By Paul Frimpong, CGIA, ICCE
It’s no doubt that funding or financing of businesses has been identified as a top bottleneck for businesses of all sizes, irrespective of location, region, and or industry.
This is supported by centuries of surveys conducted to ascertain the challenges that businesses face.
All businesses, regardless of size, require cash to cover ongoing operating expenses, build infrastructure, and for marketing, R&D, and client acquisition, among other things. The reasons for capital injections vary, yet the bottom line is that, at a point in every business, funding is a key element.
While businesses of all sizes require funding, the sources and opportunities for such funding differ. Large businesses frequently have a wide range of financial support alternatives available to them.
But for small and medium-sized businesses (SMEs), obtaining conventional funding can be extremely difficult and even fatal.
The focus of this article is to build a pipeline of funding opportunities that SMEs could explore to meet their short-, medium-, and long-term funding needs.
Fortunately, Annan Capital Partners has been at the forefront of supporting multiple SMEs in Ghana and across the African sub-region to access funding for their businesses.
What’s an SME?
It is widely acknowledged that an SME is different from companies that are primarily used by their owners as vehicles for self-employment.
A business is considered a small- to mid-size organization (SME) if its revenues, assets, or workforce are below a specific threshold.
Unfortunately, there isn’t a universally accepted definition of a SME. Each nation is free to choose its own definition and may also opt to impose particular restrictions on particular businesses. The standards for classifying a SME differ between nations and occasionally between industries.
Small and medium-sized businesses (SMEs), which make up a significant portion of firms in Africa, are the backbone of the global economy.
SMEs are thought to account for 90% of the private sector in the developing world and for 80% of jobs on the continent of Africa, making them a significant force behind economic progress.
Abor and Quartey (2010) claim that the SME sector makes up the majority of firms in Ghana, accounting for over 92% of all businesses.
In addition, it was predicted that in 2018, SMEs contributed an estimated 70% of Ghana’s Gross Domestic Product (GDP), or around 90% of all enterprises that were in operation. Close to 85% of jobs in Ghana are reportedly provided by this industry.
It is impossible to overstate the importance of SMEs to the stability of any economy, especially, that of Ghana and the rest of Africa.
Numerous studies about the primary forward-thinking function that SMEs play in every economy have been conducted in both developed and developing nations.
For these enterprises to grow, create more jobs, and generate economic growth, they need access to funding opportunities.
Funding gateways for SMEs
The owners of SMEs frequently gripe that a lack of funding prevents them from expanding and fully using lucrative investment prospects.
The “funding or financing gap” refers to this difference between the financing options available to small and medium-sized businesses and the financing they could effectively employ.
There are quite a lot of potential funding sources for SMEs. However, a lot of them have real-world issues that can make them less beneficial.
The ideal scenario, according to many SMEs, is to never need to raise money; instead, the business would support its own initial start and expand going forward at the rate at which it makes money.
Many SME CEOs who don’t want to answer to outside investors find this strategy to their liking. And the successful consequence is typically a stable business with little growth.
Let’s begin by exploring some of the funding gateways available to SMEs as they set out to fund their businesses.
Owner, Family & Friends
This is always the first attempt and source of funding for SMEs. Even before receiving external funding, you are typically asked how much of your own resources you initially invested in the business.
Due to the fact that these individuals’ (family and friends’) motivations for investing may not be solely financial, they may be ready to accept a lower return than many other investors, making this a potentially excellent source of funding.
The main drawback is that, for the majority, the ability to raise money from friends and family and on our own is relatively constrained.
Bootstrapping is the practice of launching a business using only one’s own finances, together with money borrowed or invested from family or friends and revenue from the first few sales.
Self-funded firms do not rely on conventional financing techniques like bank loans, investor money, or crowdfunding. Instead, as the name implies, business owners must “pull themselves up by their bootstraps” by starting with their own money.
Bootstrapping is the best place to start for new businesses, especially if market validation of their goods or services has not yet been completed.
The benefit of this approach is that the SME owner retains total control. Since it shows the owners’ faith in and dedication to the company, it might also be used to persuade investors to join.
Angel investors are people or organizations who make investments in start-ups or early-stage businesses in exchange for an equity ownership interest.
However, securing an angel investor is only half the battle. Once you’ve connected, you’ll need to sell your business to investors.
One drawback is that these people are uncommon and frequently very picky about what they are willing to invest in.
