Sources of Business Financing for Entrepreneurs (Nigeria as Case Study)

After conceiving a business idea, an entrepreneur needs money to commence his or her business.

The expenses incurred include;

a.  Pre-operation expenses which include payment for legal/registration of business, payment for consultancy services as well as payment for running around. In some cases this may also include payment for training.

b.  Initial working capital, this is used to pay for consumable factors/inputs, a venture can not be functional even after installing the fixed assets until these expenses are incurred.

c.  Operating cash flow. Business needs minimum level of cash to run.

d.  Payment for fixed assets which may include land, land development, furniture, equipments etc.

All these expenses highlighted above are to be met; the value however, depends on the sophistication of operation. Starting a business can be tricky, but with the help of an eProcurement service you will be well on your way.

How does entrepreneur source for funding in Nigeria?

An entrepreneur can source for fund through

1.  Owner’s Equity

2.  Loans

3.  Grants

a. Owners Equity: This is the owner’s fund contribution in business. It is also called risk capital. This is the most reliable source of funding in business. For it put less pressure on the entrepreneur even if the business failed. This money is raised from past savings of the entrepreneur. It may be contribution from friends, relations etc. The important thing is that there is no commitment of repayment on the entrepreneur.

b.  Loans: This is a facility given to the entrepreneur with obligation to pay the sum and accrued interest at an agreed date, This can be sourced from the private sources or financial institutions such as microfinance houses or commercial banks, It is not the best source of financing new business, because the payment put pressure on the entrepreneur and the business, Where it could not be totally avoided entrepreneur should be careful in taken it. As alternative to this option, a starter is advisee to take up apprenticeship to gather knowledge as well as money to start business,

Types Of Loans And Facilities

1. Short term loan: This is the type of loans with repayment period of less than six calendar months. This is the popular type offered by micro banks and venture capitalist.

They are usually sourced to finance working capital and ventures with short term gestation. They usually attract payment of interest at high rate.

2. Medium term loan: The duration of payment for this facility does not exceed twelve months. Both commercial banks and micro finance institutions are reluctant to grant this type of facility because they need fund to run their own businesses. They avoid anything that will tie down their article of trade (money).

3. Long term loan: This type of facility is repaid after two years or more. It is sourced for capital projects, it is usually provided by specialized banks such as Bank of Industry, NEXIM etc; small scale business entrepreneur may not be able to access this type of loan because of stringent conditions attached to it.

4. Overdraft: This is a facility that allows an entrepreneur to withdraw more than what he/she has in his account. It is an arrangement between the bank and it customers to withdraw above the balance in the account. It is approved from the appropriate authority in the bank. It is usually for few days or weeks. Micro finance and commercial banks offer this type of facility which is subject to renewal.

5. Syndicated Loan: This is a practice whereby two or more lending financial institutions agreed to provide fund to finance large project, usually a consortium of banks as creditors package such loan with one of the banks as the leading bank.

6. Trade Credit: This refers to different trade arrangement between sellers and buyers whereby payment for goods purchased is postponed till agreed date.

7. Loan from Credit/Thrift cooperative societies

These associations/organizations are formed to provide credit to their members at affordable/concessionary interest rate compared to what obtained at the money market.

Small scale entrepreneurs are encouraged to belong to their associations to enjoy this facility.

8. Equipment Leasing: This involve arrangement between the financial institution and its clients, whereby the institution agreed to purchase fixed asset such as equipment/machine for its client who repay the cost of this equipment and interest accrued on it over an agreed period of time. This arrangement checkmate diversion of credit to other uses.

c. Grants

Government and non-government organizations sometimes give grants to potential entrepreneurs to start small businesses. This is an allowance that a government or an organization gives to support small business creation in the country. Examples include grants given by EcoBank, GTB, state and local governments through their different youth empowerment programmes.

How does an Entrepreneur Access Institutional Loan Facility?

Since loan is to be repaid, financial institutions are very careful to part with the fund put in their trust by the shareholders. The prospective borrower is expected to come up with convincing business plan or feasibility plan. This is a comprehensive, detailed document that will show the viability of the project for which the loan is being sourced for. The document will show among other things.

i. The profile of the entrepreneur

ii. Description of the product or services being rendered

iii. Technical profile of the business

iv. Marketing profile

v. Manpower Structure/Organogram

vi. Accounting/profitability index etc.

