In Africa, apart from the known business challenges such as the decrepit infrastructure, inconsistent government policies, double taxation, increasing inflation, regulation irregularities and the COVID-19 pandemic consequences in recent times, overwhelmingly, lack of capital or funding issues contribute majorly to business failures.
According to findings of several surveys, one of the top challenges faced by entrepreneurs and businesses in Africa today is access to funding. Without doubt, funding is the bloodline of any form of business, therefore, whether it is a startup, nano, micro, small or medium-sized business, or an established large firm, knowing how to raise capital can often make the difference between business success and failure.
In fact, funding is important at all business stages and cash, which is most time, referred to as “capital” in business terms, majorly dictates the pace of performance in any business.
Invariably, without funding or capital, it will be extremely difficult to get any enterprise off the ground. However, the structure that exists in the business significantly affects the access to the choice of fund options. Recall, every business has a different structure and needs; it is, therefore, imperative to state that no financial solution is one size fits all. Fund options usually require different rules and steps. Consequently, businesses will be required to carefully plan, research, learn, and understand the necessary funding option in order to come up with the right decision.
- ‘The Origin: Madam Koi Koi’ becomes Nigeria’s most-watched Netflix series
- Uzoho, other keepers who crushed hopes of Nigerians
So, the big question for businesses is what are the ways to adequately raise capital for seamless operations? And this is the focus of this piece.
Capital comes into any business particularly in two ways: as equity or as debt. However, donations, grants, incentives, interventions, or subsidies can also be employed in certain aspects of a business to encourage activities in particular industries or sectors by government.
Just like other forms of capital raising options these grants and subsidies can be initiated for either short-term or long-term purposes. That said, equity capital involves exchanging a portion of the ownership of the business for financial investment in the business, most times it involves selling shares of the company in exchange for funding.
The ownership stake resulting from this equity investment allows the investor to share in the company’s profits. Equity capital is usually a cheap form of funding and is an important source of capital on a long-term basis. However, sometimes it involves going public, getting listed on an Exchange, and also giving up partial or major control of the business.
On the other hand, debt capital is when a business borrows fund from individuals or institutions and agrees to pay them back later. Debt capital simply means loans and borrowings. The main consideration in debt capital is the ability of the business to generate sufficient returns to service the debt (interest and capital repayment).
A typical mode of raising debt capital is through the bank loans. Banking institutions provide loans to individuals or businesses who approach them with a solid business plan, and good business structure with capacity for repayment. Bond is equally a debt instrument, and a way of raising debt capital as well.
Without doubts, it belongs to debt capital categorisation because the authorised issuer (business) owes the bondholder debt and it depends on the terms of the bond issuance. The most significant difference between equity and debt is that, unlike debt, equity capital does not require an amortization schedule for repayment. More so equity capital involves the investor taking an ownership position in the business.
Significantly, there are several sources to consider when seeking business funding or any financing, some of it are expressed here. The easiest and starting point for small businesses from context observation is usually with self-funding and personal investment, where entrepreneurs leverage their financial resources to support business operations.
Self-funding can extend to family, associates and friends for capital, otherwise referred to as bootstrapping. Both self-funding and bootstrapping lets business managers, operators, and entrepreneurs leverage their financial resources to support the business operations. Aside from every business having unique funding needs, each funding option also differ in availability, terms, funding amount option, and eligibility criteria. Therefore, each fund option needs detailed attention ahead of time.
Whether a business opts for a bank loan, an angel investment, or a government grant, note that each of these sources of financing has specific advantages and disadvantages. Good luck!
Timi Olubiyi wrote via [email protected]
Join Daily Trust WhatsApp Community For Quick Access To News and Happenings Around You.
