The CBN recently confirmed the high interest lending regime from banks
is not letting off in the near future. Bank lending to SME’s, Startups
and Individuals are still nowhere close to what is required to support
an emerging economy such as Nigeria. This hereby requires that we look
for other alternatives ways of financing our projects and Business.
1. Crowd Funding – This is a relatively new phenomenon
in the west and is yet to gather steam in Nigeria. Crowd Funding
involves sourcing for money to finance project from potential customers.
It’s basically receiving money in advance from your customers for a
product that hasn’t been manufactured. For example, as a startup you
have designed a prototype for a product that you believe consumers will
like but don’t have the money to fund its mass production. By
approaching crowd sourcing websites such as Kick Starter (based in the
US), consumers who like the product you are launching will pay for it in
advance in return for being the earliest to use it and at a cheap
price. You also make some profit and have proof that your product is
indeed marketable giving you better access to banks or venture
capitalist.
2. Venture Finance – Venture Finance is a form of
equity investing used by Venture Capitalist (VC’s). VC’s are experienced
risk takers and will support risky projects which no one may be willing
to take on. In exchange for that they get a stake in the ownership of
the company/project and then sell when the business has started
generating considerable profits. The upside for VC’s are that when they
take a bet on you and it works out well, the sell their equity stake for
a higher return. For fund seekers, the advantage is that you get
interest free money which is very crucial to the early stages of your
business simply by relinquishing some control. In some cases, you can
also seek rounds of funding from VC’s to fund different stages of your
product development. Popular business like IrokoTv, Paga, Jumia have all
used Venture Financing at some stage in their funding cycle.
3. Angel Financing – This refers to funding by
family, friends or well wishers who for little or no financial gain
decide to meet your funding expectations. Angel financing is also a very
cheap and effective way of funding projects especially when no one
believe in you. In could come in cash or in kind. For example, you Dad
can give you car to help with running errands or meeting supplies. It
could also come in the form of an office space where you can conduct
your business without having to worry for utility bills. A lot of us
rely on Angel financing at some point in our business life but do not
recognise that. Properly structured businesses must capture the value
even if it isn’t in cash. So, if there is an aspect of your business
that you find difficult funding, look to see if it is something an
“Angel” can help fund.
4. Equity Finance – Equity finance they say is the
most expensive form of finance because of its risky nature. However, it
has proven to generate very high returns if the business is run
properly. That is why the likes of Warren Buffet are the riches people
in the world and not bank owners. Therefore, if there is a business you
have developed for sometime but need some money to expand why not make a
sales pitch to a friend or family. If they know you have been running
your business successfully over the years, there is every likelihood
that they will take up some equity in the business. A Doctor who invested $30,000 in Warren Buffets Investment Company when he just started in the 60′s saw her money rise to $300million.
5. Equipment Sale and Leaseback – Equipment Sale and
lease back is a form of financing for business that offer capital
intensive services. It involves you business buying an asset and then
selling it to a lessor who then leases it back to you at a fixed
periodic rental. For example, you buy a set of computers for N1million
which you need to power your business. However, you are probably better
off using the cash to pay developers and soft ware engineers as serviced
to help finalise coding for a software that you can sell for a huge
profit. You then sell the computers to a leasing company who then
immediately leases it back to you. The leasing company gives you back
the N2million which you can immediately put to better use and still
retain the computers while the leasing company gets monthly lease
rentals (which includes some profits) from you.
6. Debt Factoring/Invoice Discounting – For business
characterised by high turnover of sales it is very likely that you
carry Naira load of debtors who purchase your goods on credit with a
promise to repay over a period (usually one month). This can be drag on
your cash flow especially as you need to replenish sold out inventory.
Debt factoring is basically selling the rights to your debtors at a
discount in exchange for cash. For example, Company A supplies packs of
toilet roll to a Multinational Organisation for N2million which he will
receive after 30 days. He then sells the right to receive the cash to a
Debt Factor for N1.9million. He gets the benefit of getting the cash
immediately while the Debt Factor makes a profit of N100k. Invoice
Discounting is similar to Debt Factoring except that it is mostly
offered by banks.
7. Cash Flow Management - The way you manage your
cash can also limit the number of times you approach a bank for a loan.
As mentioned above, Multinationals and Large Corporates manage cash
flows very well which is why they issue local purchase orders to vendors
with a promise to pay back after 30 days. You can also deploy such cash
flow techniques but make sure you inculcate the habit of paying as and
when due. Experience shows companies who make do their payments as and
when due are able to command better discounts and quality products that
those who chronically owe.
Source: http://web.ugometrics.com/7-viable-alternatives-to-a-bank-loan/
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