Financial Literacy
Between loan and equity funding, which is best for startups?
Loan and equity are both viable means of funding businesses. Entrepreneurs choose either or the bother of them, depending on what works best for them.
- Loan and equity are both viable means of funding businesses
- Some business owners choose either or the bother of them, depending on what works best
- Loan and equity also have peculiar advantages and disadvantages
- Read further to see our financial experts’ insights on this topic
In the early 2000s when Charles chose to resign from his high-salaried bank job to pursue his interest in fashion, he knew for sure that he was doing the right thing. At the time, some of his friends were opting to leave Nigeria altogether for greener pastures elsewhere. He could have done the same thing but chose to stay.
This wasn’t an easy decision by any means because it came with many challenges. As an entrepreneur, Charles had to solve a whole lot of problems all by himself; including funding his business. Although his experience in the financial services sector helped out in this regard, he still had some difficulty deciding on the best funding option for his business.
Funding has long been one of the biggest challenges facing entrepreneurs around the world. It goes beyond merely finding the money, to include knowing the right form of funding to seek. This is very important because oftentimes, the difference between a successful startup and a failed one lies in how the seed-funding is secured.
Loan versus Equity Investment
These are the two main types of credit facilities available to entrepreneurs and startups. When it comes to loans, an entrepreneur can raise debt by borrowing money which must be paid back to the lender (with interest) after a specific duration. Loans can be accessed from the likes of banks, credit unions, finance companies, etc.
Equity funding, on the other hand, basically entails selling a portion of one’s stakes in the business to equity investors who are willing to help you raise much-needed funding.
The pros and cons
Now, both loan and equity have their respective advantages and disadvantages. As mentioned earlier, there really is no one-size-fits-all approach to securing funding. However, bearing in mind the advantages and disadvantages of each funding type and knowing fully well the aims and objectives of a startup will better guide the entrepreneur into choosing what works best for them.
Loan, for instance, can enable the entrepreneur to secure immediate funding without necessarily letting go of full ownership of the business. Therefore, assuming that Charles who was mentioned earlier, had chosen to raise debt to finance his fashion business, he would have been able to, among other things:
- Access funding faster and because loan is faster than equity funding
- Retain ownership and control
- Make all the decisions without external interference
- Forget about his liability forever once his debt is offset
- Interests paid on his loan would be tax-deductible
- Generally, debt financing is cheaper for the very fact that you get to retain full ownership.
[READ: Extramile Africa to drive financial inclusion with N4 million soft loans]
On the flip side, getting a loan to fund your business can also come with some disadvantages. According to Investopedia, “debt financing sometimes comes with restrictions on the company’s activities that may prevent it from taking advantage of opportunities outside the realm of its core business.”
More so, the inability/failure to pay back a loan as at when due is generally bad for anybody’s credit score. It may also attract extra charges.
Meanwhile, equity also has some advantages which can not be ignored. First of all, the entrepreneur is under no obligation to pay back the funding. What this means, therefore, is that he/she will have more money to run the business without thinking about how to pay monthly interests.
However, the very fact that this type of funding requires giving up a percentage of one’s stake in a business is something a lot of entrepreneurs have issues with. Charles, for instance, was very worried that he may eventually lose control of the creative vision he had for his business. This alone informed the final decision he took.
This is a serious concern, particularly so at a point when a business is just starting out. After all, nobody can really understand the vision of a company than the person that founded out. And when he/she has to give up control just to raise funding, it becomes problematic.
[READ: BoI’s disbursements to businesses increased by 130% in FY 2018]
Another disadvantage is that equity funding is not really easy to access. Around the world, equity investors are very choosy when deciding on whether to invest their money in a particular business or the other. In Nigeria, we do not even have a lot of them as much as we have lenders. Therefore, their scarcity in itself is a problem. Perhaps it is all for the best after all.
What the experts are saying
Opinions were, unsurprisingly, split among the experts we interviewed in the course of researching this article. Although financial expert, Kalu Aja, acknowledged that both have advantages and disadvantages, he did add that “Capital Assets Pricing Model says equity is more expensive than debt”.
Once again, imagine giving up a significant portion of your ownership in a business to someone (or a set of people) whose strategic direction may not even align with yours. That’s right, equity funding is expensive!
[READ: Meet Sola Akinlade, co-founder of Nigeria’s foremost payment platform Paystack]
Segun Olarinmoye believes that there is no wrong or right answer when trying to decide which is the best between equity funding and loans.
