Securing the right financing

SMEs Have Been Advised To Look At The Ghana Alternative Market To Raise Money For Their Businesses M SMEs contributes about 70 percent of Ghana's Gross Domestic Product (GDP)

Wed, 28 Oct 2020 Source: thebusiness24online.net

The Ghanaian business environment is dominated by Small and Medium-Sized Enterprises (SMEs) representing 85% of businesses and contributing 70% of Ghana’s Gross Domestic Product (GDP) according to the Association of Ghana Industries (AGI). However, this very important business segment continues to face a myriad of challenges including access to finance.

Capital, which is a critical determinant of sustainability and growth of these businesses is most often inaccessible to most SMEs. According to the IFC-McKinsey MSME database, 55% – 68% of SMEs in emerging markets cannot access the full amount of funding they need.

A key contributor to the challenge of accessing the right type of finance is the type of financing partner being engaged.

Regardless of how well your business is set up, speaking to the wrong capital provider, given the stage of the business will thwart the fundraising efforts. The question then to be asked is, “which capital provider should you speak to at the current stage of your business?”

A business can be at various stages; from pre-seed up to mature companies. The right funding mix differs at each stage of the business.

The pre-seed stage is where the business is just an idea. At this stage, the idea owner is still refining the idea and conducting the surveys or experiments needed to validate the idea. This stage is generally characterized by the highest risk of failure – the largest proportion of businesses die at this stage.

Given the characteristics of businesses at this stage, an investment decision is largely based on trusting the capability of the idea owner once the investor is aligned with the prospects of the idea.

Thus, the right investment at this stage is largely driven byyour resources and that of your close networks. Other sources of funding at this stage include grants and other pre-seed support programs. Approaching a commercial bank should not be an option at this stage.

As the idea becomes a registered business, the owner can now approach business angels for funding. Business angels are a major source of funding that helps fill the gap that lies between the start-up and seed capital stage. A study published in the Journal of Business Venturing by Cheryl Mitteness, Richard Sudek, and Melissa Cardon suggests that business angels rely upon the personality of the entrepreneur when making investment decisions.

Thus, entrepreneurs seeking to impress a business angel should do some research about them ahead of a meeting to improve their chances of securing the funding required. Angel investors are usually concerned with the scalability of the idea to achieve revenues that make an exit attractive.

As the business moves from pre-revenue to early post-revenue stage, the chances of success increase and this attracts venture capital funding. Venture capital (VC) or seed funds provide early-stage funding to businesses typically after the minimum viable product (MVP) has been developed.

The development of an MVP provides VC funds with the sufficient information required to make their investment decision. VC funds are also very much interested in how scalable the business is, the cash burn rate, and the time required (investment horizon) to reach attractive revenues that will facilitate a profitable exit of their investment.

As the business grows, the risk of failure reduces and the business can also generate sufficient historical data to attract all other forms of funding. At this stage, the credibility of historical financials is very important to funding partners as that forms a key element in their funding assessment.

Other things they consider include the quality of the people, processes, and systems, the prospects of the industry amongst others. The funding partners at this stage also provide relatively higher funding amounts which usually aligns with the high funding needs of businesses at this stage.

Other factors to consider in choosing the right funding partner include the type of business and the non-financial needs of the business. For instance, if your business is involved in agriculture, you are more likely to secure the required funding from an agri-dedicated fund such as the Agri-Business Capital Fund (ABC Fund) than a fund that invests across multiple sectors. If this same business requires additional technical assistance to put the funds to efficient use, then a funding partner that provides technical assistance such as the ABC Fund is more preferred.

Finding the right partner to secure funding given the current stage of your business does not only improve your chances of getting funded but also presents you with the right terms and conditions required for your business success which includes technical support, longer and/or flexible payment terms.

Columnist: thebusiness24online.net
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