Once a business angel expresses interest, they can be of considerable assistance to the SME because they frequently possess excellent commercial judgment and are likely to be connected to a wealth of resources.
Angel investors may be relatives or family members, but they are mostly outsiders eager to support start-up businesses with creative ideas.
Some of the angel investor networks in Ghana/Africa includes the following:
African Business Angels Network
Accra Angels Network
Ghana Angels Investor Network
Venture Capital (VC)
Most people undoubtedly picture VC when they think of early-stage financing. Some investors will put money into a new business, while others may wait until it has been operating and proving itself.
A venture capitalist firm is very often a subsidiary of a company that has significant cash holdings that they need to invest in. The venture capital subsidiary is a high-risk, potentially high-return component of their investment portfolio.
These companies invest quite a significant amount of capital into a SME and have already performed market research and generated initial sales.
In return, they receive stock in the business, which entitles them to a seat on the board and a voice in its operations. The injected capital may occasionally be set up as a convertible debt.
A presentation to a venture capitalist must demonstrate how they would be able to “exit,” or release their value, after a number of years, as these investors rarely wish to remain invested for the long term.
This is frequently accomplished by either selling the business to a larger firm engaged in the same industry or expanding it to the point where a stock market listing is feasible.
An SME needs a business idea that could generate the high returns a venture investor is looking for in order to get venture capital funding.
Invoice Factoring / Discounting
Invoice factoring is a type of accounts receivable finance that is also known as “factoring” or “debt factoring”. Invoice factoring enables businesses to sell outstanding invoices (accounts receivable) to a third-party commercial finance company (a factor).
These sources of finance effectively let a company raise finance against the security of their outstanding receivables.
This funding is only temporary and frequently costs more than an overdraft. One advantage of these sources of funding, though, is that when a SME expands, their existing receivables will expand as well, increasing the amount they can borrow from their suppliers or through invoice discounting.
Therefore, factoring and/or invoice discounting are two of the extremely limited number of financial sources that expand on their own in tandem with the expansion of the business.
Loans & Bank Finance
Here, a business borrows money from an individual, a microfinance organization, or a bank that must be repaid with interest after a certain amount of time.
When a loan can be secured against significant assets like land and buildings, banks may be ready to offer some type of overdraft as well as long-term loans.
Accessing loans can be challenging, particularly when collateral is needed. But thanks to technology, it’s now simpler to get unsecured loans through mobile-based services.
Crowdfunding is a method of obtaining outside money from a big audience as opposed to a limited number of specialized investors (such as banks, business angels, or venture capitalists), where each person contributes a small portion of the desired funding.
The contributions are then given a reward by the company, which may take the form of gifts, special offers, or even stock.
When it comes to crowdfunding, individuals provide the funds that the business requires. Crowdfunding typically occurs through specialized networks, particularly the internet, with the business owner outlining the activities and goals of the company, sometimes in the form of a business plan, and asking for funds under a set of rules and regulations.
With regard to traditional types of financing, this constitutes the main novelty of crowdfunding because it allows business owners to access big audiences’ savings without the need for a middleman like a bank.
Agoo Africa Crowdfunding
Coming highly recommended as an efficient crowdfunding platform for small businesses and start-ups in Africa is the yet to be launched Agoo Africa by Annan Capital Partners.
“Agoo Africa is a crowdfunding platform for African early-stage start-ups’ and small traditional businesses.”
“When launched, it will allow owners of such businesses to make their project and their pitch accessible to a large number of investors, from young non-professional business angels to established international funds.”
“On the other hand, any investor can now have access to a curated database of small Ghanaian companies from various sectors and invest in them seamlessly via our platform.”
Another distinguishing feature of Agoo Africa is that, unlike most of the existing equity crowdfunding/crowdinvesting platforms, Agoo doesn’t require your startup to be incorporated in Delaware. On the contrary, it’s the first such platform which clearly encourages fundraising for companies registered in Africa.
When to Raise Finance
When you’re not in need of funding is the best moment to begin looking. On-boarding new investors requires time, especially if they are corporate investors like venture capitalists (VC) and or even angel investors.
Utilize every opportunity you get to inform potential investors about your company, your vision, and what makes it special. This will ensure that they have heard of you and, ideally, are familiar with your narrative when you approach them later to discuss a fundraising effort.
Annan Capital Partners, bringing on board decades of experience in connecting multiple SMEs across the African region to funding opportunities, will be an ideal partner in your quest to fund your SME.