Courting alternative sources of funding for businesses and SMEs

The centrality of SMEs to the economic development of developing countries, especially, has been well established. In Africa, SMEs account for the vast majority of jobs and more of such businesses would be required to absorb the growing workforce and address unemployment on the continent. This requires an enabling environment for SMEs to thrive and contribute to economic development. One of the major constraints facing SMEs especially startups is the mobilization of the requisite funds to serve as initial capital for the commencement of the business.

The ordinary and viable option for startup businesses is the resort to bank loans for initial capital. For startups, this option is usually a longshot not only because they may not have the requisite documentation to access the loans, but also the process could be arduous. According to Alhassan Andani, CE of Stanbic Bank Ghana, startup businesses have hurdles they have to overcome to achieve success in their businesses and one major hurdle is finding ways to raise funds to support businesses.

“The financial world has a wide spectrum of actors with distinct roles and responsibilities. There are firms who are into venture capital capital, commercial banking, equity investors and businesses advisory services, so as an SME with a unique idea at the formative stage, it is important to know the right places to source for funding. Fortunately, there are new innovative ways to raise funds to start your business”

Mr. Andani noted that new business owners are now gravitating towards the new age fund raising methods, which help them set-up their businesses and once they gain traction and start making profit they make use of the traditional methods to grow and expand their businesses. He speaks about alternative sources of funds that SMEs can explore to support their businesses:

1. Crowdfunding

Be they family, friends or strangers, if people believe in your business idea and believe it has the potential to be successful, they will invest in it. Crowdfunding entails having a large number of people “donate” to your business idea without requiring you to pay them back, as such, it has democratised access to finance by lowering the barriers to financing opportunities for not only entrepreneurs, but also charities and creatives. Crowdfunding is a good alternative to fund a venture without giving up equity or accumulating debt. So, choose the crowdfunding platform of your choice, share your business goals and raise funds.

2. Bootstrapping

Bootstrapping is also a good way to fund your business because it entails you founding or building your company from personal finances or from the operating revenues of the new company. It is also an effective and inexpensive way to ensure a business' positive cash flow. It’s the best way to keep company’s mandate 100% your own, without outside interference because you’re not borrowing or selling equity or a stake in your business. Friends and family are valuable in this instance; however, your life savings could come in handy if neither option is available. Bootstrapping is also a great way to get around the early challenges of ‘no confidence’ from banks, investors and other traditional sources of capital.

3. Factoring

Factoring is a finance method where a company sells its receivables at a discount to get cash up-front. However, factoring should be the last option as it can cause substantial amount of immediate debt. It is most commonly considered by those with limited funding, and are strapped for cash. Seeing as the business is selling its receivables at a discount to obtain immediate cash, it can be dangerous and should rarely be used.



4. Angel Investor

Angel investors are typically wealthy people who provide start-up capital for a business in exchange for convertible debt or ownership equity; however they are generally more private and harder to find because they don’t want to be inundated by deal flows. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. Angel investors are focused on helping start-ups take their first steps, rather than the possible profit they may get from the business which is why they are ideal for aspiring entrepreneurs.

5. Government Funding

The Government of Ghana, for example, introduced the National Entrepreneurship and Innovation Plan as a primary vehicle for providing an integrated national support for startups and small businesses. However, government loans and grants are usually subject to key deliverables such as job creation, women empowerment, and youth and economic development being met. With affordable repayment options they are the best option for entrepreneurs who are working with very little.

6. Bank finance

If you have a good credit record and capital (raised from bootstrapping, crowdfunding, angel investors, etc.), it can open up financing from the bank. You need to be able to prove to the bank that your business idea is viable and that you have a client base anticipating the launch of your product or service. Cash and fixed assets are a great way to show that you have security and increase your chances of being approved for a business loan. “The way in which people do business is evolving, this also means the way people start their businesses is changing, and there is no right or wrong way to do it. Get creative when you need to fund your business, there are many options you can consider. Cash has rarely stopped a focused entrepreneur from achieving their dream so don’t let it stop you,” Mr. Andani concluded.