The CBN recently confirmed the high interest lending regime from banks is not letting off in the near future. Bank lending to SME’s, Startups and Individuals are still nowhere close to what is required to support an emerging economy such as Nigeria. This hereby requires that we look for other alternatives ways of financing our projects and businesses.
1. Crowd Funding – This is a relatively new phenomenon in the west and is yet to gather steam in Nigeria. Crowd Funding involves sourcing for money to finance project from potential customers. It’s basically receiving money in advance from your customers for a product that hasn’t been manufactured. For example, as a startup you have designed a prototype for a product that you believe consumers will like but don’t have the money to fund its mass production. By approaching crowd sourcing websites such as Kick Starter (based in the US), consumers who like the product you are launching will pay for it in advance in return for being the earliest to use it and at a cheap price. You also make some profit and have proof that your product is indeed marketable giving you better access to banks or venture capitalist.
2. Venture Finance – Venture Finance is a form of equity investing used by Venture Capitalist (VC’s). VC’s are experienced risk takers and will support risky projects which no one may be willing to take on. In exchange for that they get a stake in the ownership of the company/project and then sell when the business has started generating considerable profits. The upside for VC’s are that when they take a bet on you and it works out well, the sell their equity stake for a higher return. For fund seekers, the advantage is that you get interest free money which is very crucial to the early stages of your business simply by relinquishing some control. In some cases, you can also seek rounds of funding from VC’s to fund different stages of your product development. Popular business like IrokoTv, Paga, Jumia have all used Venture Financing at some stage in their funding cycle.
3. Angel Financing – This refers to funding by family, friends or well wishers who for little or no financial gain decide to meet your funding expectations. Angel financing is also a very cheap and effective way of funding projects especially when no one believe in you. In could come in cash or in kind. For example, you Dad can give you car to help with running errands or meeting supplies. It could also come in the form of an office space where you can conduct your business without having to worry for utility bills. A lot of us rely on Angel financing at some point in our business life but do not recognise that. Properly structured businesses must capture the value even if it isn’t in cash. So, if there is an aspect of your business that you find difficult funding, look to see if it is something an “Angel” can help fund.
4. Equity Finance – Equity finance they say is the most expensive form of finance because of its risky nature. However, it has proven to generate very high returns if the business is run properly. That is why the likes of Warren Buffet are the riches people in the world and not bank owners. Therefore, if there is a business you have developed for sometime but need some money to expand why not make a sales pitch to a friend or family. If they know you have been running your business successfully over the years, there is every likelihood that they will take up some equity in the business. A Doctor who invested $30,000 in Warren Buffets Investment Company when he just started in the 60’s saw her money rise to $300million.
5. Equipment Sale and Leaseback – Equipment Sale and lease back is a form of financing for business that offer capital intensive services. It involves you business buying an asset and then selling it to a lessor who then leases it back to you at a fixed periodic rental. For example, you buy a set of computers for N1million which you need to power your business. However, you are probably better off using the cash to pay developers and soft ware engineers as serviced to help finalise coding for a software that you can sell for a huge profit. You then sell the computers to a leasing company who then immediately leases it back to you. The leasing company gives you back the N2million which you can immediately put to better use and still retain the computers while the leasing company gets monthly lease rentals (which includes some profits) from you.
6. Debt Factoring/Invoice Discounting – For business characterised by high turnover of sales it is very likely that you carry Naira load of debtors who purchase your goods on credit with a promise to repay over a period (usually one month). This can be drag on your cash flow especially as you need to replenish sold out inventory. Debt factoring is basically selling the rights to your debtors at a discount in exchange for cash. For example, Company A supplies packs of toilet roll to a Multinational Organisation for N2million which he will receive after 30 days. He then sells the right to receive the cash to a Debt Factor for N1.9million. He gets the benefit of getting the cash immediately while the Debt Factor makes a profit of N100k. Invoice Discounting is similar to Debt Factoring except that it is mostly offered by banks.
7. Cash Flow Management – The way you manage your cash can also limit the number of times you approach a bank for a loan. As mentioned above, Multinationals and Large Corporates manage cash flows very well which is why they issue local purchase orders to vendors with a promise to pay back after 30 days. You can also deploy such cash flow techniques but make sure you inculcate the habit of paying as and when due. Experience shows companies who make do their payments as and when due are able to command better discounts and quality products that those who chronically owe.