As the saying money goes “money is the oil of evangelism” likewise in business “capital is the oil of business”.
Capital is one of the problem entrepreneur need to solve before they can start their business but most time they think it is only bank or investor that can bankroll their business, they neglect other sources which is not true because there are numerous way entrepreneurs can take to finance their business .
Well that is the purpose of this article; to show you deferent method of financing your business from startup to establish business.
Sources of finance can be categories into two which are
Internal source of finance
Internal source of finance are money you take from personal income or retained profit of a company. They are
1) Personal sources
This is a common source of finance entrepreneur go for, the money can be from personal saving, credit card and other personal financial arrangement.
You should use this source when other sources have fail also make sure your projected revenue, cost and burn rate is valid or else you might be in debt longer than you can think of.
2) Retained profit
This is for company or business that is doing well already, instead of getting money from other sources you can discipline yourself, reduce burn rate and re invest back your profit.
If you want to go higher in business world especially in Nigeria where there is scarcity of fund you need to take this way.
Do not follow western way of funding business they already have structure, they can get millions of dollar in funding with just prototype.
This is not possible here, bank and investors will want to see already growing business before they will release fund.
3)Friend and Relatives
This is difficult to pull off if you don’t have rich relative and friends but if you do, you can ask them for money to finance your business.
If you take little here and there from your relative, before you know it you will meet your target, do not ask them what they cannot afford, in fact let the money look like a peanut to them.
What you should be after is number, if you can have multitude the money will surely add up
Less I forget make it clear to them if they will be given equity or goodwill. If it is equity prepared a cap table and distributes them accordingly.
These are source of finance outside your control or influence usually in this source of finance people or organization give out fund in expectation of future profit or income.
4) Bank loan
Bank loan is the best source of finance for business in Nigeria but their requirement is too much you need to have collateral which will be liquidate if you default.
Sure this is not good for starting up a business, it is best for already establish business.
Using bank loan to start a business is risky, imagine business that you don’t know its nitty gritty, forget about your projection or business plan most business plan or projection get knock off before the end of second year
5) Bank overdraft
What is the difference between bank loan and over draft
Overdraft is a short loan usually for a month while bank loan is for long term, bank over draft require no collateral and less paper work while bank loan require ton of paper work and collateral depending on the amount.
Like bank loan bank overdraft can only be use to finance an already establish business, don’t even try to use it to start a business if the pressure of new business did not kill you, bank overdraft will surely do.
Most business did not know they can also issue bond like government , though this is also for already establish business.
This is how it works
Bond is like borrowing from individual with a promise to pay at the later date with interest. You as business will issue bond (certificate, form), investors will come and buy it with the purpose of earning from it.
You can choose to pay the interest every month or with the investor’s capital as stated in your terms and condition.
Note: bond does not offer equity
Both new business and already established one can use this method but should I not deceive you in Nigeria you can’t list a new company on the stock exchange nobody will buy it but oversea especially in America there has been numerous cases of entrepreneurs selling share of a new company.
This method is only possible for established business in Nigeria, when you list your business people will buy it at a stipulated price and you offer them share, you can then use the money to finance your business
How people make profit from share
When they buy share of your company they can sell it latter at a higher price if your company is doing well also they are entitle to dividends if there is any.
That means we shear ownership?
The moment you list your business you and your partners or cofounder are no longer the sole owner of the company but do not worry what they will have is common share it has no voting power
8) Ventures capital
Venture capital is another form of equity but not public , it is a good method to finance a business but venture capitalist are bias towards tech startup.
This is how it works venture capital which itself can be called a company or organisation who help wealthy individual to invest their money usually at the middle or later stage of a company, invest money with the hope of selling the equity when the company reach IPO (Initial Public Offering) or get sold.
Some also provide guide to young entrepreneur.
9) Angel financing
This is in the same categories with venture capitalist the only deferent is that they invest lower amount compare to venture capitalist also the angel investor primary aim is to guide first time entrepreneur since they are entrepreneur themselves who have sold their company or list it.
The only problem with angel investing is that most of them invest in tech startup it is difficult to find those that invest in many ventures especially in Nigeria but if entrepreneur is lucky to have them they worth more than the amount they will invest.
10) Lease financing
This is best for business that require heavy equipment and plant. This is how it works; a business will lease plant or equipment from a lessor for a period of time while the business pay monthly or annual for instance a poultry production business can lease farm house instead of building one outrightly
11) Trade credit
Startup and already establish business can use this method instead of paying supplier immediately you can negotiate to pay it at a later day. This is possible if your industry suppliers does not have a controlling power.
12) Government grant
This should be taking with a pinch of salt because government grant is hard to secure, you can’t base your company on the thought of securing grant.
Anyway if you are able to get it, it is a better way of financing business because you don’t have to pay back or give out equity
13) Crowd funding
If your business is about tangible goods, something that you can hold, you can use crowd funding method, the only problem is that it is new in Nigeria you will hardly see a credible crowd funding platform at the time of writing this article.
This is how crowd funding works
You will list your company in crowd funding website with the amount of money needed, if your product touch people’s heart they will donate to your cause but once you start production you should at least send some of your product to people that donate.