Financing
is needed to start a business and ramp it up to profitability. There are several
sources to consider when looking for start-up financing. But first you need to
consider how much money you need and when you will need it.
is needed to start a business and ramp it up to profitability. There are several
sources to consider when looking for start-up financing. But first you need to
consider how much money you need and when you will need it.
The
financial needs of a business will vary according to the type and size of the
business. For example, processing businesses are usually capital intensive,
requiring large amounts of capital. Retail businesses usually require less
capital. Having exhausted all the internal sources of raising funds, other
options left for an entrepreneur include:
financial needs of a business will vary according to the type and size of the
business. For example, processing businesses are usually capital intensive,
requiring large amounts of capital. Retail businesses usually require less
capital. Having exhausted all the internal sources of raising funds, other
options left for an entrepreneur include:
1.
Raising Capital from Angel Investors
Raising Capital from Angel Investors
If
you don’t have enough funds to kick-start your business or expand it, and
getting a loan is an absolute no-no for you, then approaching an angel investor
is one of the good small business financing options
you have. An angel investor (or angel)
is a high net-worth individual who typically invests in and supports start-up
companies (or brand new ideas by
existing companies) in their early stages of growth, with the aim of
achieving higher returns than the typical public markets provide.
you don’t have enough funds to kick-start your business or expand it, and
getting a loan is an absolute no-no for you, then approaching an angel investor
is one of the good small business financing options
you have. An angel investor (or angel)
is a high net-worth individual who typically invests in and supports start-up
companies (or brand new ideas by
existing companies) in their early stages of growth, with the aim of
achieving higher returns than the typical public markets provide.
In
addition to the funding they add to your business, angel investors usually
contribute their time and experience, as well as offer introductions to
valuable contacts that could be essential to the success of your business.
addition to the funding they add to your business, angel investors usually
contribute their time and experience, as well as offer introductions to
valuable contacts that could be essential to the success of your business.
2. Raising Funds from Venture Capital
Raising capital is one of
the major challenges faced by entrepreneurs; especially when it is a new
business. It’s much easier to raise capital as an established entrepreneur than
to raise capital as a first time startup entrepreneur. Venture capital funding
is another option that you can adopt when trying to raise capital for your new
business.
the major challenges faced by entrepreneurs; especially when it is a new
business. It’s much easier to raise capital as an established entrepreneur than
to raise capital as a first time startup entrepreneur. Venture capital funding
is another option that you can adopt when trying to raise capital for your new
business.
What is Venture Capital?
Venture capital refers to
funds provided to high-risk, high potential, startup companies. These funds may
be required to start a new business from scratch (seed capital), expand an existing business (expansion capital), or acquire
another business with huge profit potential (buyout funding).
funds provided to high-risk, high potential, startup companies. These funds may
be required to start a new business from scratch (seed capital), expand an existing business (expansion capital), or acquire
another business with huge profit potential (buyout funding).
Venture capital comes from
the input of many investors who are willing to support business ideas that are
likely to succeed. The institutions charged with the task of handling the funds
and issuing them out to support deserving entrepreneurs are known as Venture Capital Firms or Venture Capitalists
(VCs).
the input of many investors who are willing to support business ideas that are
likely to succeed. The institutions charged with the task of handling the funds
and issuing them out to support deserving entrepreneurs are known as Venture Capital Firms or Venture Capitalists
(VCs).
In return for their
investment in a business, Venture Capitalists hold a certain percentage of
shares in the company. Therefore, venture capital is a subset of private
equity. Venture capital funds are issued primarily to support businesses that
are not yet eligible to take up bank loans or adopt other advanced financing
options.
investment in a business, Venture Capitalists hold a certain percentage of
shares in the company. Therefore, venture capital is a subset of private
equity. Venture capital funds are issued primarily to support businesses that
are not yet eligible to take up bank loans or adopt other advanced financing
options.
