SOARING YOUR BUSINESS; FINANCE OPTIONS FOR START-UPS AND EMERGING BUSINESSES IN NIGERIA
Start-ups and emerging businesses play a prominent role in the growth and economic development of any nation. The start-ups and emerging business in Nigeria is gaining momentum as efforts are being made by the government to create a conducive environment for business to thrive. However, despite the moves by the government to encourage start-ups, the fear nursed by a lot of people has always been the lack of capital to fund and run their businesses. This has discouraged many from taking a step. Lack of basic information and adequate sensitization on the finance options available in Nigeria for start-ups and emerging businesses has been a major challenge.
The journey to becoming a large
and influential company begins with a step, and that step is giving life to
that business idea, expanding that small business in the corner of your house
without the fear of capital. Here, we shall attempt to discuss some of the financing
options available to you in Nigeria to take your business on a flight. But
before then, it is important that we explain what start-ups and emerging
businesses are.
A start-up or start-up is an
entrepreneurial venture which is a newly emerged business venture that aims to
meet a market place need, want or problem by developing a viable business model
around products, services, process or platforms. A start-up is a new business
venture designed to effectively develop and validate a scalable business model.
Put in a more simple way, a start-up is a business enterprise that has recently
been started. So, basically start-ups are emerging businesses.
Start-ups form a large chunk of
Micro Small and Medium Enterprises (MSMEs) in Nigeria which are mostly registered
companies and business ventures. Therefore, the first step into the journey of
becoming that big business brand is to have your business registered with the
Corporate Affairs Commission (CAC) either as an enterprise or a limited
liability company. Once you have your business registered, you automatically
fit into the MSMEs family and can benefit from the various financial
opportunities available for MSMEs in Nigeria. Let me quickly add here, that
start-ups are MSMEs but not all MSMEs are start-ups. Confused? A definition of
what constitute MSMEs will help in dealing with this.
There is no stand-alone
definition of MSMEs but for our purpose here, we shall be adopting the
definition given by Small and Medium Enterprises Development Agency of Nigeria
(SMEDAN). SMEDAN defines MSMEs as follows:
ü Micro
enterprises are those enterprises whose total assets (excluding land and
building) are less than Five Million Naira with a work force not exceeding 10
employees.
ü Small
enterprises are those enterprises whose total assets (excluding land and
building) are above five million but not exceeding fifty million Naira with a total work force of above 10,
but not exceeding 49 employees
ü Medium
enterprises are those enterprises with total assets (excluding land and building)
are above fifty million Naira, but not exceeding Five Hundred Million Naira
with a total work force of between 50
and 199 employees.
By the above definition, it is
seen that MSMEs are classified using employment and asset criteria. Now back to
our purpose of giving the above definition. It is possible for a business to
have been in existence for more than a decade with an asset of 50, 000 naira to
500 million naira and a work force of less than 200. This category of
enterprise, considering the duration of its existence, though a MSME, will not
be regarded as a start-up going by our earlier definition of a start-up
business. On the other hand a newly formed enterprise having an asset of 50,
000 naira to 500 million naira and a work force of less than 200 can be both a
start-up and a MSME. Basically, start-ups are so regarded because “they are new
businesses”.
Now, as a new business, it is
important to be aware of some of the finance options available to you in
running your business. Whilst our main focus in this piece is to do an
exposition of some of the finance options for start-ups in Nigeria through
government initiatives, we shall attempt to quickly run through some of the
general methods of funding a business. Generally, businesses are financed
through; personal savings/friends & family support, debt and equity
financing, venture capitalists, grants, and loans. Some of these are briefly
explained below.
Equity Financing is the process of raising capital through the sale
of shares in an enterprise. Equity financing essentially refers to the sale of
an ownership interest to raise funds for business purposes. (Investopedia).
Equity financing span a wide range of activities in scale and scope, from a few
thousand naira raised by an entrepreneur from friends and family, to giant Initial Public Offerings (IPOs) running
into billions by household names such as Google and Facebook. (Investopedia).
Usually, equity financing is associated with public companies listed on the
stock exchange (Nigeria Stock Exchange), it also includes financing by private
companies/enterprises as well.
As a startup, with a potential of
growing into a big and successful company, you may need to be involved in
different equity financing to take off your business or keep it running. One of
the equity financing instrument available to you as a startup is the use of venture capitalist. This is discussed
below.
Debt Financing occurs when a company/enterprise raises money for
working capital or capital expenditure by selling debt instruments to
individuals and/or institutions. In return for lending the money, the
individuals or institutions become creditors and receive a promise that the
principal and interest on the debt will be repaid. (Investopedia). This method
of financing basically involves issuing debt securities such as bonds, bills,
notes to investors in the capital market. The investors have no stake in the
business save for the principal sum invested and the interest on the sum.
For startups, debt financing may
not be a good option considering the complexities and risk involved, especially
access to the capital market.
A Venture Capitalist is an investor who either provides capital to
startup ventures or supports small companies that wish to expand but do not
have access to equity markets. Venture capitalists are willing to invest in
such companies because they can earn a massive return on their investments if
these companies are a success. In deciding whether or not to invest in a
business, venture capitalists look for a strong management team, large
potential market, and a unique product or service with a strong competitive
advantage. They also look for opportunities in industries that they are
familiar with, and the chance to own a large percentage of the company so that
they can influence its direction.
