Even if there are many business ideas to explore in Africa, it might be difficult for entrepreneurs to find ways to obtain capital for a small business in Nigeria and most underdeveloped nations.
The majority of small firms have historically struggled to find ways to raise money for their operations, in contrast to larger companies that are more likely to have access to credit facilities from financial institutions.
High-end company expectations, strict selection procedures, and demanding financial requirements are frequently faced by the few startups and small enterprises that are able to sort out their funding needs.
You might think you would never be able to access the traditional funding options as a small business in need of capital for expansion, but in the sections that follow, we will outline some significant alternatives and doable ways that you can obtain funding for your company, even if you’re just getting started.
Equity Financing
Equity financing is the process of substituting a financial investment in a firm for a share of the company’s ownership. An equity investment gives the investor a stake in the business, allowing them to profit from it. Equity is a long-term investment in a business that isn’t later paid back by the business.
A fully established corporate entity should contain a proper definition of the investment. An equity position in a business might take the shape of common or preferred stock, as in a corporation, or membership units, as in a limited liability company.
Businesses may create various stock classes in order to regulate shareholder voting rights. In a similar vein, businesses may employ various kinds of preferred stock. For instance, preferred investors often cannot vote, but common stockholders can.
In the event of default or bankruptcy, common investors, however, are last in line for the company’s assets. Prior to common investors receiving a dividend, preferred owners receive a predetermined payout.
Businesses may create various stock types in order to regulate shareholder voting rights. In a similar vein, businesses may employ various kinds of preferred stock. For instance, preferred stockholders often cannot vote, but common stockholders can.
In the event of default or bankruptcy, common stockholders, however, are last in line for the company’s assets. Prior to common stockholders receiving a dividend, preferred stockholders receive a predetermined payout.
Personal Savings
Your own savings or equity should be your first port of call. I can’t imagine that you don’t have some sort of funds on your own and you are thinking of a business. Cash value insurance policies, real estate equity loans, and profit-sharing or early retirement accounts are examples of personal resources.
Life insurance policies: The ability of the policyholder to borrow against the policy’s cash value is a common feature of many life insurance policies. Term insurance is not included in this since it has no cash value. You can use the funds for business purposes.
A policy must accrue enough cash value over the course of two years in order to be eligible for borrowing. The majority of the policy’s cash value is yours to borrow. The loan will lower the policy’s face value, and in the event of death, the loan must be paid back before the policy’s beneficiaries are paid.
Home equity loans: A loan secured by the equity in your house is known as a home equity loan. You can use the full value of your home to produce income if it has been paid for. If there is an existing mortgage on your house, it may be able to cover the difference between the house’s worth and the outstanding mortgage balance.
Certain home equity loans are designed to function as a revolving credit line that you can access whenever you need money. The home equity loan has a tax-deductible interest.
Venture Capital
Venture capital is funding provided by organisations or individuals who are involved in the business of investing in start-ups that are privately held. They lend money to start-up companies in return for a stake in the company.
Generally speaking, venture capital firms prefer not to be involved in a company’s early funding unless its management has a track record of success. In general, they favour investing in businesses that are already profitable and have seen sizable equity commitments from the founders.
Additionally, venture capitalists favour companies with a patent, a demonstrated market need for the product, or a unique (and patentable) concept as a competitive advantage or value proposition.
They frequently invest actively, necessitating representation on the board of directors and perhaps the employment of management. Investors in venture capital can offer insightful direction and business counsel.
Their goals might conflict with those of the founders, though, as they seek significant returns on their investments. They frequently have short-term benefits in mind.
In order to generate high rates of return, venture capital firms often concentrate on building an investment portfolio of companies with significant growth potential. These companies are frequently risky ventures. They can aim for 25–30% yearly returns on their entire investing portfolio.
They are looking for investments that have a 50% or higher predicted return because they are typically high-risk company investments. It is hoped that the entire portfolio will return 25–30%, assuming that some business investments will fail and others will return 50% or more.
To be more precise, a lot of venture capitalists follow the 2-6-2 rule of thumb. Generally speaking, this means that two investments will succeed, six will produce moderate returns (or just repay their initial investment), and two will fail.
Angel Investors
Angel investors are people and companies who want to support the survival and expansion of small businesses. Therefore, their goal might be broader than concentrating only on financial gains.
Angel investors are concerned with security and profitability for their investment, even if they frequently have a mission focus. They might, therefore, continue to make many of the same requests as a venture capitalist.
The economic growth of a particular region where angel investors are based might catch their attention. Compared to venture capitalists, angel investors could prioritise smaller funding amounts and earlier stages of funding.
Read also: Global Business Trends to Watch Out For 2025
Government Grants and Programs
For new or growing firms, the federal and state governments frequently offer financial aid in the form of grants or tax credits.
Certain programs are organised at the federal, state, and municipal levels to help finance small enterprises and innovative projects. One well-known source is from the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), of which many have been beneficiaries.