Thank you for taking time to read through our post your contributions through comments would be greatly appreciated. Kindly share with others by inviting them to our website and also share using the social networking icons below. In our next post, we would be examining the Factors Considered To Grant/Loan

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Comments
  1. Ebube Dibie

    You guys are Fantastic. What you are doing is great. Please i need materials on “The role of commercial banks in SME growth and development in Nigeria” Thank you.

  2. May

    Hi thanks for the information you have provided. I want to know are there any companies in nigeria that practise equipment leasing? and if there are can I pls get their contact..thanks.

    • Thanks for your message May. I’m sure of equipment leasing company in Nigeria. Just google the equipment you need and you get their contact. What equipment do you need?

  3. Ebube Dibie

    In developing countries characterized by low capital formation, and weakness of both the capital and money markets, the major sources of finance available to budding entrepreneurs are majorly through personal savings, loans and support from family and friends and government scheme’s to support SME’s.

  4. Ameh Enojo

    Financing is a major challenge for upcoming enterpreneurs in Nigeria.The Government needs to have a human face to help eradicate the level of poverty in the country.

    • Yes Ameh, financing is a problem but you need to have a great and innovative business idea. The Government is making plans to help out too in Nigeria. Check this link YouWin!

  5. ODERINLO OLUWAKEMI

    I APPLIED FOR YOU WIN WAS NOT TAKEN ,EVEN WHEN MAY LINE OF BUSINESS IS THE ONE THAT WILL HELP TO ERADICATE
    POVERTY AND PROVIDE EMPLOYMENTS FOR MANY NIGERIANS IN MY LOCAL ENVIRONMENT.

    ALL AM SEEKING IS ANOTHER AVENUE TO RAISE FUND TO FINANCE MY IDEA BUT THAT HAVE BEEN A VERY DIFFICULT TASK TOO.

    PLEASE KINDLY INFORM ME ON OTHER MEANS OF RAISING FUND TO FINANCE THIS PROJECT BECAUSE I BELIEVE SO MUCH IN HELPING PEOPLE.

    THANKS.

  6. Olufemi Peter

    Cool, i like your work youth with Innovative ideas should be empowered.
    They can try forming cooperative society to access certain support in the bank. Like the Dangote fund in BOI.

  7. Olufemi Peter

    Also try FCMB and STANBIC Bank for loans without collateral.

    • Thanks for this use information and contribution Peter. Nice having you on on website.

  8. Thanks for data provided. Please a person that wants to finance his/her old business, will the procedure Aids or is that any other alternative?

  9. The how-to-do-it contributions were highly appreciated. I hope to get my vision realised

  10. I AM AN INDEPENDENT CONSULTANT ON GIVING CAPACITY BUILDING TO MSMEs THAT ARE INTO AGRIC RELATED BUSINESSES AND WE EQUALLY GIVES COUNCELLING TO THE TRAINEES AND ALSO ASSIST THEM TO DEVELOPED BANKABLE BUSINESS PLAN/FEASIBILITY STUDY IN ORDER FOR THEM TO ACCESS FUNDS AND OTHER RESOURCES FOR THEIR SUSTAINABILITY. MY QUESTION IS HOW CAN WE COME INTO NIGERIA CAPITAL DEVELOPMENT FUND AND PARTNER TOGETHER.

  11. Eseka Igwe Augustine

    Am glad to come across this wonderful website. I was able to develop a business plan on yam, plantain, cassava and beans flour production. I have been in the business though with crude method of production but now want to go into using technology. I want you people to help me with grants to enable me start-up
    send me information to kiainspiro@yahoo.com

  12. sulaimon Anike

    thank you for making my search easier

    • Olufisayo

      We are glad we could be of help to you Anike! Thanks for dropping this

  13. athif

    what is the best source of finance for start-up business

  14. sani ali mohammed

    please the role of NDE in developing small scale enterprise in Nigeria

  15. Onikan Adebayo

    My question is this,how can i access start up loan?cos i want to go into advertising business and i can fund it alone,so i dont know if banks do finance business .silurdadebayo@gmail.com

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