“There is no right or wrong answer. There are different types of startups and different scenarios, you have to choose what fits that particular scenario. Looking at the big picture if you know what you are doing debt can be cheaper.
“In terms of equity, for example, if you aren’t making any profit for years your shareholders can still be with you. That can happen in debt which requires frequent payment. See a business like Amazon or Jumia they haven’t been making a profit but they ultimately will in the future so if you believe in the dream equity offers you that flexibility to invest.”
On the other hand, a financial expert at Investment One, who chose not to be mentioned, said that equity funding is the best. He gave reasons for his belief;
“Generally speaking, Equity is best. This is because startups usually don’t have the capacity to repay loans at their early stage of existence (particularly early-stage startups); both from the standpoint of cash flow maintenance and the standpoint of revenue generation capacity.
“Equity affords them freedom from the frequent outflows resulting from interest and principal repayments. Also, equity tends to be accompanied by management expertise and social capital (i.e. networking) from the investor.
“There is an argument, however, that loans make startup Founders sit up; in that realising that they have financial obligations make them prudent and motivates them to work hard. But honestly, this isn’t the best way to motivate founders.”
Lastly, Chu Achara, a banker at First Bank of Nigeria, also believes that equity funding is the best for a startup. However, he believes that “as the business grows, a loan may be used because theoretically, loans are cheaper.”
In conclusion, it is the entrepreneur that will eventually have to decide which funding option works best for them. However, it is important to consider the pros and cons before making any such decision. Left for the authour of this article, however, loans would do just fine; especially during the early stages of a business. By the way, Charles eventually made do with a loan, just in case you are wondering.
Personal Finance
Personal Finance Culture: The 4 Cs of Financial Success
To achieve financial success, the 4Cs will be of great help.
Many Nigerians who had a pseudo-confidence in their financial stability, were rocked by the storms of the economic hardship that followed the COVID-19 pandemic. Some did not survive it, while those who did, now seek ways to be better financially equipped for future eventualities.
It’s six (6) months since the COVID-19 outbreak was officially declared a global pandemic by the World Health Organization (WHO) on March 11th, 2020. With the full enormity of the pandemic in mind, we cannot come out of this without noting its attendant life lessons. Interestingly, some of those lessons correlate with principles that can enhance your personal finance, on your journey to financial freedom.
READ: Emirates Airlines banned from operating in Nigeria
Financial freedom does not happen overnight, as it results from self-discipline and good money habits practised consistently over time.
To help you on your journey, I have come up with the 4C’s. To achieve financial success, you must be;
- Creative – Find creative ways to earn more money. Having more than one source of income is a good way to increase your financial security. I’m sure the people who lost their jobs or took a pay cut during the pandemic will agree with me.
- Conservative – Be conservative with your expenses, and make sure to spend less than you earn. You can actually save more if you stick to a budget. It is okay to occasionally reward yourself, and enjoy the finer things of life. But that should also be on a budget.
- Consistent – Form the habit of saving and investing a part of your income. As far as savings go, you need to have at least 3 months’ worth of living expenses, stashed away in liquid assets – Emergency funding, to cushion the impact of job loss, unplanned medical expenses, and other emergencies. It also applies to small businesses – many SMEs without any financial buffer felt the impact of the lockdown from Day 1. Investing, on the other hand, is the only way you can grow your money. You should take it seriously; develop the right mindset, become financially intelligent, and seek expert advice before taking a step.
- Careful – Be careful who you listen to. Not every investment advice is good for you, and you should do your due diligence before releasing your money.
READ: Effective financial planning after taking a pay cut in Nigeria
So, will you be making any changes to your money management style? What did you wish you learnt about money pre-COVID-19?
Importantly, we are not out of the woods yet. The virus is still out there, and you should stay safe, as Health is Wealth.
Temitope Busari, CFA
Temitope is an Investment Professional, with over 11 years of cognate experience spanning regional financial markets across Sub-Saharan Africa. Her technical skills cut across Treasury, Risk management, Fintech solutions, and Strategy. With a passion for positive social impact, she leverages multiple media platforms to advance financial literacy efforts, helping individuals and small businesses make better money decisions.
Personal Finance
Budgeting apps that help you manage your personal finance
In today’s world, these apps make it easy to effortlessly manage your finances.