Equity Offerings
In this case, the company sells stock to the general public directly. Equity offerings have the potential to raise significant sums of money, depending on the specific situation. The offering’s structure might take many different shapes, and the company’s legal representative must carefully monitor it.
Initial Public Offerings
Initial public offerings (IPO) are special types of equity offerings. Companies that operate profitably, have stable management, and have a high demand for their goods or services employ initial public offerings or IPOs. Usually, businesses don’t do this until they have been operating for a number of years. They typically raise money privately one or more times to reach this stage.
Warrants
Warrants are a unique kind of long-term financing tool. By reducing negative risk and offering upside potential, they help start-up businesses attract funding. For instance, as part of the reimbursement package, warrants may be given to the management of a startup business.
Warrants are securities that, at a future date (before a defined expiration date), give the warrant holder the right to purchase stock in the issuing business at a certain (exercise) price. Its value is determined by the correlation between the stock’s market price and its purchase price, also known as the warrant price.
The holder may exercise the warrant if the stock’s market price surpasses the warrant price. This entails paying the warrant price for the stock. Thus, in this case, the warrant offers the chance to buy the stock at a discount to the going market price.
Since exercising the warrant would equate to purchasing the shares at a price greater than the current market price, the warrant is worthless if the stock’s current market price is less than the warrant price. The warrant is, therefore, allowed to expire. Warrants typically have an expiration date that, if not exercised by that date, will occur.
Debt Financing
Debt financing entails taking out loans from creditors with the agreement to pay them back, plus interest, at a predetermined future date. Interest on the amount lent to the borrower is the incentive for the creditors, or those who are lending the money to the company, to provide the debt financing.
Both secured and unsecured debt financing are possible. Collateral is a valuable asset that the lender can seize to repay a secured loan in the event that the borrower defaults. On the other hand, since unsecured debt lacks security, the lender is less protected in terms of repayment in the event of failure.
Repayment plans for debt financing (loans) can be either short-term or long-term. While long-term debt is typically used to fund assets like buildings and machinery, short-term debt is typically used to finance ongoing activities like operations.
Friends and Relatives
When launching a firm, entrepreneurs may turn to personal connections like friends and family. It could take the kind of equity funding, where a friend or family member gains a stake in the company. Nonetheless, the same formality that would be applied to outside investors should be applied to these transactions.
This could also take the shape of low-interest debt capital. Borrowing from friends or family should be handled with the same formality as borrowing from a commercial lender.
This entails drafting and signing a formal loan agreement that specifies the exact terms of repayment (depending on the anticipated cash flow of the startup company), the interest rate, the amount borrowed, and collateral in the event of default.
If you have to keep things official, please do. Do not be deceived, a friend or relative can still betray you once money is involved. In this case, the heartbreak will be worse than that of your toxic ex.
Banks and Other Commercial Lenders
Commercial lenders, such as banks, are common places to get business funding. The majority of lenders need a strong business plan, a clean background, and an abundance of collateral.
These are typically difficult to find for a new company. The business can be eligible to borrow more money after it has started operations and has produced cash flow budgets, profit and loss statements, and net worth statements.
Commercial Finance Companies
When the company is unable to obtain funding from other commercial sources, commercial finance companies may be taken into consideration. These companies might be more inclined to trust the quality of the collateral to pay back the loan than your company’s performance history or anticipated profits.
A commercial finance corporation might not be the ideal option for obtaining funding if the company lacks significant personal assets or collateral. Additionally, compared to other commercial lenders, finance company money typically has a greater cost.
Bonds
Bonds can be used to raise money for a particular project. Since the corporation issues the debt instrument, they are a unique kind of debt financing. Bonds differ from other debt financing products in that the bond issuer sets the interest rate and the maturity date, or the day on which the principal is repaid.
Additionally, until the designated maturity date, the business is exempt from paying any principal or interest. The face value of the bond is the amount paid when it is issued.
A business guarantees to repay the principal (face value) plus interest when it issues a bond. When it comes to finance, issuing a bond gives the business a chance to obtain funding without having to repay it until the money has been used effectively.
Investors run the risk of the business defaulting or going bankrupt before the maturity date. Bonds, on the other hand, have priority over stock investors for corporate assets because they are debt instruments.
Lease
One way to acquire the use of assets for the company without resorting to debt or equity financing is through a lease. It is a formal contract between two people that outlines the terms and conditions for renting out a physical resource, like a building or piece of machinery.
Usually, lease payments are due once a year. The contract is typically not between the business and the entity supplying the assets but rather between the business and a leasing or financing company. The asset is either purchased, the lease is renewed, or the asset is returned to the owner at the conclusion of the lease.
Because it does not tie up funds from the purchase of an asset, a lease may be advantageous. It is frequently likened to financing the purchase of an asset with debt, which is being repaid over a number of years.
However, although debt payments are made at the end of the year, lease payments are typically made at the start of the year. Therefore, even though a down payment is often needed at the start of the loan period, the company may have additional time to create funds for debt payments.
The above funding routes have been successfully explored by other businesses that were once starting. We are sure you can get funds when considering any of the above.