Example
of Notable Venture Capital Firms in Nigeria
of Notable Venture Capital Firms in Nigeria
·
Vetiva Capital
Vetiva Capital
·
Solid Rock Securities and
Investment Limited, Lagos.
Solid Rock Securities and
Investment Limited, Lagos.
·
Newdevco Investment and
Securities Limited, Lagos.
Newdevco Investment and
Securities Limited, Lagos.
·
Riggs Ventures West Africa
Limited, Lagos.
Riggs Ventures West Africa
Limited, Lagos.
·
Best Future Integrate
Investment Limited, Lagos.
Best Future Integrate
Investment Limited, Lagos.
·
Profound Securities
Limited, Lagos.
Profound Securities
Limited, Lagos.
·
Osprey Investments Nigeria
Limited, Abuja.
Osprey Investments Nigeria
Limited, Abuja.
·
Webar12 Limited, Abuja.
Webar12 Limited, Abuja.
·
Disok International
Limited, Kaduna.
Disok International
Limited, Kaduna.
Of all the avenues
available to raise capital; venture capital funding is probably the toughest.
Even though existing businesses such as early- and late-stage startups record
most successes with this option, some venture capital firms support new
businesses with seed capital.
available to raise capital; venture capital funding is probably the toughest.
Even though existing businesses such as early- and late-stage startups record
most successes with this option, some venture capital firms support new
businesses with seed capital.
VCs as they are better
known to cut a tough deal. They are seasoned investors that know the
intricacies of startup investing and running a business. Not all businesses
qualify to pass through the scrutiny of Venture capitalists; and of the few
that pass the initial test, only fewer will get the start up funds.
known to cut a tough deal. They are seasoned investors that know the
intricacies of startup investing and running a business. Not all businesses
qualify to pass through the scrutiny of Venture capitalists; and of the few
that pass the initial test, only fewer will get the start up funds.
·
Now
how do you leverage the experience and resources of VCs to successfully start a
business?
Now
how do you leverage the experience and resources of VCs to successfully start a
business?
·
How
do you raise startup capital from Venture capitalists?
How
do you raise startup capital from Venture capitalists?
·
VCs are tough and get to
see hundreds of business plans everyday. So
how do you ensure your business plan gets noticed?
VCs are tough and get to
see hundreds of business plans everyday. So
how do you ensure your business plan gets noticed?
·
How
do you get called up to defend your business plan? How do you stand the fire of
Venture capitalists?
How
do you get called up to defend your business plan? How do you stand the fire of
Venture capitalists?
Before taking your business
idea or business plan to a VC; please be sure that your business idea or
opportunity has strong profit potential because VCs are purely investors
risking their capital for a profit. It’s also advisable that the potential or
expected return on investment should be within the range of 35% – 45% per
annum; depending on the terms and conditions of the VC.
idea or business plan to a VC; please be sure that your business idea or
opportunity has strong profit potential because VCs are purely investors
risking their capital for a profit. It’s also advisable that the potential or
expected return on investment should be within the range of 35% – 45% per
annum; depending on the terms and conditions of the VC.
3. Taking your company public through IPO:
Taking a company “public” simply means transforming a
privately owned company into a public entity by selling its shares to the
public. This first-time sales of equity securities to the public is called the
initial public offering (IPO).
Going public helps companies raise expansion capital and become publicly traded
enterprises. It also helps them pay off debts or monetize the investment of
angel investors and venture capitalists.
privately owned company into a public entity by selling its shares to the
public. This first-time sales of equity securities to the public is called the
initial public offering (IPO).
Going public helps companies raise expansion capital and become publicly traded
enterprises. It also helps them pay off debts or monetize the investment of
angel investors and venture capitalists.
After an initial public
offering, a company changes from being a closely held entity with a handful of
shareholders to a company with a large number of holders of its stock, which
can be easily bought or sold through a stock exchange.
offering, a company changes from being a closely held entity with a handful of
shareholders to a company with a large number of holders of its stock, which
can be easily bought or sold through a stock exchange.