In our fast-paced lives and rapidly evolving world, technology makes it possible to get things done in a more convenient manner, saving time, energy, and other resources. Personal budgeting should be a daily routine and somewhat a habit in our lives, unfortunately, not many people pay attention to this.
The tech world has taken notice and provided us with ways to manage our finances with convenience and ease through mobile apps development.
Life is good when you are on top of your money and ahead of your expenses; these apps make it easy to effortlessly manage your finances.
READ: How hackers break into your WhatsApp account, and how to avoid them
1. GoodBudget: This budgeting app uses the shared envelope-budgeting principle. With its virtual tracking program, it makes it possible to not only, keep up with friends and family by syncing shares and budget, but also lets you save for big expenses and pay off debt. With a friendly user interface, the app makes it easy to categorically differentiate your regular monthly expenses from annual savings goals and irregular expenses. It is important to note that this particular app doesn’t sync transactions with your financial institutions, so for every amount that comes in or goes out, you’d have to manually enter the transactions. Another incentive this app offers is that it provides customisable reports for you to keep track of budget trends, offers helpful tips on how to create a budget and get ahead of your expenses. Works on android and iOS devices.
2. Piggyvest uses the traditional, simple saving idea of a piggybank, also locally known as ‘kolo ’. It presents you with the opportunity to use the ‘piggybank’ feature to reach personal savings goals more quickly. There are several other features for various purposes such as ‘Target Savings’ which helps you save for multiple goals like holidays, fees, and special events, ‘SafeLock’ which secures your funds by locking it until your pre-selected, this helps avoid impulsive spending. There is also the opportunity to partake in investments by investing in little bits that one can afford whilst still enjoying the same rate of return as a well co-investment option. Every option is vetted and secured by Piggyvest and you can easily monitor the progress of your investments. This is a Nigerian based app and accepts all Nigerian debit cards.
READ: What Nigerian banks consider before granting personal loans
3. YNAB short for, You Need a Budget, is a personal finance help app that teaches you how to manage your money. The general principle is to ‘give every dollar a job’. For a dollar saved, it is saved for a particular purpose which could be long term or short term. It strives to eliminate the common trap of living paycheck-to-paycheck. One of the pros of this software is that it displays the user’s financial reports and syncs transactions so that users can seamlessly categorise their finances at a glance. It has a more proactive rather than reactive approach to budgeting. For every dollar you’re expected to earn, work is assigned to it, that is, to either spend or save. With over a million downloads, it’s gained popularity with its educational and philosophical approach to financial management.
Works for both android and iOS devices.
4. Carbon: If you have ever been caught in a predicament where you needed just a small amount of cash to solve an emergency, but you probably thought it was not possible to access loans in such a short period of time, you’ll really love this bit of good news. There’s a mobile app that you can use to get that ‘small cash’ without stress and have the money deposited directly to your account in 24hours or less. That app is called Carbon. Formerly known as Paylater, this is a personal finance and loan service app that helps you make all sorts of bill payments and money transfer with ease. It is built to help users understand their spending habits and learn how to categorise income and expenses to have full control over their finances. With this app, you can get a short-term loan amount as low as #10,000 and as high as #500,000. In addition to making it easy to recharge your phone, transfer money and have access to short-term loans, it also provides users with the option to invest using Payvest and earn up to 16% per annum. Available on Google Playstore.
READ: Zoom reports a surge in profit of 3,300%
5. Expensify: This mobile and web-based application is developed from the world-leading expense management company of the same name. It was originally developed to make it bearable for anyone to analyse expense reports. It is a software that allows individuals and businesses to track and file expenses such as fuel, travels, etc. Just by snapping receipts of transactions, the software uses artificial intelligence to identify the details of the transaction and automatically categorise and save the expense. It also allows users to download these reports based on user transactions. The product offers two payment options for individuals and organisations; for either annual subscriptions or pay per use charge. One of the pros of this particular app is that you can easily convert currencies for international travel. It is compatible with android and iOS devices.
6. PocketGuard: This is a personal finance help tool that makes for a more simplified budgeting snapshot. It helps you manage your disposable income, bills, and subscriptions. While some other personal finance apps try to provide you with tools to discipline your saving and spending habit, PocketGuard simply shows you what you have available for daily spending. The software is built to help you manage your everyday spending after your regular bills and subscriptions have been paid. Upon sign up, the app syncs with your financial accounts and helps you keep track of your account portfolio. Using it to pay for services helps you stay ahead and negotiate better rates. With AutoSave you can automatically grow your savings to the desired amount.
