Starting a business in Nigeria is incredibly difficult but starting a business without knowing what you are doing could be disastrous. Many young entrepreneurs believe the first point to starting a business after idea generation is raising capital and they are right. However, what these entrepreneurs define as capital is typically limited to only financial capital, when in fact financial capital is only one of the three critical types of capital required for a business to succeed. It is therefore imperative that entrepreneurs understand that raising capital for a successful business must include financial capital, human capital and social capital. In this article, we discuss the three most important capital every entrepreneur must raise in ensuring the success of their business.
Financial Capital
Without cash, businesses can hardly survive. This makes financial capital critical for any businesses whether young or old. Financial capital refers to cash required by the business to meet up with all its financial obligations which includes capital expenditure, recurrent expenditure, salaries and wages, amongst many others. Businesses can only raise financial capital either through debt or equity. Debt capital refers to funds secured through borrowings from financial institutions, family and friends that will be repaid usually with interest at a predetermined date. Common types of debt capital include; Secured loans, unsecured loans, promissory notes, bank overdraft, credit card, etc. Access to loans for individuals and businesses has been improving in Nigeria over the years with Credit Direct being one of the pioneer lending companies to make loans available to customers within 24 hours of loan request.
Equity on the other hand refers to capital that is raised by selling a stake of business to investors. Investors do not expect that the capital they have invested in the business will be repaid, however, investors expect to earn decent returns over time from the business through payment of dividends or sale of their equity stake in the business. Businesses raise equity capital by selling shares of the company either in the public or private financial market.
While raising equity capital for business operations puts the entrepreneur on less financial stress than raising debt, financial experts often note that equity is a more expensive source of capital than debt. This is because the expected rate on investment required to keep equity investors happy is typically higher than the rate of interest banks will request borrower to pay on their loans. Still entrepreneurs must note that the fact that raising equity puts the business on less financial strain than debt capital does not mean that they should go all out and raise funds excessively through equity. For a profitable business with decent profit margins, the higher the amount of equity used to fund such business, the lower will be the return on equity for investors. Entrepreneurs must strike the right balance between debt and equity to ensure an optimal capital mix that provides investors the best return on their investments.
Mark Cuban, a famous investor and successful businessman once said, “only a moron starts a business with a loan.” Even though the capital mix of a growing business should not be 100 percent equity in order to maximize returns, for startups the best financial advice you can get is to start the business on 100 percent equity until the business concept has been proven and the path to profitability is crystal clear. This way you significantly reduce the chance of business failure due to bankruptcy. As Warren Buffet famously said, “No business has ever gone bankrupt with zero percent debt.”
While understanding how to source for capital through debt and equity and determining the right capital mix for the business is critical, managing the funds raised in an effective manner is just as important for survival as raising the financial capital. Entrepreneurs must strive to limit waste in the business to ensure that all funds are not raised for the business in excess of what is required and that funds deployed in the business are used as effective and efficient as possible.
Human Capital
Human capital refers to the skills and abilities a company’s employees bring to the operation of the enterprise. An assembly of a star team is easily the difference between a great company and an average company. Many successful entrepreneurs have tied the success of their business to building the right team. Without the right person positioned in the right office and doing his/her job in the most efficient manner the success of the business will be challenged on a daily basis. In business, almost no job is more important than the other, everyone has a role to play in building a successful enterprise. Therefore, businesses must focus on recruiting the best talent, training and retraining employees and assembling a team that can compete on a global stage since the world has become a flat global market.
Many young entrepreneurs don’t give enough attention to building a fantastic team that can help achieve their vision. Either they see it as too expensive, a waste of time or not necessary at all. But this mentality cannot be more wrong. A good example where we can easily glean the fact that building the right team matters is football club. Over the years, analysts have observed the fact that the key success to winning trophies and accolades has always come down to building a world class team that can take on any challenge thrown at them anywhere around the world.
Building a team in itself does not guarantee success if there is no teamwork and cooperation among teammates. Team building, team bonding, staff training all help to ensure that the employees are highly productive and instrumental to the achievement of the corporate goals of the organization. Beyond building the right team within an organization, it is also important for businesses to get strategic partners who deliver fantastic results whenever certain business activities is outsourced to them. Young entrepreneurs who struggle to recruit the best talents to join their teams due to high renumeration cost businesses incur to attract the best talents can leverage strategic partnerships that help achieve their corporate goals.
Social Capital
Social capital simply refers to how much an entrepreneur can leverage his social network to grow his/her business. As we all know, your network can determine your net worth. Therefore, an entrepreneur’s ability to convert his/her immediate and external network to become customers, evangelists and ambassadors of his/her company can determine its survival and success. In business, an entrepreneur with high social capital has access to many influential people within his industry who can always proffer advisory, give referrals and as such may have more opportunities for advancement and development than someone who has a low social capital or smaller network. People with high social capital may also have an easier time accomplishing their goals, both personally and professionally, because they can draw on the strengths and resources of others within their networks.
Asides providing financial support and business referrals, some successful entrepreneurs say one of the largest contributors to their success was having a wonderful and inspiring mentor. Social capital is very intangible and there are no means to measure it quantitatively today, but we all know the benefit of knowing the right person, building the right relationships and having a respected authority in the industry guide your footsteps and help bring you and your business to limelight. All entrepreneurs must be able to turn their immediate network to become solid pillars with which their organization stands. Entrepreneurs must also ensure that their business brand appeals to their target audience. The ability to captivate your target audience and convert them to loyal customers will not only build your social capital but also ensure the success of your business.
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