One of the biggest problems entrepreneurs especially in Africa face or think they face in starting their own businesses is lack of access to startup capital.
The question of how to raise capital to start a business almost always keeps a lot of entrepreneurs from taking any positive step with regards to starting their businesses.
Lack of access to startup finance is indeed a serious problem and a serious discouraging factor to the growth of entrepreneurship across Africa.
But worse is the fact that most African entrepreneurs don’t even know how to raise capital for their businesses.
Here’s therefore a list of 8 smart ways of raising capital to start your business.
1. Your savings
Do you have savings? If you do, then that could be a starting point. No matter how small it is, you can start some form of business with it.
Then, bootstrap your way up to whatever you had as your initial business idea.
Who knows, this method can create two or more businesses for you, enabling you to diversify your risk.
Here’s an example of a friend and fellow entrepreneur, Susan, who initially wanted to start a big poultry farm.
She didn’t have the finances to support the establishment of a poultry farm to the scale she wanted.
So, tired of applying for business grants without success, Susan decided to start with the savings she had.
What business could the tiny savings finance?
Purchase and distribution of eggs.
She lost no time, but swung into action. She approached a poultry farm, procured some crates of eggs and started selling them to supermarkets and shops.
Reinvesting her profits into the business, she moved from 10 crates a week in January of 2018 to nearly 500 crates of eggs per week in December of the same year.
Though she still intends to establish a poultry farm, she already has another viable business she can pursue to diversify her risk portfolio.
Also, she can now be able to address more than one aspect of the poultry value chain, hence, make more money from the business.
Can you follow this model?
2. Paid Employment
Sometimes you don’t have savings which is typical of a young school leaver.
But you’ve acquired skills in school which you can exchange for money.
So, why tarriest thou? Arise and take up a paid employment through which you can earn enough to start your business.
However, in going with this option, you must know that discipline in spending as well as a healthy saving culture is required for you to be able to meet with your goals.
Again, there is usually the temptation of abandoning your entrepreneurial dreams because of the false sense of economic security that comes along with paid employment.
Therefore, you must set your goals right and keep on reminding yourself that the paid employment is not an end in itself, but just a means to an end, which is realizing your entrepreneurial dreams.
Here’s a story of a friend Dianne, who always loved to bake cakes.
She was highly skilled at baking cakes even while she was studying pharmacy at the University of Benin, Benin City, Nigeria.
Upon graduation, she didn’t have enough savings to launch her confectionery business.
So, she decided to take up a paid employment as a graduate intern in a hospital.
With this job, she was within a year, able to save enough money to launch her business.
Now, she has the option of establishing a pharmacy (which the internship exercise gave her good experience to start) in addition to her existing confectionery business.
3. Friends and Colleagues
Do you know that if you have a business that requires N100,000 to start, all you need to do is to identify just 10 friends who can give you an average of N10,000 each.
Reaching out to your friends and colleagues will make you realize how easy it is to raise capital for your business.
But, here you must be able to convince them that this is not another wild goose chase.
For those of your friends you believe can offer more than funding, you might consider bringing them in as cofounders.
But, you must be careful in doing so because as cofounders, they have as much right to the business as you do.
4. Family Members
Your family members are among those that would most likely key into your entrepreneurial dreams once you make it known to them.
What other way can they show support to your aspirations than parting with whatever they can afford to enable you pull together the critical resources you need for your business to take off.
So, never ignore your family members when considering how to generate funding to start your business.
Family members must however understand that while supporting the business to start up, they cannot interfere in the management of the business. Otherwise, doom awaits the business.
5. Client Financing
This is a smart way of financing your business whereby you have the client pay in advance for the products or services required.
In almost all cases of client financing, you have to invest to develop a minimum viable product (MVP).
In this case, all you need the funds for is to either perfect the sample you have or customize it to suit what your client wants or even mass produce the product.
However form it comes, client financing has the advantage that you already have a market for your products or services. Therefore, there’ll be no case of capital being tied down in unsold products or services.
Second, with client financing, you bear less risk as you’re already working in line with client expectation. This is actually the model aircraft manufacturers use. Airlines place orders while the manufacturers produce and deliver.
However, caution must be exercised when financing your business through client funding.
This arrangement always comes with terms and conditions which if not properly understood and followed might reverse the fortunes of your business.
My very good friend and Chief Executive Officer of Ixora Production Limited, Lagos, Nigeria, Chioma Ngaikedi, adopts this business funding model for most of her company’s productions.
According to her, advertisers pay in advance for TV series that would promote their brand while her company produces the series content based on agreed terms.
With this model, the company’s resources can be channeled to another productive activity while still serving client needs.
6. Bank Loan
Financial institutions especially banks and micro finance institutions can offer loans for startups like yours.
However, you must have a very convincing idea or preferably a minimum viable product in order to be eligible for any loan.
In addition, bank loans would require some form of collateral whose value must be at least twice the value of the loan being requested.
If you have a qualified collateral, you might go with this funding option. Note however that loans from these institutions might come with interest rates as high as 25% especially in Nigeria.
Loans from these institutions have the advantage of not only coming at a single digit interest rate and with extensive moratorium, but also requires no collateral.
7. Venture Capitalists
Approaching venture capitalists can provide a very smart way of securing funding for your business.
But a lot of skills and understanding of your business are involved in Pitching your idea convincingly to a venture capitalist.
To target a venture capitalist, you must always have an executive summary of your business ready, such that, you can send it across to any investor at a moment’s notice.
Note also that venture capitalists will either want a decent return on investment or a share in the business.
In the event that you’re expected to part with a certain share of the business, don’t be too hesitant to do so, of course after consulting widely to know how much you can offer for a certain volume of investment.
Remember that 100% ownership of a $1billion business idea is far worse than 0.5% ownership stake in a $1million existing business.
So, be wise , o ye entrepreneur!
8. Business Development Grant
If you can win a business grant, this would be the best option among all those mentioned.
Not because it is free money (which, by the way, isn’t free if you ask those that have won it), but because you’re free from the huge pressure that comes with loan repayment which might drive a first time entrepreneur to make terrible business decisions.
Note that this option is usually extremely competitive with very little odds of emerging as the eventual winner of the grant.
For instance, in 2018, the Tony Elumelu Foundation Grant Program that offers $5,000 in seed funding to over 1,000 African entrepreneurs every year, received over 150,000 applications out of which only a little above 1,000 can be awarded the grant.
Nevertheless, if your business is extremely impactful, then you could support your business startup entirely with grants.
A typical example here is the entrepreneurial Amazon and Chief Executive of U&I Integrated Resources Ltd. Imaobong Ekanem who has won a number of business grants some of which include the federal government YouWiN! Grant, the Tony Elumelu Foundation grant, the Diamond Bank BET6 grant as well as the World Bank Big Portal Grant.
If your business idea is well packaged, you could replicate this success and have your business entirely funded by grants.
You can follow Entrepreneurs’ Square for updates on the latest business grant Available for entrepreneurs
Which Business Funding Option should You consider when starting your business?
The business funding option you should go for depends on the nature of your business as well as the resources you have at your disposal.
However, ensure that you properly study whichever option you choose, to ensure you operate within the stipulated terms and conditions as doing otherwise might spell doom for your business.
Good luck as you set out to secure funding for your business!
Do you have any comments about this post or any other suggested business funding option that was not captured here, kindly mention it in the comments section.
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