7. Financial Calculator: This app is handy for calculating the future value and present value of your financial assets. Some of its features help you to; perform financial calculations with ease and on the go, compare interest rates, compare lease and auto loans, determine how much time is needed for you to pay off debts, and to calculate the exact tip you should give for services rendered.
8. Unsplurge: We’ve all been there at one point or another, where we felt the need to splurge sometimes on impulse and give in to personal cravings. But then when the utility has declined you start regretting your impulsive spending and berate yourself for not being disciplined enough. Well, with Unsplurge, you have an opportunity to discipline yourself. It is built to encourage you to save money by working on your goals. There is no limit to the number of goals you can decide to save money for. You just log savings and monitor your progress. You can also get inspiration and encouragement from family and friends as they cheer you on and share their success stories as well. This app is built only for iPhones.
Explore the Nairametrics Research Website for Economic and Financial Data
9. Personal capital: This self-help tool basically offers two primary functionalities; a free personal money manager and a paid investment management service. The free function allows you to monitor your income, assets, expenses, and investments from a single portal, get investment advice on how to optimise and make more money, whereas the paid version which is also known as the Wealth Management program offers a more personalised portfolio management.
10. Mint: This is one of the most popular personal finance apps of all time. This app has been hailed for its easy-to-use programs and friendly user interface. With a sort of colour-coded system, it gives a more graphical display which helps users navigate the app seamlessly.
Explore the Nairametrics Research Website for Economic and Financial Data
Also known as intuit mint and formerly mint.com. This personal finance management app allows users to track bank, credit card, investment, loan balances, and a number of other transactions through a single user interface. One of the pros of this app is that it automatically syncs with your financial institutions to track user bills and gives constant alerts to ensure you keep up with payments. Based on financial data and transactions, its features allow users to create categories, track budgets, and set financial goals. It promotes savings by recommending credit card deals and insurance. The software is said to be securely protected, using a number of financial institution level security and high-level encryption. It was originally designed for iOS but an android version has been made available in recent years.
MSME
FG to provide financial support for 1.7 million businesses, individuals in next 3 months
FG had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.
The Federal Government has announced plans to provide financial support for 1.7 million businesses and individuals across the country within the next 3 months.
This disclosure was made by the Minister of State for industry, Trade and Investment, Ambassador Mariam Katagum, at the virtual commissioning of the Fashion Cluster Shared Facility for Micro, Small, and Medium Enterprises (MSMEs) tagged, Eko Fashion Hub, in Lagos.
Katagum disclosed that the initiative is borne out of the Federal Government’s continued commitment to helping cushion the devastating impact of the coronavirus pandemic on the economy by saving existing jobs and creating new job opportunities.
READ: FG releases new details on MSMEs support scheme, budgets N200 billion for loans
The minister said that President Muhammadu Buhari’s administration, through the Economic Sustainability Committee, had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.
She said, “The Federal Government is fully committed to empowering Nigerians; more so in the face of the COVID-19 Pandemic. In this regard, the government, through the Economic Sustainability Committee had announced specific programmes aimed at cushioning the impact of COVID-19 on MSME businesses.
“These programmes include among others, the N75 billion MSME Survival Fund and Guaranteed Off-take Schemes of which I have the honour to chair the Steering Committee for the effective implementation of the projects.
READ: NNPC reveals survival strategies to cope with the oil sector downturn and new normal
“The project, which will run for an initial period of three months, is targeting 1.7million entities and individuals and has provisions for 45 per cent female-owned businesses and five per cent for those with special needs. The registration portal for the schemes is set to open on Monday 21st September 2020 and I urge you all to take full advantage of the schemes.’’
The Nigerian Economic Sustainability Plan which was produced by a committee headed by the Vice President, Yemi Osinbajo, is a response to the health and economic challenges which foisted on the country by the outbreak of the novel coronavirus pandemic.
READ: FG to save N1 trillion annually from petrol subsidy removal
Aside from developing robust monetary policies and fiscal measures to enhance oil and non-oil government revenues and reduce non-essential spending, the plan also includes a N2.3 trillion stimulus package for the economy.
Katagum said that the schemes were at the core of the N2.3 trillion stimulus package being implemented by the Federal Government. She said that the commissioning of shared facilities was also expected to provide succour and relief to the teeming micro-businesses in need of space and infrastructural support
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