How Entrepreneurs can get Access to Funds

Start-ups should target family, friends for funds

BY GODWIN EHIGIAMUSOE 

Godwin Ehigiamusoe

The Managing Director, Lapo Microfinance Bank, Mr. Godwin Ehigiamusoe, tells SIMON EJEMBI how entrepreneurs can get access to funds

 Reasons for low rate of access to funds

There are different reasons for low rate of access to funds. The first is the fact that access to funds in the commercial banks can be very challenging.0nly a few companies, especially among the small and medium enterprises, are able to meet the conditions that are usually put forward by commercial banks for credit facilities. The second reason, probably, is the fact that most companies have not really decided to access public funds through the capital market.

 Getting funds to convert great ideas to thriving businesses

It is quite challenging, but I think there is a way out. The first step  is to be very clear about your ideas; convert them into a very clear business plan for people, especially those who have funds, to be interested. The second step – and that is my advice for most young people with business ideas – is to try as much as possible to start with little funds that can be primarily mobilised from own savings, friends and family members. It is not advisable for beginners to access loans for implementation of an idea.  In summary, my advice is, come up with very bright idea, clarify your ideas, and put them in a manner that people can understand in the form of a business plan. Secondly, begin fund mobilisation by targeting family and friends.

 Why small businesses should avoid loans

Start-ups usually are quite vulnerable and in that case, can easily fail. At this point viability has not been assured. No matter how good your business plan is, when you are beginning a business, which is  more or less an adventure, there are possibilities things could go wrong. It is therefore not advisable for a beginner  to borrow money with interest and all the conditions to begin a business. The wisdom is that you start small, and mobilise your funds from sources that tend to be a bit cheaper. (So) when the business has started, gradually, demonstrating  viability and that one can access credit facilities for the purpose of scaling up.

 What to consider when taking loans

The first factor  is to ensure that you are looking for an amount that you really need – not just an amount you think that you want. Second, is to ensure that you have a very clear utilisation plan for the fund. If you do not have a plan, there could be a possibility of misapplication (of the fund). And the third factor, is to make sure that you have a clear business plan that would guide the growth of the business. In addition, one should be careful on the terms such as  interest rates, other charges, repayment schedule and tenor.

Those factors must be considered in a manner that they are, first of all, affordable and the repayment structure or schedule must be sensitive to the cash flow pattern of the funded  business.

 Alternative sources of funds

For those who are beginning, as I have noted, you are advised to use your own money, which in this case could be own savings. The other sources are family members  and friends . These sources are of cheap and readily reliable. Beyond that you need to also look at the capital market, but again it is important to note it is not common for start-ups to access  funds from the capital market. I would also like to recommend a non-financial approaches. In this case, credit financing and easing come to mind. Credit financing allows a business to  access some of the things without making instant cash payment. With the easing, a business is able to acquire plants and machinery without outright purchase.

 Often ignored sources of funding

People readily point at the fact that businesses, particularly small scale businesses, are not maximising the opportunities in alternative sources of funding for instance. Most business people ignore these alternative sources probably out of lack of awareness of the inherent benefits. Take the benefits of leasing in this country. How leasing helps in terms of funding is simple and straightforward; if I need an equipment for my operation and it requires X amount to for outright purchase , obviously that would have impact on my cash flow. If I, therefore, go into a leasing arrangement with a leasing firm, and I need to pay in instalments, that leaves the business with some funds for the operation.. Leasing, therefore, for me is an alternative that would help you to maximise the utilisation of the funds you currently have.

Another sources is the place of venture capitalist. We need promote this funding approach which enable young people with bright business ideas or start-ups obtain affordable funding support.

 Best source of funding for businesses

I don’t think there is a best option. What is important is to consider, what the sources which provide you with the right quantum of loan your business requires on affordable terms, such as interest rates and repayment structure, are. It depends on the stage of development of your business. For instance,  start-ups should look for funds within the family, from savings, friends and if possible from venture capitalists. Bigger businesses implementing expansion or growth pans  will  look  beyond family members and friends to the formal money market.