Raising funds to start a business has always been one of the biggest problems faced entrepreneurs in Africa and all over the world. Almost all entrepreneurs need additional capital to grow their business. I will be sharing with you some sources of business funding for entrepreneurs in Africa. Before we delve into it, we should know that the sources of business funding for entrepreneurs in Africa can be classified into two main types of funding. This include debt funding and equity funding.
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Debt funding: Debt financing or funding involves the borrowing of money by the entrepreneur to be repaid in a future date with interest.
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Equity funding: Equity financing of funding involves the sale of a part or percentage of the business by an entrepreneur in exchange for capital.
However, it all depends on the entrepreneur to take the decision whether to get a loan or sell shares of his business to others in other to raise funds. In a previous article, 6 reasons why you need to register your business, I made mention of the fact that you will need an incorporated or private limited company to easily attract funding for your business.
Let’s together checkout these sources of business funding for entrepreneurs in Africa.
1. Personal capital
This is the most easiest and cost-effective way of raising funds for your business as an entrepreneur. Most entrepreneurs in Africa usually start their business with money that has been saved by them before going in for any external capital.
Apart from personal savings, a high percentage of African entrepreneurs will do other jobs or carry out payable services to earn extra income so as to raise funds for their main business. It is common to see them doing side jobs which have no link with their business just to raise financing for their main business.
2. Family & friends
This is one of the most common sources of business funding for entrepreneurs in Africa. Once the entrepreneurs’ personal funding is inadequate, they usually turn to friends and family for funding. This type of funding falls under debt financing. It is easy raising funds from people with whom you have a close relationship with because they know that you are competent and reliable.
However, this source of funding maybe be more delicate if you are not professional enough. Don’t always treat them as family or friends – treat them like you would any other professional investor. Always insist on them making a legal documentation that both of you will sign. Rather than borrow on informal basis or making the terms verbally, it will be professional enough for you to write it down as in a contract. Let your lawyer prepare an I.O.U (promissory note) for the said family member or friend in other to avoid hard feelings in the future.
3. Pre-sales funding
Also known as customer financing or funding is one of the easiest sources of business funding for entrepreneurs. It is a great way to launch or grow your business especially when it’s physical products. In this type of funding, customers pay upfront for the products which helps entrepreneurs to cover the cost of production, materials and others.
Even though the pre-sale model of raising funds may look too good, it comes with some risks, especially to beginners and for established firms that may want to refine their manufacturing process or products. They may make mistakes that will lead to delays in production, defects, poor quality or even loss of inventory. Lost of inventory in particular can be disastrous for a business that is still at the beginning stage since they may not have resources to re-make the product or the money to repay the consumers.
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4. Purchase order funding
Purchase order financing or PO funding is when your suppliers make available goods to your clients before an invoice is generated. This usually works with entrepreneurs that carry out import activities, distributors or resellers and those in need of capital to deliver large purchase orders.
Purchase order financing is necessary when you have single or multiple customer orders and have cash-flow issues. There are times you may not have enough cash to meet up with orders from customers. Rather than turn down the order, which may mean a loss of revenue or a rub-down of your business’ reputation, entrepreneurs will prefer to get in touch with suppliers to make available the goods before an invoice is generated.
5. Supplier financing
Supplier credit financing is mostly used by manufacturing companies as well as distributors (like in purchase order financing). For manufacturing companies, supplier credit financing means the supplier supplies the entrepreneur with raw materials needed for production on credit. It helps them get the raw materials needed which they transform, sell and repay the supplier in cash.
Supplier financing plays a very important role as it improves the business’ cash-flow and operations. It helps them to get raw materials of products on credit in other to build inventory or meet up with new orders.
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