RAISING CAPITAL – TRAINING
what different sources of capital can my business leverage?
We are coming from background that from a relative point of view businesses are completely a life painstaking and yet enjoyable journey, we say so because of the relative reasons that surround that saying. We also know that Uganda in particular I a very entrepreneurial country with the majority of the population engaged in startups, SME’S among others. However, that between 80-90% of the startups fail to make it to their first year anniversary. Thus there is a high rate of startup failure, this is because of very many reasons such as minimal business financing, lack of enough managerial capacity amidst other reasons.
In this article we shall try to understand why entrepreneurs seek financing for their businesses, what kind of funding is therefore very relevant to your business what are you going to put onto consideration while partaking a business financial platform. The trade off, that is the cost and the benefit, the risks and the gain. Effort and impact. These have to be out into very serious thought and consideration. As a disclaimer no financing is a fits all. That is caters for all your business needs. So you always need to seek more financing. Whether a business is in the inception, survival or growth, expansion and maturity, we all need financing, though it is very important for the startup stage.
Why should I seek financing for my business?
Basically to get started, you have an idea and you need to put it into actuality thus you go out to seek financing.
- For growth. You need to progress from one stager to another thus one seeks financing.
- For the purchase of a real estate among others. May be your business needs to move to better offices or you need a ware house among others
- For the purposes of purchasing equipment for the running of the business.
- The most important reason as to why people seek financing for their business is because they are seeking for working capital. Working capital is sometimes called operations capital. ‘Opex’ the operating expenses that a business need s to assumes the next level of your business.
What do you put into consideration while taking a financial decision for your business?
Entrepreneurs, people in the business community think about debt and equity how much of debt do I want how much of equity do I want. Or I can even strike a balance. In the same line you put into consideration the self-financing. Something the lay man calls “entandikwa”, “olinawo mekka”?
So at the end of the day you want to know which is the best option while financing your business?
It’s good to answer this question in a very frim manner, are you able to answer this question basing on your financial strategy after a clear assessment of your business. I will start with the providers and the solutions shall come later. There are different providers of debt financing and it’s from these that you can sample out which one can do best for your company/ business enterprise.
These include debt financing institutions such as,
- the banks, development financial institutions e.g. east African development bank, Uganda development bank etc. non-bank entities.
- Credit institutions,
- The MFI’s – micro financial institutions usually regulated by the central bank of Uganda.
- Government programs like the operation wealth creation, the “emyoga”, microfinance support center the start facility, for startups with in the agricultural sector. It’s important for entrepreneurs to look out for these facilities to find out how best they can help us.
- Crowd funders. (these shall be explained later)
Equity providers of financing include.
- The private equity firms, usually prefer to invest in stable firms,
- Venture capitalists these prefer to work with (for startups)
- Angel investors
- Impact investors
- Crowd funders who offer equity facilities
- Capital markets/ public listing, where firms have reached a larger market to give them the leverage for funding.
- Personal savings
- Retained earnings
How do I finance my business?
- Bootstrapping. It speaks more about or relation to self-financing. It means you start with living within your means. What do you have, you need to start a business when you have some money. That starts with your own savings, your need to start with some traction this means the progress of your own company/ business. startups are advised to look so much at this option. Before you start looking into traction its highly unlikely that you are going to work with banks or other debt firms and other equity firms. This option works very well with startup firms, so you will need to look at your family friends and close relations. Its less costly in terms of interest.
- Crowdfunding. In this kind if funding, an entrepreneur will go online, and log into that platform, it will give you a profile, where you will have to put a detailed description of your business in your profile. And that means that the most important part of crowdfunding id your pitch, they don’t really care about how much you need as funds but rather your impact story, give a clear and beautiful impact story of what your business is trying to do. If investors start to pick up interest in your input, different investors give you different amounts of money and at the end of the day you have your amount you require as funding. There are four types of crowd funding.
- Rewards, where an investor gives you fifty dollars and does not require any interest but simply inclusion or recognition in one way or another as your product starts running in your society.
- Debt crowd funders. These give you their money with an interest which may be as low as 2% or more or less.
