Sources of Business Financing for Entrepreneurs (Nigeria as Case Study)

After conceiving a business idea, an entrepreneur needs money to commence his or her business. We will discuss how to raise funds for business in Nigeria in this article.

The expenses incurred include;

1.  Pre-operation expenses which include payment for legal/registration of a business, payment for consultancy services as well as payment for running around. In some cases, this may also include payment for training.

2.  Initial working capital, which is used to pay for consumable factors/inputs, a venture can not be functional even after installing the fixed assets until these expenses are incurred.

3.  Operating cash flow. Business needs a minimum level of cash to run.

4.  Payment for fixed assets which may include land, land development, furniture, financial management software, equipment, etc.

All these expenses highlighted above are to be met; the value, however, depends on the sophistication of the operation. Starting a business can be tricky, but with the help of an eProcurement service, you will be well on your way.

READ: How to Become an Entrepreneur with No Money or Experience

How do Entrepreneurs Source Funding in Nigeria?

An entrepreneur can source funds through

1. Owner’s Equity
2. Loans
3. Grants

1. Owners Equity

This is the owner’s fund contribution in business. It is also called Risk Capital. This is the most reliable source of funding in the business. For it put less pressure on the entrepreneur even if the business failed.

This money is raised from the past savings of the entrepreneur. It may be a contribution from friends, relations, etc. The important thing is that there is no commitment to repayment on the entrepreneur.

2.  Loans

This is a facility given to the entrepreneur with an obligation to pay the sum and accrued interest at an agreed date.

This can be sourced from private sources or financial institutions such as microfinance houses or commercial banks. It is not the best source of financing new business, because the payment puts pressure on the entrepreneur and the business.

Where it could not be totally avoided, an entrepreneur should be careful in taking it. As an alternative to this option, a starter is advised to take up an apprenticeship to gather knowledge as well as money to start the business.

Types of Loans and Facilities

1. Short-term Loan: This is the type of loan with a repayment period of less than six calendar months. This is the popular type offered by micro banks and venture capitalists.

They are usually sourced to finance working capital and ventures with short-term gestation. They usually attract payment of interest at a high rate.

2. Medium-term Loan: The duration of payment for this facility does not exceed twelve months. Both commercial banks and microfinance institutions are reluctant to grant this type of facility because they need funds to run their own businesses. They avoid anything that will tie down their article of trade (money).

3. Long-term Loan: This type of facility is repaid after two years or more. It is sourced for capital projects, it is usually provided by specialized banks such as Bank of Industry, NEXIM, etc; small scale business entrepreneurs may not be able to access this type of loan because of stringent conditions attached to it.

4. Overdraft: This is a facility that allows an entrepreneur to withdraw more than what he/she has in his account. It is an arrangement between the bank and its customers to withdraw above the balance in the account.

It is approved by the appropriate authority in the bank. It is usually for a few days or weeks. Microfinance and commercial banks offer this type of facility which is subject to renewal.

5. Syndicated Loan: This is a practice whereby two or more lending financial institutions agreed to provide a fund to finance a large project, usually a consortium of banks as creditors package such loans with one of the banks as the leading bank.

6. Trade Credit: This refers to different trade arrangements between sellers and buyers whereby payment for goods purchased is postponed till the agreed date.

7. A loan from Credit/Thrift cooperative societies: These associations/organizations are formed to provide credit to their members at an affordable/concessionary interest rate compared to what is obtained at the money market.

Small scale entrepreneurs are encouraged to belong to their associations to enjoy this facility.

8. Equipment Leasing: This involves an arrangement between the financial institution and its clients, whereby the institution agreed to purchase a fixed asset such as equipment/machine for its client who repays the cost of this equipment and interest accrued on it over an agreed period of time. This arrangement checkmate diversion of credit to other uses.

3. Grants

Government and non-government organizations sometimes give grants to potential entrepreneurs to start small businesses. This is an allowance that a government or an organization gives to support small business creation in the country.

Examples include grants given by EcoBank, GTB, state and local governments through their different youth empowerment programs.

How does an Entrepreneur Access Institutional Loan Facility?

Since the loan is to be repaid, financial institutions are very careful to part with the fund put in their trust by the shareholders. The prospective borrower is expected to come up with a convincing business plan or feasibility plan.

This is a comprehensive, detailed document that will show the viability of the project for which the loan is being sourced. The document will show among other things.

• The profile of the entrepreneur
• Description of the product or services being rendered
• Technical profile of the business
• Marketing profile
• Manpower Structure/Organogram
• Accounting/profitability index etc.

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