IPO
versus private placements: What’s the Difference?
versus private placements: What’s the Difference?
Though they appear similar,
initial public offerings and private placements are technically different.
While an IPO is the initial sales of shares to the public, a private placement
is the sale of shares to a limited number of qualified private investors
selected based on certain criteria.
initial public offerings and private placements are technically different.
While an IPO is the initial sales of shares to the public, a private placement
is the sale of shares to a limited number of qualified private investors
selected based on certain criteria.
In other words, anyone can
purchase shares offered for sale during an IPO. But private placements are
offered only to institutional investors and accredited individuals (rich investors) and entities that
meet certain eligibility requirements.
purchase shares offered for sale during an IPO. But private placements are
offered only to institutional investors and accredited individuals (rich investors) and entities that
meet certain eligibility requirements.
Unlike IPOs, private
placements are generally not subject to public disclosure obligations and are
exempt from registration with the securities exchange.
placements are generally not subject to public disclosure obligations and are
exempt from registration with the securities exchange.
As an alternative to IPOs,
private placements provide a quicker infusion of cash and are less expensive.
In addition, private companies—unlike IPOs—allow a great deal of control over
the whole process; the company can decide who how much to sell, and to whom.
private placements provide a quicker infusion of cash and are less expensive.
In addition, private companies—unlike IPOs—allow a great deal of control over
the whole process; the company can decide who how much to sell, and to whom.
Notable
Investment Banks in Nigeria
Investment Banks in Nigeria
- Apel Assets and Trust,
Lagos. - ICMG Securities
Limited, Lagos. - BGL Securities Limited,
Lagos. - Vetiva Capital
Management Limited, Lagos. - Cardinal Stone
Partners, Lagos. - Hasal Microfinance
Bank, Abuja. - PHB Asset Management
Limited, Lagos. - Centage Savings and
Loans Limited, Lagos. - CSL Stock Brokers
Limited, Lagos. - IBTC Chartered
- Lead Capital
4. Obtaining Small Business Loans
Debt
financing simply means raising capital for your business by taking loans. When
you borrow a certain amount of money to start or expand your business, and this
money has to be paid back along with interest within a specified period of
time, what you have taken is a loan.
financing simply means raising capital for your business by taking loans. When
you borrow a certain amount of money to start or expand your business, and this
money has to be paid back along with interest within a specified period of
time, what you have taken is a loan.
What
makes a loan different from the equity funding options explained in previous
chapters is that the lender does not hold shares in your business. Rather, the
lender’s reward for helping your business is the interest that you will pay
back along with the loan.
makes a loan different from the equity funding options explained in previous
chapters is that the lender does not hold shares in your business. Rather, the
lender’s reward for helping your business is the interest that you will pay
back along with the loan.
Loans
have a language of their own. Being the one borrowing the money, you (or
your business) are the borrower or debtor. The bank or other source
of the loan is the lender or creditor. The specified period you have to pay
back the loan alongside the accompanying interest is the term or period of the
loan, or the loan’s maturity. And the amount you borrowed from the lender is
the principal.
have a language of their own. Being the one borrowing the money, you (or
your business) are the borrower or debtor. The bank or other source
of the loan is the lender or creditor. The specified period you have to pay
back the loan alongside the accompanying interest is the term or period of the
loan, or the loan’s maturity. And the amount you borrowed from the lender is
the principal.
There
are two types of loans, based on the sources you obtained them from:
are two types of loans, based on the sources you obtained them from:
·
A commercial loan is one
you obtain from a private institution such as a bank or a government-owned loan
agency, such as the Small Business Administration, or SBA (in
the U.S.)
A commercial loan is one
you obtain from a private institution such as a bank or a government-owned loan
agency, such as the Small Business Administration, or SBA (in
the U.S.)