- Donations, where an investor is very interested in the effects of your business that is going to contribute to the economy of the world at large or the society he gives you that donation or money
- Equity, an investor ends up wanting a part of your business given the fund he is injecting in your business, like 20% OF YOUR BUSINESS, thus it’s your input to know which one works for your business which one does not. Do / can I get a financial return when I go along with this kind of business. Examples include; Alibaba, yahoo, google among others all started in a very small form before they became multi million.
- Angel investors. as they are called angel investors, they offer mentoring and advise alongside the capital they offer you. They are individuals who have a lot of money, and they have kin interest in investing in startups. They usually help startups in the very basic ways of business operations irrespective of the amount of money they give you. They work a lot with connections and they have an office in Ntinda.
- Venture capitalist. They usually go with the private equity firms, they invest in companies that have a big potential, they prefer stable companies to invest their money in. examples include; Mara in Uganda. Private equity firms include Damascus, Adebco, Pearl Capital among others.
- Business incubators and accelerators. These offer startup capital to startups, they could be very little funds but can help you as a startup, incubator are like parents they provide shelters, connections, work with other partners to provide seed capital to ventures and startups. Accelerators help businesses that are already working and running as opposed to incubators. Such incubators include, an incubator at MUBS.
- Grants and contest. If you go online or with in the networks that you have, or even banks, there are a lot of contests going on especially within the tech space. As an entrepreneur it’s your responsibility to go out there and access the viability of these contest in your business.
- Government programs, much as there are very many sentiments as regarding the current government its high time you overlooked these biases and go in for the government programs and funds.
- Banks loans. Many of the bank loans are very costly thus for startups it may not be a very good option for funding in your startup. Its commonly used by startups but it may not be the best option. Banks have rolled out very many facilities even to support SMES, but understand where you are and whether you can keep up. Usually they want other qualifications, like revenue, cash flow, and they look at the risks involved in your business, many times they want to look at collateral, and as a startup do you have collateral.
- Micro-finance institutions; many micro finance institutions provide loans and facilitate startups, e.g. investment clouds, Sacco’s, among others
- The capital markets. It’s about entities that have grown up, they are already in a maturity stage.
What advantages do we have with debt financing over equity financing?
|DEBT FINANCING||EQUITY FINANCING|
|Keep full ownership||Less risk than debt|
|No obligation after paying debt||No paying back|
|Interest is tac deductible||Gain credibility through investor network|
|Short and long term options||Investors don’t expect immediate return on investment (ROI)|
|More cash on hand||Fixed payments for better budgeting|
|Must pay back||Investor returns could be more than debt payment|
|Could cause cash flow issues||Investor gets some of your ownership|
|Usually need collateral||Must consult investor for decisions|
As a business owner it’s important for you to make an assessment of theses according to your business.
You need to know yourself as a business operator or owner, well knowing that a talking to a lot of startups here,
- What stage of growth are you as a business?
- What are your funding needs? What kind of working capital do you need? is it long term or short term?
- The risk appetite; how much risk are you able to take?
- The issue of return on investment expectation should also be importantly accessed.
|Business stage||Business Need||Financing Source|
|Inception||Working capita||Owners, bootstrapping, angels, suppliers, credit among others|
|Survival.||Working capital||Owners, bootstrapping, angels, suppliers, banks and grants.|
|Growth.||Working capital, extending plant.||Banks, new partners, Retained Earnings private equity.|
|Expansion.||New operation unit, premise expansion||Retained Earnings, new partners, secured IT debt, public capital (CM) joint venture, M&A|
|Maturity||Maintenance, market position, R&D||RE, LT secured debt, public listing|
You an entrepreneur out there these are the few things you need to take serious note about when developing your financial strategy for your business.
- You need to consider the right funding option because it varies from one business to another.
- New and small businesses struggle to get equity financing so they must take on debt or focus on the other sources of financing their business., but also get your houses in order in many businesses the owner is the everything of his business, programs manger, the operations, the accountant so much so that when he dies the business dies with him.
- Established businesses have a wider variety of funding or financing options.
- For lenders and investors providing financing comes down to risk and reward or return.
- Go into debt very selectively, the issue of debts from banks is very expensive especially for small businesses. It’s also necessary to discuss customer segmentation, in as far as business financing is concerned.