Equity financing best bet for SME funding

In the face of rising cost of borrowing from banks amid the numerous challenges businesses face to secure loans and other forms of credit locally, small and medium enterprises (SMEs) have been asked to see venture capital financing as the best alternative source of funding.

Access to credit, which ranks foremost among the setbacks of many businesses -- particularly those within the SME bracket despite the proliferation of banks and other financial institutions in the country is an old-age problem.

However, with little help in sight as interest and other charges on loans keep soaring, not to mention the cedi’s poor showings against major trading currencies, competition from government for loans from the domestic financial market and the suffocating demands from banks, most businesses continue to fold-up.

But to come out of these financial doldrums, venture capital financing -- private equity capital provided as seed funding to early-stage, high-potential, and growth companies -- has been put forward as the best option for businesses to utilise.

Venture capital financing usually comes from venture capital firms that specialise in building high risk financial portfolios, and provides businesses a good opportunity to share the gains and risks arising out of approved schemes.

It is in view of this, among others, that the Zonal Manager for Venture Capital Trust Fund, Mr. Emmanuel Osei Akuamoah, has said businesses need to opt for private equity - which attracts no monthly payments - if they want to reach new heights in their operation.

He noted that access to finance businesses has been a very difficult area for start-ups and businesses looking for funds to expand businesses, or turnaround their businesses. He gave assurance that the best alternative source of financing businesses is through venture capital.

It however appears that despite the introduction of venture capital financing, most businesses have failed to make enough use of this innovative and more accessible source of financing.

The Venture Capital Trust Fund is a government of Ghana-backed private equity initiative, established by the Venture Capital Trust Fund Act 2004 (Act 680), to provide low-cost financing to small and medium enterprises so as to enable them expand, create wealth and jobs.

Having operated for about ten (10) years now, the VCTF’s board of trustees, with the enduring support of government of Ghana, has through its investments established a vibrant venture capital industry in Ghana.

The Fund started with an initial funding of GHC22.4million, and today it provides much-needed long-term funds as well as technical support to enable SMEs grow and expand their operations; thereby creating more jobs and increasing their contribution to Ghana’s economic progress.

In addition to this the VCTF has been at the forefront of entrepreneurship development in Ghana, having established Ghana’s first Angel Investor Network in 2011 to provide financial and mentoring support for young entrepreneurs and start-up businesses.

Since 2006, the Trust Fund has partnered with various private sector institutions and international DFIs to establish five funds with more than a total US$57million in committed capital. To date, more than US$16million has been invested in 50 SMEs across various sectors of the Ghanaian economy.

The Fund is a major player in Ghana’s agricultural sector through its agricultural value chain financing of cereals and grains for the poultry, livestock and brewery industries, having disbursed US$3.5million to key actors in the agricultural commodity value chain.

The challenge of the moment is that revenue inflows from government have not been sustainable, compelling the VCTF to consider alternative funding arrangements to support its activities - given the duration its takes for it to plough back investments.

But Mr. Akuamoah - in an interview at the backdrop of an event that was part of a series of media and business encounters organised by the Fund to educate the public, businesses and other stakeholders on the VCTF’s operations in Kumasi explained that the Trust Fund since its inception has impacted positively on the economy.

He said growth of the private sector and private equity industry is indicative of some of the Trust Fund wonderful achievements.

He advised businesses they should endeavour to acquire the necessary skills, keep proper records, define their market, and establish the proper structures, among others, to succeed in wooing investment.

The Investment Manager of the Northern Zone, Mr. James Nsiah, disclosed that after a successful investment in sorghum production which provided jobs for countless number of farmers, out-growers, and processors the VCTF has gone into the soya value chain through one of its investee companies, Vestor Oils in Kumasi.

He noted that the current challenge has however been lack of access to the raw material, soya, forcing the processors to at times look outside the country’s shores for raw materials.

However, he said steps have been taken to strengthen the soya value chain and address some of these challenges, while also creating jobs for Ghanaians.