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, financial management software, 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 Entrepreneurs Source for Funding in Nigeria?
An entrepreneur can source for fund through
1. Owner’s Equity
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 taking it. As alternative to this option, a starter is advised 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.
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.