How to find Finance for your business (Part 1)
One of the major factors affecting the success of business men and women in Nigeria is poor access to funds. Nigerians by nature are enterprising. They want to run a profitable business of their own. Some individuals and groups have started lucrative businesses but because of inadequate supply of funds, the businesses have either collapsed or remained a struggling entity with no sure future of success. In some cases, the businesses are still profitable but there is no money to expand the business.
There is another group of people; they are yet to start any form of business. They are eager to start but there is no sufficient capital to do so. Every day, they are hoping for a breakthrough one day for them to start running their dream business entity.
The youths are also not left out of this desire to be their own bosses. They want to enjoy the respect and freedom of having their own businesses which they can run from their homes or offices. The reward for self-employment is great, and there is self-fulfillment in owning a profitable and thriving business of your own.
It is therefore my intention to address the issue of poor access to funds for SMEs (Small and Medium Enterprises). You don’t need to worry yourself anymore. Every business requires money to run. Money is like blood to a business just as blood is to a human being. Without blood, the person will die. If there is no cash (money) in any business, the business will surely die. Money is very important in business.
WHERE CAN YOU GET MONEY FOR YOUR BUSINESS?
There are various sources for getting finance (money) for your business. It depends on the type of finance (money) that you want. Is it short term or long term finance? Is it debt or equity? Debt is money you owe and you must repay the amount borrowed (principal) plus interest for using the money over a period of time. Equity financing is the second form of funding that is available to a business. It is different from a debt because you don’t have to pay back. It is a representation of ownership in the business for the person or entity that gave you the money. The equity financiers are the owners of the business. They share profits if the company makes profits.
The two major types of funding are debt and equity. This is represented in the diagram labeled: Fig 1 above.
Financing a business can be through internal or external sources, or a combination of internal and external sources.
Internal sources consist mainly of personal savings, remortgaging of your properties or sale of personal assets or rights. It includes money received from family members and friends. You can sell your car, landed property or any other assets to secure cash to be invested in the business. When the business is strong enough, you can buy the same type of assets or a better one if you still consider it necessary. One of my friends sold his Mercedes Benz car in order to infuse cash into his business which was lucrative but lacking in cash in order to increase the level of operations. If you have jewelries or landed property, you can sell it to generate more equity fund for your business.
Some family members are ready to help you without lending you any money. They are just prepared to help you. Approach them, such as your spouse, parents or children (if they are grown up). Be careful to agree to terms with family members. Is it loan or equity, or a contribution to assist you? If it is a loan, agree to the payment terms and ask if there is any interest to be paid. Be careful about interest payment. If it is equity, you have to run the business well to ensure that it generates profit. You should always keep proper records and give the share of profits to all those family members who gave you money to start or expand your business. Equity holders (external and internal) must be treated well. They are co-owners with you. They are expecting returns on their investment in your business. They have trusted you with their money. Do not disappoint them.
Those who are already in business should plough back part of the profit instead of spending all on themselves. An internal source (which is called retained earnings) is a good way of building up a strong business that will grow and expand in the future.
ISSUES IN FINANCING A BUSINESS
It is important for you to note that starting a business will require you to have a stake in the financing. Your own contribution must be verifiable before others can invest in your business. Some institutions call it “seed money”. Before they will give you any money, you will be required to contribute between 20% and 40% of the project cost. The percentage is negotiable in some cases, but there is a minimum which you must bring to the table for consideration.
In the next article, we shall consider external sources of financing a business with some guide on how to go about them. You are free to ask questions on how to finance your business through this email addresses:
Dr. Adebola Olubanjo is an Entrepreneur and a Consultant on SMEs. He is the Chairman of Council for Entrepreneurship Promotions Academy International.