It takes money to make money. Businesses need money to stock goods, pay staff, acquire licenses, pay rent, carry out marketing activities, pay taxes etc and whilst finances are not necessarily as important as vision and a great product, it is however finance that gives motion to a business idea.
Getting finance to kick start and run your idea can be a daunting challenge in Nigeria, and in continuation of our series on Doing Business in Nigeria we now bring you several ways in which startups can access necessary capital to drive ideas.
A key starting point to raising capital is financial planning which basically involves the calculation of the amount of expenditure you will incur and the amount of capital you have to raise to cover that expenditure. Such plans would also include your projected inflow which is necessary to show how you intend to sustain the business and repay debts you might incur. You then need to identify the source of finance most suitable for your business starting from your personal savings or from family and friends. In the event that this is not available or suitable for your business you can consider any or all of the under listed sources of business capital.
- Loans/ Grants: It’s an unfortunate fact that Nigerian Banks rarely lend to startups because of the inherent risks involved and also because most startups do not know how to properly package their business ideas for a Bank Loan. Since loans are meant to be repaid, financial institutions are very careful to part with the fund put in their trust by the shareholders/depositors and prospective borrower is expected to come up with convincing business plan or feasibility plan which is a comprehensive, detailed document that will show the viability of the project for which the loan is being sourced. Nigerian Banks have some products suitable for startups and recently the Central Bank of Nigeria introduced the N220 billion fund for Micro, Small and Medium Enterprises, which is being dispensed through commercial banks, micro finance banks and finance houses at single digit interest. You can get requirements to access this fund and other necessary details from your Bank. Also worthy of note are bodies like Bank of Industry (BOI) which recently made their loan processing easier by opening an online portal where you can initiate and monitor your loan application. You can also get grants/loans through institutions like Small and Medium Enterprises Development Agency of Nigeria), Bank of Agriculture
- Private Equity/Angel Investors: These are individuals or corporations who fund startups in return for either shares in the business or repayment with interest. Private Equity or Angel investments are better suited for businesses that are beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy. A downside could be that you might be giving away anywhere from 10 to more than 50 percent of your business. On top of that, there’s always the risk that your investors will decide that you are the business’ greatest obstacle to success, and you could get fired from the company you created. An indigenous example of Private Equity Investor is the Tony Elumelu Entrepreneurship Program which aims to create 10,000 startups across Africa within the next 10 years that will generate significant employment and wealth. On a yearly basis the Foundation grants $10,000 to deserving entrepreneurs.Other examples include African Capital Alliance, Advanced Finance and Investment Group LLC etc.
- Crowd Funding– This is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals and leverages their networks for greater reach and exposure. Crowd funding can be charity based, equity based or rewards based depending on the business objectives and composition of investors. A lot of these crowd funding platforms exist online and popular platforms include (https://www.indiegogo.com/ ) Kickstarter (https://www.kickstarter.com/ ). Some popular Platforms focused on Nigeria include Funda Solva (http://www.fundasolva.com/ ) Jump Start Africa (www.jumpstartafrica.com )
Please note that before entering into any commercial relationship it’s recommended that you retain the services of a professional who can guide you in the areas of business structuring, financing options, due diligence, contract documentation etc.
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