The number one reason for not starting a business is a lack of financing. Also coincidentally lack of financing ranks among the top reasons why businesses fail. Funny how nobody will credit a businesses success to financing. Not to say that financing isn’t critical to success but rather that it is an unsung hero in many success stories. On the subject of financing what are the financing options available for businesses? Where do they work and where don’t they work?
It makes sense to start at the bottom and the most accessible method. Bootstrapping in simple terms means building a business from your savings and quickly bringing in money from clients to support the business. Does it work? There are many types of businesses that can be bootstrapped. That said some are very difficult to bootstrap. Businesses that require huge capital outlay are difficult to bootstrap unless you have really large savings. Bootstrapping suits low investment business ideas.
Peer to Peer Loans
Peer to peer loans are just as they sound, loans from private individuals to private individuals. Later we will talk about private investments which are a different ball game. The main difference is that loans are external and are expected to be repaid. These of course depend on personal relationships. The majority of peer to peer loans come from close relationships but it’s not impossible to get peer investors that are not close relations. These are sought after because they rarely have punitive interest rates or strict terms. Repayment is usually very relaxed. Unfortunately, it is very rare to get these in large amounts. These people will not look to become part of the business but rather expect only their money back, perhaps with interest.
Institutional loans are loans extended through professional money lending institutions. Unlike peer to peer loans here you’re going to have to qualify for the loan and have a tight repayment schedule at best. Given challenges around finance in Zimbabwe you really should expect punitive interest rates. One other problem presented by these loans is that institutions will rarely lend start-up funds. Institutions will lend where there is an active operation with positive cash flow. So they will rather lend for expansion and in the short term.
Private partnerships as mentioned before are private arrangements with other individuals to provide capital for the business. These individuals will take up part ownership in the business and this may or may not include participating in decision making. Your options here are partnership, private limited company and private business corporation. This is a valuable method of financing because it is generally done with patient capital which makes no demands of repayment.
Government and PVO programs
Many benevolent institutions provide funding and financing for businesses. The government of Zimbabwe for example has many programs administered through various institutions such as Empower Bank. Many Private Voluntary Organisations have programs that support with funding targeted at various groups and if you qualify you can receive assistance. I decided to separate these from institutional loans because they are not always provided at commercial rates of interest. You may find them at zero interest or in the form of grants. The downside here may be the selection criteria, particularly where they are created to help certain groups.
Crowdfunding is something no African should be surprised by. Crowdfunding is something we have always done within our family or community units. What the internet has done to crowdfunding is given it a wider reach. That has the advantage of reaching a wider audience but conversely reduces the connectedness with the audience. Crowdfunding also has the advantage of being hybrid and non-conforming to traditional financing methods. That means you can make any sort of arrangement with your financiers including donation, pre-order and any other combination you can agree with your financiers.
Success has many fathers as the saying goes. In the pursuit of success, you may find you will have to use more than one of these methods and that is perfectly acceptable.