·
A private loan, on the
other hand is one you obtain from your best friend, your uncle, or your
father-in-law.
A private loan, on the
other hand is one you obtain from your best friend, your uncle, or your
father-in-law.
In both cases, the basic rule applies. That is, you
will pay back the loan within a specified period along with some interest,
which may vary from lender to lender. Loans can also be classified based on how
they are released to you—into two main types:
will pay back the loan within a specified period along with some interest,
which may vary from lender to lender. Loans can also be classified based on how
they are released to you—into two main types:
·
A lump-sum loan, where
you get all the money you need at once and then repay it.
A lump-sum loan, where
you get all the money you need at once and then repay it.
·
A line of credit, where
you are only allowed to use up the funds gradually until you reach a certain
limit. (For example, if you receive a $10,000 line of credit, you can take
$4,000 initially and reserve the rest for another time).
A line of credit, where
you are only allowed to use up the funds gradually until you reach a certain
limit. (For example, if you receive a $10,000 line of credit, you can take
$4,000 initially and reserve the rest for another time).
Obviously, your first line of defense when you need
to take a loan for your business is to approach your relatives and friends. It
could be a wealthy cousin or a well-connected father-in-law. Getting a loan
from these people is always very easy, and they won’t demand crippling
interests.
to take a loan for your business is to approach your relatives and friends. It
could be a wealthy cousin or a well-connected father-in-law. Getting a loan
from these people is always very easy, and they won’t demand crippling
interests.
Only when you cannot get loans from your close ones
should you consider taking a commercial loan, because they involve lots of
formality and protocol.
should you consider taking a commercial loan, because they involve lots of
formality and protocol.
4. Government Business Grants
Government
business grants are loans with a government-backed guarantee. Example of this
type of grant is the Nigerian YOUWIN programme and the SPDC Livewire business
grant. Like most bank loans, they can be tough to get, and the process can be
frustratingly long. But the repayment conditions are usually very friendly.
business grants are loans with a government-backed guarantee. Example of this
type of grant is the Nigerian YOUWIN programme and the SPDC Livewire business
grant. Like most bank loans, they can be tough to get, and the process can be
frustratingly long. But the repayment conditions are usually very friendly.
5. Crowdfunding
Crowdfunding is a
collective effort of individuals who network and pool their money, to support a
business or some other cause initiated by an individual or organization. In
other words, crowdfunding is an arrangement in which a “crowd” of people collectively raise the amount of money needed
to support a project.
collective effort of individuals who network and pool their money, to support a
business or some other cause initiated by an individual or organization. In
other words, crowdfunding is an arrangement in which a “crowd” of people collectively raise the amount of money needed
to support a project.
There are two major forms
of crowdfunding:
of crowdfunding:
- Donation crowdfunding
- Business crowdfunding
In
donation crowdfunding, people contribute their
money to a cause they believe in, without necessarily expecting any reward, the
only reward that contributors get is a feeling of satisfaction about helping
the project.
donation crowdfunding, people contribute their
money to a cause they believe in, without necessarily expecting any reward, the
only reward that contributors get is a feeling of satisfaction about helping
the project.
Business crowdfunding this is the type we are really concerned with in this
chapter. It involves collective contribution of the funds needed to start a new
business or expand an existing one. In this type of crowdfunding, investors
support your business with their money but with the aim of getting some reward
in the end. This reward could be interest that you must pay back along with
their investment (debt crowdfunding), some shares in your business (equity
crowdfunding), or your product once it’s made available.
chapter. It involves collective contribution of the funds needed to start a new
business or expand an existing one. In this type of crowdfunding, investors
support your business with their money but with the aim of getting some reward
in the end. This reward could be interest that you must pay back along with
their investment (debt crowdfunding), some shares in your business (equity
crowdfunding), or your product once it’s made available.
