Access to finance continues to be a major hinderance to the growth of small businesses. This challenge has been attributed to small businesses inability to provide collateral to secure funding, inability to demonstrate adequate traction, inadequate knowledge and experience as well as lack of adequate information on the operations of small businesses.
The major challenge is not availability of funding, however the inability of small businesses to prepare and make themselves attractive to investor and financiers. For instance, there have been various interventions by governments to resolve SMEs financial obstacle to capital.
These interventions include; grants, debts and equity. Example of these funding interventions include; MASLOC, National Entrepreneurial Innovation Programme (NEIP), Ghana Venture Capital, Skills Development Fund, Ghana Export-Import Bank, etc.
Unfortunately, most small businesses in Ghana have not managed to develop themselves in order to be attractive for investment. Most entrepreneurs, aside the few who have been taken through incubation or training programmes, lack the knowledge on fundraising and do not know how to prepare to be attractive for investment.
To help improve the situation, this article identifies some factors that influences the financing decisions of financial institutions and investors, and provides measures that could be undertaken by entrepreneurs to improve their ability to attract investment into their businesses;
Factors influencing the financing of startups by Banks and Investors name
Project viability and Financial Information
Banks and investors expects entrepreneurs to demonstrate the viability of the project in terms of the availability of market opportunity, as well as the plan to achieve business growth to ensure that any investment into such business could be paid off. For example; an angel investor wants to see a business with high potential to scale up in a way that can generate the right returns for potential investment. For Banks, on the other part in a finance application, would like to know how the business intends to generate revenue and the market for the product. In addition, the business should be able to provide documentary evidence to support any the business model and assumptions.
Entrepreneurs should have the skill and ability to achieve their ambition of establishing a business. They should be able to show commitment to the project. For instance, investors will assess the entrepreneur and the team on their understanding and knowledge on the business environment. For Banks, the entrepreneur is required to show commitment by having an equity contribution, “skin in the game”, in the business. Startups that apply to financial institutions without any contribution in the business and expecting to be funded are likely to be rejected.
Collateral has been a major requirement by banks as a measure to mitigate credit risk. Even though collateral is not the foremost thing that banks look out for, but it is taken to ensure the commitment of the borrower to perform and repay the facility.
To improve the ability of small businesses to attract investment, the following measure can be taken;
Need to have a business plan
Entrepreneurs, before setting up a business, need to document their business idea into a business plan. The plan should include, but not limited to; the problem or opportunity identified in the market and the solution (value proposition) the business intends to offer, as well as how the business intend to make money (Business Model). This will enable potential investors associate with the viability of the business or idea.
Find a partner
Most entrepreneur prefer to be long rangers. However, this does not appeal to a lot of investors. It is better for entrepreneur to find a partner who share in their vision. The potential partner should be someone who has something that the founder do not have. For instance, in case the founder do not have adequate financial resources, a partner with an interest in the business and the financial resources to support will be advisable. The founder could also find a partner who have expertise in areas about the business which they do not have. This provide investors with the comfort that the decisions are not made by just the founder and there will adequate support to sustain the business and secure their investment.
Formalize the business
It is important that entrepreneurs take the necessary measures to formalize their business to give it credibility. Entrepreneurs need to register their business with the Registrar Generals Department and take up the relevant certifications for their operations, as well as tax registration. This will help them to access government support and businesses and it make them credible when seeking for credit from banks or funding from other investors.
Build a learning culture
For the entrepreneur to improve their competency, they should find avenues to educate and train themselves on the business and financial management skills. They can also build a network of entrepreneurs to learn and share ideas. This will help them understand the sector and develop the skill to manage the business. Such networks help startups to identify potential sources of funding and how to appeal to increases their chances of securing funding.
Leverage on Social Capital
Little improvement is important to keep a startup going and prove its viability to investors. There the entrepreneur need to be creative with its product or services but importantly how to raised money from alternative sources. One creative strategy is to leverage on their social capital to raise funding. For instance, the entrepreneur can use special occasions in their lives (such as birthdays) to raise some funding from family and friends for their business. This will help the entrepreneur to show contribution in the business and sustain the business before deciding on first round of external funding.
The writer is a Chartered Accountant (ICAG) and an MBA holder from the University of Warwick Business School in the United Kingdom. A Staff of Ghana Export Import Bank and a freelance entrepreneurship trainer. I can further be reached on the mobile number 050 8887688 or email at [email protected].