6 Points To Consider When Looking For Financing To Grow Your Business
At different stages in your business, you will need different types of funding as an entrepreneur. It may be just a little funding to get you over short cash flow problems or a lot of funding to re-position yourself in the market or make a big leap in your business strategy. Along with such big leaps, you may be doing something you have never done before or need technical assistance go along with the funding. This support makes the difference between survival and death of your business.
As with marriage, many people feel they have made a great achievement when they get a partner, however securing the wrong financing can be a disaster if it’s not from the right partner and for the right reasons. It cannot only mess your business but your life as well especially if it is your sole source of income. With the right partner, your business can grow faster than you ever thought possible however investors will very rarely make or break your business. Your ingenuity tenacity and determination does that. Given this, you should take extra care when choosing who to bring on board your business as an investment partner. Below we discuss what you should consider when looking for financing and partners to come along your with your on your entrepreneurship journey.
There are mainly three broad types of financing available to small businesses in Africa; debt, equity and grants. The factors to consider when choosing the type of financing are amount money required, what the funding is to be used for, interest rates, relationship with investors and even source of their money. You will find that many people are willing to offer advice or tell you your business idea will not work, but none can give you money, and only a few the sage-like advice you need to succeed. An experienced investor can be helpful to your cause and branding and equally. Work with investors who understand the industry, you and your goals.
DIFFERENT TYPES OF FUNDING
Debt Financing / Term loans;
Typical normal long-term loans that are borrowed with a set repayment period with interest rates that may be fixed or variable. The loan period may be up to 10 years. However such loan is best taken for small short-term financing that is required to address cash flow problem. Typically, such financing will cover operational costs that can be paid within a year to a maximum of 2 years. So if you are looking for funding of less than say USD 200,000 to be paid in a couple of years then this could be your best option. Debt financing can either be done by banks or non bank financiers.
This is one of the oldest types of alternative lending but is relatively new in many African economies. Factoring companies give you cash advancement on 80% of your confirmed outstanding receivables. This is an alternative form of lending that is not normally offered by banks but financiers specialising factoring.
Peer to Peer (P2P) lending;
Often done on online lending platforms. Entrepreneurs are able to raise cash from individuals like them or those who share a passion for what they are doing. Different platforms will also seek to promote different interests e.g. poverty reduction, tech start ups, renewable energy or just entrepreneurship in general. Financiers include peers, organisations, development organisations or high net worth individuals.
Merchant advances and Revenue based financing;
The most common form of merchant advances is advanced on a credit card for merchants who use credit card processing. It allows traders to pay more when business is booming and less when business is slow. The cost is interest on the borrowed funds and fees calculated daily. Similar is revenue based financing that takes into account the whole business’s financial picture as opposed to only the credit card payments.
With this, you give part of the share of the company for the financing you receive. This financing is suitable if you want the money for longer term projects (the financing could be in phases) or for the purchase of very expensive equipment that could change your operations or overall business strategy. Along with the financing, you may also need technical or business advice. Such financing is normal to be paid in more than two years.
Business grants are often received by social businesses that are not NGOs. This is financing that you need not pay back. Business grants are used for scientific research, for high impact social businesses and similar businesses that would impact the community. Different governments and foundations offer business grants to impact the communities they administrate or operate in.
WHAT TO CONSIDER WHEN CHOOSING INVESTORS
1. Trust; find investors you can trust and are committed. In the early stages of a company, a lot changes month on month. Knowing you can trust then to back you up as you go through difficult period
2. Experience; you want investors who have experience and can solve your current and possible future problems. As with different cycles of suitable business leaders, you need different investors are required for different stages of the business cycle. You are likely to need a different type of investor during the start-up phase than you would during the growth phase. The first round of financing you want seed investors who may not be interested in having a board seat. After proof of concept the kind of investor you get is likely to want a board seat and you should get an investor who will bring in significant value; be able to solve significant business problems.
3. Brutally honest; An investor who can tell you things straight up is important because they understand you and your industry . Such an investor is priceless as they understand market you’re playing in. They also should be as strong character as you are because if you have an arrogant personality you may find an investor who lets you do what you want if you don’t listen as you ware them out.
4. Diverse investors; if you are getting more than one investors it is wise to diversify your investors based on their skills and experience. Their experience is priceless especially if you are a young entrepreneur
5. Aligned strategy and Objectives; if your investor has different goals and objectives on what the business should be doing they are not suitable for your business unless you agree with them and are ready to realign your business objectives and strategy to theirs. If they want to get out quickly they may not be the right partner for the long haul. Do not partner with one who is trying to give short-term money for a need that is a long term.
6. Good background; Do background rese arch on the investor and ensure they have no criminal records and no other law suits. Find out about criminal records, bankruptcies, real property transactions, civil court judgments and anything else that could affect your relationship with them. Talk to other businesses they have invested in to find out whether you can cope with their personality.
Synergy For Africa helps you get financing to grow your business through our network of investors and high net worth individuals. You can send us your business detail by filling an investor request form HERE
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