6. Equipment Leasing
Equipment
leasing is one of the easiest, yet commonly overlooked ways to finance your
business. Although it won’t really add to funds you already have, it will help
you save a lot of money that can be converted to other relevant uses. In this
chapter, you will learn the basics of equipment leasing and how to adopt it as
a way of financing your business.
leasing is one of the easiest, yet commonly overlooked ways to finance your
business. Although it won’t really add to funds you already have, it will help
you save a lot of money that can be converted to other relevant uses. In this
chapter, you will learn the basics of equipment leasing and how to adopt it as
a way of financing your business.
Equipment
leasing is an arrangement in which a business rents the equipment needed for
its operations for a specific number of months and at a specific cost.
leasing is an arrangement in which a business rents the equipment needed for
its operations for a specific number of months and at a specific cost.
At
the end of the lease period, the business (or lessee) may purchase the equipment for its fair market value
(or a fixed or predetermined amount),
continue leasing it, or return it to the owner (lessor).
the end of the lease period, the business (or lessee) may purchase the equipment for its fair market value
(or a fixed or predetermined amount),
continue leasing it, or return it to the owner (lessor).
Let’s use this scenario as an illustration:
You want to purchase a bunch of Dell servers to run your web application. Dell
can lease the servers to your company instead of selling them to you. The deal
will require you to pay a fixed monthly cost for the period for which you
intend using the servers. At the end of the lease period, your company will
have the option to buy the servers (and
own them permanently) or return them back to the lessor (Dell in this case).
You want to purchase a bunch of Dell servers to run your web application. Dell
can lease the servers to your company instead of selling them to you. The deal
will require you to pay a fixed monthly cost for the period for which you
intend using the servers. At the end of the lease period, your company will
have the option to buy the servers (and
own them permanently) or return them back to the lessor (Dell in this case).
The
basic advantage of equipment leasing is that it costs much less than purchasing
new equipment. This makes it a lifeline for cash-strapped businesses struggling
to keep afloat. It’s also alluring to entrepreneurs who are trying to
bootstrap.
basic advantage of equipment leasing is that it costs much less than purchasing
new equipment. This makes it a lifeline for cash-strapped businesses struggling
to keep afloat. It’s also alluring to entrepreneurs who are trying to
bootstrap.
If
you are wondering why equipment leasing is regarded as a way of “financing” a
business, then look at it this way: “Equipment
leasing is a loan arrangement, in which you borrow equipment instead of money.”
you are wondering why equipment leasing is regarded as a way of “financing” a
business, then look at it this way: “Equipment
leasing is a loan arrangement, in which you borrow equipment instead of money.”
There are two types of equipment leasing
arrangements. They are:
arrangements. They are:
a.
Operating leases: Also known as service leases, operating leases
provide for both financing and maintenance. That is, the lessor is responsible
for maintaining the equipment as the lessee uses it. The cost of this
maintenance is usually worked into the rental fee paid by the lessee.
Computers, office copiers, trucks, medical diagnostic equipment, and
automobiles are typical examples of equipment involved in operating leases. In
addition, operating leases are not fully amortized, in that the payments
required under the lease arrangement are usually not sufficient for the lessor
to cover the full cost of the equipment. However, the lease period is usually
much shorter than the expected useful life of the leased equipment, and this
helps the lessor to eventually recover the full cost of the equipment through
lease renewal or sale of the equipment.
Operating leases: Also known as service leases, operating leases
provide for both financing and maintenance. That is, the lessor is responsible
for maintaining the equipment as the lessee uses it. The cost of this
maintenance is usually worked into the rental fee paid by the lessee.
Computers, office copiers, trucks, medical diagnostic equipment, and
automobiles are typical examples of equipment involved in operating leases. In
addition, operating leases are not fully amortized, in that the payments
required under the lease arrangement are usually not sufficient for the lessor
to cover the full cost of the equipment. However, the lease period is usually
much shorter than the expected useful life of the leased equipment, and this
helps the lessor to eventually recover the full cost of the equipment through
lease renewal or sale of the equipment.