Unlike debt financing, venture
capitalist by investing in a business holds a stake in such business and are
entitled to dividends like every shareholders in the company. In reality,
giving their nature of investment, they occupy a giant place in the control of
the business. Although, this is a good finance option for any startup, the
downside to it may have a dire effect on the owners of the business in that the
probability of them being relegated to the background is high.
Grants are non-repayable funds or products disbursed or gifted by
one party (grant makers), often a government department, corporation,
foundation or trust, to a recipient, often (but not always) a non-profit
entity, educational institution, business or an individual. (Wikipedia). Unlike
business loans (to be discussed next), grants don’t need to be repaid, so there
is no worry over term length, interest rates, refinancing etc. The only
requirement for a grant is an application and in most instances, a feasibility
report (business plan). Grant is the most seamless and zero risk means of
financing a startup. In Nigeria, there are various grant scheme available which
are engineered by governments, individuals, foundations etc. Some examples of
these business grants are: Tony Elumelu Entrepreneurship Programme (TEEP),
YouWin Connect Nigeria, Youth Entrepreneurship Support Programme (YES) – a Bank
of Industry (BOI) initiative, Diamond Bank Bet Programme – an initiative of
Diamond Bank Plc, etc.
A Loan is a sum of money borrowed from the bank to assist for
certain planned or unplanned events. The borrower is required to pay back the
loan, including the interest charged over a stipulated period. A bank can grant
loan in the form of a secured or unsecured loan. One of the primary functions
of banks is financial intermediation that is, giving out credit facilities to
individuals, enterprises and corporate bodies with interest to run their businesses.
These credit facilities are usually secured by collateral (security interest).
These collaterals are usually, but not always landed properties. Due to the
stringent requirement (particularly as it relates to collateral), accessing
credit facilities by startups is often difficult. Apart from this, banks are
often wary of lending to startups as most of them do not have confidence in the
viability of the businesses and the ability of these startups to pay back.
In the face of the difficulties
being encountered by startups in accessing funds to run their businesses and
the recognition of the impact of startups in the growth and development of the
economy, the government of Nigeria, has over the years initiated various
programs aimed at ensuring the smooth running of business by SMEs through
unhindered access to finance. Some of these are:
a.
Small
and Medium Enterprises Equity Investment Scheme (SMEEIS)
SMEEIS is a voluntary initiative
of the Banker’s committee. The initiative was a response to the Federal
Government concerns and policy measures for the promotion of Small and Medium
Enterprises as vehicles for rapid industrialization, sustainable economic
development, poverty alleviation and employment generation. The objective of
the scheme was to facilitate finance management expertise to small and medium
scale industries in Nigeria. Banks were to set aside 10 percent of their profit
after Tax annually in support of equity investment in support of small and
medium enterprises. The arrangement eliminates the interest burden and other associated
charges on SME financing. This innovative scheme affords SMEs access to long
term funding.
b.
The
Micro Small and medium Enterprises Development Fund (MSMEDF)
In recognition of the
considerable contributions of MSMEs sub-sector to the Nigeria economy and the
huge financing gap in the country, the CBN launched the MSME improvement fund
on August 15, 2013, with a share capital of N220 billion. Ten (10) percent of
the fund has been devoted to developmental goals while ninety (90) percent to
commercial components to be released to participating Financial Institutions
(PFIs) at 2% interest rate for on-lending to MSMEs at a maximum of 9 % per
annum. Eligible activities to be financed consist of agricultural value chain,
services, cottage industries, artisans and, any income generating business as
can be prescribed by CBN.
c.
Small
and Medium Enterprise Credit Guarantee Scheme (SMECGS)
SMECGS was introduced in 2010 to
fast-track the development of the manufacturing and SME sub-sector by providing
80% guarantee for bank credits. The purpose of the intervention is to create
more jobs and to provide N100 million maximum loan facility with 5 years tenor
for each project.
d.
N200
Billion Refinancing/Restructuring Facilities to Small and Medium
Enterprises/Manufacturing (RRF)
The scheme was introduced in
April, 2010 to fast track the development and revitalization of ailing SMEs in
the country through refinancing and restructuring of Deposit Money Banks (DMBs)
existing loan portfolio. The facility has a tenure of 15 years and an annual
interest rate of 7.0 percent repayable quarterly.
e.
Real
Sector Support Facility (RSSF)
The CBN had in November, 2014
approved the establishment of a N300 billion Real Sector Support Facility to
address the funding needs of large ticket SMEs in Nigeria. It is aimed at
closing the short-term and high-interest financing gap for SME/Manufacturing
and start-ups as well as create job through the real sector of the economy.
This particular scheme is of much importance to start-ups in the real estate
sector.
f.
Youth
Entrepreneurship Development Programme (YEDP)
YEDP was launched on 15th
March, 2016 to enhance the deployment of the ingenuity and resourcefulness of
Nigeria youths for maximum economic development. The YEDP is aimed at fixing
the tripled-barreled constraint of insufficiency, high cost and inadequate term
of capital usually faced by start-ups. It offers credit of up to N3 million to
eligible youths and start-ups or 10 million for groups of 3-5 youths, interest
rate is 9% per annum. Tenor broadly depends on project complexity and cash flow
but is between 1 year for working capital and 3 years for term loan. The
collateral requirements are quite simple: academic and NYSC certificates, third
party guarantee and other movable assets.
The modalities for applying and
participating in some of these schemes will be discussed in our subsequent
article. Also, other individual state governments initiatives aimed at availing
startups/SMEs with capital will be discussed.
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