How to raise capital for your business (2)

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How to raise money or better How to raise capital

  1. Bootstrapping

In bootstrapping, you are using your own money, your savings, or you are converting what you don’t need to cash e.g. a spare car you really don’t use or an unused office equipment or old newspapers or old bottles etc

2. Get a bank loan

When I talk of bank loan, I am referring to raising money from financial institutions. Depending on the kind of finance you want to access, there are things like Cashflow requirements, equity contributions, collateral etc.

There are also considerations on the tenure of the loans and the volume and purpose etc for instance, if you are getting a short term loan, you could simply apply for an overdraft if you are a salaried income earner or a business person with good cashflow and a good relationship with your bank. However, I need to state here that getting funds from financial institutions is getting harder and harder especially if you are not doing it big

Talk to your bankers. It is always a good idea to always know what’s happening in this area even if you are not using this method. So, the next time you are in the bank, ask for your account officer and discuss options.

These days there are also loan sharks. Private business people who are ready to give funds at high interest rates. Except you know what you are doing, I will ask you to beware of these way to raise capital. Like I have always said, there are no certainties in business, and it is easy to make projections and run figures on paper. But until you go out there in the real world and prove your figures, they are just that… figures on paper. So please never make the mistake of getting a loan from loan sharks based on paper projections. If you are doing that, make sure you know what you are doing.

…then have backup plans and counter backup plans. For instance, if I were to take such a loan, I would in the background look at my assets and check which one of those assets can offset the loan if I get to the point of fire. I will then decide in my mind if I am ready or not to let that asset go. So, if I am getting into something with such a high risk for say N5m, I want to have an asset of say N10m or N15m which I know can be a haven and a rescue point. This way, I don’t ever lose sleep

The point about loans from businesspeople (financial institutions) of any kind is that you must have a rock-solid repayment plan. Oh… and before I forget, NEVER EVER sign a loan agreement without reading the fine print. The legal papers are usually deliberately long, you are usually rushed into signing it and that can be trouble.

Here is one simple trip-wire to watch out for especially here in Nigeria.

if you take a loan at say 10% interest per annum, always check and ASK if that 10% is fixed or if a clause allows the amount to increase. Usually, what happens is that you start at 10% and somewhere down the line, it has magically increased, and you may end up servicing the loan for 15 or 18 or even 20%.

Next, ask if you are permitted to pay above the agreed in order to reduce your payments. For instance, if you take a 10m loan to be paid over a 10-year period at N1m per year at a 10% interest rate per annum. It means you will pay back 100% (N20m) over a 10year period.

So, what if you can just pay like N3m in a single year to bring down your total. In most cases you are denied this option and it is usually stated in the agreements. Shine your eyes.

Talk to your bankers and accountants and think well. Loans are good ONLY if you know how to use it.

raise capital

3. Crowd Funding

Crowd funding is just a way to raise capital where you get an audience to fund your ideas. It is still a very young, immature way of raising funds here in Nigeria, but it is catching on. What you do is to share a kind of prototype or proposal of what you intend to do (not birthday party type o). And then share that idea with people who put their money into it based on their capacity.

If you are a person of integrity, this works very well but your integrity must be intact. People must have the confidence that when you say there is a loss, it is true a loss occurred. If you say a profit was made, you have not removed 5% of the profit in the name of personal compensation

You must also know that as someone who is raising funds through crowd funding, you will make personal sacrifices and these sacrifices will be great. Because your investors will sit in the house and you will do the work. If it works, you all win. If it fails, they blame you. despite your hard work. If you are a man or woman of great integrity, they get ready to fail with you again

As crowd funding matures more and more in Nigeria, the difficulty and mechanics of using this as a way of raising funds will be less and less tedious. I am informing you way in advance so that when it starts maturing you can see it early and take advantage of it. Before the Nigerian syndrome spoils the market.

4. Collaborations

This is also still new here and is most common in the tech industry. We have what is called ‘Incubators/Accelerators’ And this is especially very popular amongst young people. For instance, you see a guy of 20 who has an idea to build a web app where Nigerians can crowd fund their ideas.

This chap knows the programming to get it done but he/she is not good with the design to present a corporate, serious looking app, so he teams up with another 20-year-old guy who does the design. And then they both realise they need a marketing expert, so they team up with a guy who is a whiz at marketing etc. In the end, you have a team of 5 young guys who are willing to try or fail together.

Using the Incubator approach to raise capital, you end up having everything the business needs to succeed without needing the capital outlay you first thought was necessary

For instance, the business can start by sharing an office, you don’t need to hire a designer, you don’t need to hire a programmer, you don’t need to pay a marketing expert.

The main problem with collaborations in Nigeria is greed and a lack of documentation

Read up on Incubators and Accelerators as a means of raising funds. And how it works in the context of collabos.

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