A final feature of operating leases is that they
allow for a cancellation clause, which gives the lessee the right to cancel the
lease and return the equipment to the lessor before the lease expires. This
clause is important to the lessee because it allows the equipment to be
returned if it is rendered obsolete by technological advancement or is no
longer needed because of a decline in the lessee’s business.
allow for a cancellation clause, which gives the lessee the right to cancel the
lease and return the equipment to the lessor before the lease expires. This
clause is important to the lessee because it allows the equipment to be
returned if it is rendered obsolete by technological advancement or is no
longer needed because of a decline in the lessee’s business.
Payments on operating leases can be structured in
two ways. They may be made periodically (usually monthly), in which case
the cost to the lessee is known with some certainty. Payments may also be made
per procedure, in which case a fixed amount is paid each time the equipment is
used—for example, for each X-ray taken, in the case of an X-ray machine.
two ways. They may be made periodically (usually monthly), in which case
the cost to the lessee is known with some certainty. Payments may also be made
per procedure, in which case a fixed amount is paid each time the equipment is
used—for example, for each X-ray taken, in the case of an X-ray machine.
In a pay-per-procedure arrangement, the cost to the
lessee and the return to the lessor are not known with some certainty, since it
depends on volume. In essence, a per-procedure arrangement converts a fixed
cost for the equipment into a variable cost that is based on volume.
lessee and the return to the lessor are not known with some certainty, since it
depends on volume. In essence, a per-procedure arrangement converts a fixed
cost for the equipment into a variable cost that is based on volume.
b. Financial leases: Also
called capital leases, financial leases are different from operating leases, in
that they do not provide for maintenance, they are not cancellable, and they
are generally carried for a period that corresponds with the approximate useful
life of the equipment. Therefore, they are fully amortized.
called capital leases, financial leases are different from operating leases, in
that they do not provide for maintenance, they are not cancellable, and they
are generally carried for a period that corresponds with the approximate useful
life of the equipment. Therefore, they are fully amortized.
In a typical financial leasing arrangement, the
lessee chooses the item it requires and negotiates the price and delivery terms
with the manufacturer. The lessee then arranges to have a leasing firm (lessor) buy the equipment from the
manufacturer. After the lessor has acquired the equipment, the lessee then
executes a lease agreement with the lessor.
lessee chooses the item it requires and negotiates the price and delivery terms
with the manufacturer. The lessee then arranges to have a leasing firm (lessor) buy the equipment from the
manufacturer. After the lessor has acquired the equipment, the lessee then
executes a lease agreement with the lessor.
The terms of a financial lease usually call for
full amortization of the lessor’s investment plus a rate of return on the lease
that is close to the percentage rate the lessee would have paid on a secured
term loan.
full amortization of the lessor’s investment plus a rate of return on the lease
that is close to the percentage rate the lessee would have paid on a secured
term loan.
At the end of a financial lease, the ownership of
the leased equipment is usually transferred from the lessor to the lessee.
Although there is a theoretical distinction between operating and financial
leases, today in practice, leases often do not fit exactly into any of the two
categories, as lessors now offer leases under a wide variety of terms that cut
across both categories.
the leased equipment is usually transferred from the lessor to the lessee.
Although there is a theoretical distinction between operating and financial
leases, today in practice, leases often do not fit exactly into any of the two
categories, as lessors now offer leases under a wide variety of terms that cut
across both categories.
References
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9, 2014
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http://www.mytopbusinessideas. com/guide-to-startup-funding/ on December
9, 2014
Cole, R. (2013) “How Did the Financial Crisis
Affect Small Business Lending in the United States?”. Depaul University.
Affect Small Business Lending in the United States?”. Depaul University.
Mckinsey, C. (2010), Two Trillion and Counting:
Assessing the credit gap for micro, small, and medium-size enterprises in the developing
world.
Assessing the credit gap for micro, small, and medium-size enterprises in the developing
world.