Financing is a very critical aspect of new businesses, although it is not the only important aspect. However inadequate financing can easily destroy a new startup. In fact most new businesses cannot even fly, without adequate financing.
In Nigeria, financing of startups is one of the most challenging aspect of entrepreneurship, and is responsible for the death of many new businesses. A lot of aspiring young entrepreneurs, are not able to launch their ideas because of inadequate finance. Even those who are already in business, continue struggling year after year and lacks the capacity to expand and take their business to the next level.
Nigerian banks are not helping issues. Majority of the banks will not finance a startup (apparently because of the high rate of failure in Nigerian businesses), and even when they agree to finance a startup, the high interest rate and short repayment period will usually kill the business and leave the founders with a huge debt profile ( Ask HiTv and numerous others).
The government every year introduces one program after the other, with a view to financing startups. However, inefficiency, low level of awareness, and the Nigerian Mindset, usually make these programs ineffective or not as successful as it would have been. I will explain this in a moment.
Before we talk about the sources of finance available to startups, let us first look at the critical factors inhibiting entrepreneurs from accessing some funds meant for them.
Poor Book keeping skills
Many young businesses who claim to be looking for funds, cannot provide a detailed account of their business for the past 12 months. How do you expect a bank or any lending institution to loan you money, when you cannot show them what you have been doing with your little funds for the last 12 months? Banks are in business of lending money, because that is how they make their profit, but they are not Father Christmas. They only sow, where they are absolutely sure that the land is fertile. And only your records backed up with your bank statements can prove this.
2. Poor Entrepreneurial Training
Most entrepreneurs in Nigeria, receive ZERO formal training in business. They cannot prepare a good business plan, keep accurate company records, prepare financial records and cannot show you their business model or strategy. And even today that online business schools like Millionaires Academy, EDS – Lagos business School, etc has made business training affordable and available to everyone, yet many refuse to take such courses that will greatly expand their knowledge and make them more attractive to lenders and angel investors.
3. Nigerian Mindset
It is unfortunate that most Nigerians has developed a very terrible negative mindset. Most young people even without trying will simply assume that they cannot access funds from banks, government and other organizations. This negative mindset is so strong that even when certain free grants are given, many youths will simply laugh and make stupid comments, without checking out the fact or just googling it. When the administration of ex-President Jonathan Goodluck started YouWin, So many youths where busy making stupid, negative comments like “there is nothing like free money” or “only those that know somebody will get the money”. Today, We know so many people that knew nobody, and yet got N10million FREE money through YouWin. All they had, was a good business plan. When Tony Elumelu started TEF, with a pledge to share $100 Million dollars in 10 years, the same sort of youths continued deceiving themselves and other uninformed youths. Meanwhile many young people came from as far as South Africa, Uganda etc and won Tony Elumelu’s grant right here in Nigeria. When Millionaires Academy did an extensive networking and research throughout the world, and brought together the most comprehensive list of 50 other organizations that are willing to give Africans and Nigerians grant, just like Tony Elumelu’s grant, the same sort of people will still see such opportunities and pass it over or worse make disparaging comments and yet they are the ones that complain the most. And while they are busy complaining and making negative comments, some entrepreneurs in Nigeria have already received as much as N50 Million from these organizations (Click here to check this out).
4. Low level of awareness
Many entrepreneurs are highly uninformed when it comes to sources of finance. This is also as a consequence of no 2 above: i.e Poor entrepreneurial training. Today in Nigeria, there are several angel investors that can give you funds as equity, there are also startup incubators that can nurture your business and help you find funds. But lack of business training, keeps many entrepreneurs oblivious to these sources of finance.
Now let us look at the top sources of finance available to Entrepreneurs :
Self-funding from your savings (if you have it) is always preferred. This proves to your banker and future lenders that you have a long-term commitment to your project. Bootstrapping should be your first option when starting up a new venture. It may require you to sell something dear to you.
2. Love money
This is money loaned by a spouse, parents, family or friends. A banker considers this as “patient capital”. As a rule of thumb, professional investors like to see real skin in the game–your own, of that of people who trust you. Love money proves to them that people trusts you. When borrowing love money, you should be aware that:
- Family and friends rarely have much capital.
- They may want to have equity in your business; be sure you don’t give this away.
- A business relationship with family or friends should never be taken lightly.
3. Small business grants
This critical sector often gets overlooked, but it should be a major focus for your business because grants are not expected to be repaid, and thus are usually the biggest infusion of cash to a business. Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent.
Generally, you will need to provide:
- a detailed project description, including location
- an explanation of the benefits of your project
- a detailed work plan with full costs
- details of relevant experience and background on key managers
- completed application forms when appropriate
The best approach to get a grant, is to team with a business training school, such as Millionaires Academy or Lagos Business School. Such schools understands the process more than you and have easier access better than an individual. When they help you to prepare applications and you win, it is a win win situation, because you get the money, while the organization gets the recognition.
4. Line of Credit
If your company needs only a temporary or small infusion of cash, you can use line of credit from your banker. This is a small overdraft that may cover a sudden inventory purchase. It is important that you have a good relationship with your bank and account officer, for you to be able to secure overdrafts.
A start-up incubator is a company, university or other organization that ponies up resources–laboratories, office space, consulting, cash, marketing–in exchange for equity in young companies when they are most vulnerable. Lagos now has a number of good incubators, helping startups to overcome the initial teething phase of business.
Generally, the incubation phase can last up to 2 years. Once the product is ready, the business usually leaves the incubator’s premises to enter its industrial production phase and is on its own.
Businesses that receive this kind of support often operate within state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology. Businesses that were supported by an incubator have a better success rate over 5 years.
6. Angel Investors
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge.
In turn for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations like EDS, Lagos Incubators, Millionaires Academy, and other online sources. Some notable and public angel investors in Nigeria are Jason Njoku of Iroko TV, Aliko Dangote (in partnership with BOI), Oba Otudeko, Folorunsho Alakija, etc..Many more others choose to keep a private profile.
7. Venture Capital
The first thing to keep in mind is that this funding source is not necessarily for all entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications, and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
As a rule of thumb, don’t try this one in the earlier stages; in fact, don’t try it unless you need more than $1 million. VCs take their pound of flesh in equity and control. It’s not the most efficient route.
Millionaires Academy is an online business training school, with a vision to create 100 new millionaires every year through Entrepreneurship. To succeed as an entrepreneur, you need training, mentorship, networking , exposure, financing and business support. Millionaires Academy is more than just a training institute, but a complete business support organization which focuses on all the key areas of success above, with the singular aim of making your business massively successful. Click here to join Millionaires Academy today.