impact-oriented solutions as most business competitions come with financial incentives.

Non-profits and social development organizations – Many organizations in these categories offer grants to businesses in underserved communities and the green economy.

The government – Governments at the federal and state levels sometimes offer low-interest loans and grants to promising businesses in a bid to stimulate the economy.

Cryptocurrencies and decentralized finance – Entrepreneurs can also raise business capital by selling digital assets or tokens, which is known as an initial coin offering (ICO). But the controversy surrounding cryptocurrencies and decentralized finance, as well as frequent government clampdowns make it one of the riskiest funding options for businesses.

Advance Payment – You can have your customers fund your business by getting them to pay upfront for a service or product that you have not yet delivered and using the money to actually provide the service or produce the product. This is where your social capital comes into play. Your customers will be more willing to pay you for a service not yet enjoyed if they can vouch for you and if your brand has a good track record and reputation.

10. Prepare your pitch deck or grant proposal: Now that you have identified the right funding source or mix of sources for your business, the next step in your quest to raise capital will be to prepare a pitch deck. A pitch deck is a concise document that gives investors a snapshot of your company. It usually comes in the form of a presentation material (like Microsoft PowerPoint), but it can also be a text-based document (like Microsoft Word). The alternative to a pitch deck when applying for a grant is a grant proposal. If you are approaching a grant provider, ensure you highlight the social impact of your business model, product or service in your grant proposal. If you are approaching a venture capitalist, ensure you focus on innovation and viability in your pitch deck. If you are approaching a bank, ensure you showcase good cash flow and possibly the presence of collateral. And so on.

11. Apply for funding: All that is left for you to do at this point in time is to go over your pitch deck or grant proposal once again (preferably with someone with experience in raising capital) and approach an investor with your funding request. Once you have figured out the type of funding that your business needs (debt or equity or hybrid or grant), you can apply to as many financiers that provide it as possible. But ensure you tailor your application to each one. Doing this will give you the opportunity to cherry-pick if you get multiple offers.

Chinedu George Nnawetanma is a business growth strategist and a startup and SME finance advisor. He can be reached via the email address mediachinedu@gmail.com.

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