Getting financial investment for starting or sustaining a small business is one of the biggest challenges most businesspersons face. However, lack of funds shouldn’t kill your dream of establishing and scaling your dreams. Let me walk you through some legal and legitimate ways that you can use to seek additional cash.
1.Bank SME Lending
Photo of Equity Bank of Kenya, a renowned SME lender. Courtesy/ Business Daily
Your bank will want to see a detailed business plan and a thorough description of your business and its prospects. So be prepared to go to great lengths to prove your financial responsibility. Besides that, be patient and allow the bankers enough time to process the loan.
Normally, banks view small businesses as high risk; hence, it is quite difficult for them to extend unsecured loans to them. You may therefore need to use some of your personal assets to back the loan – so keep your vehicle logbook or title deed close.
Most banks in Kenya still seem to prefer funding businesses with traditional models that have been tried, tested and proven to work. As a start-up with a fresh idea, you will have a pretty difficult time convincing them to fund you.
In general banks are ideal for entrepreneurs who don’t want to retain 100% equity but they may not suitable to those who are just starting out – with no capital, no collateral, no nothing. If you want to access these loans, then at least make sure you have set up a stable foundation for your small business.
RELATED: Top 10 Kenyan Banks Offering Cheapest SME Loan Capital
2.The Family Investor
Friends and family are best used only at the beginning of a company, when there are few or no alternatives available. They also make sense for very long-term investments motivated more by friendship or family than by strict return on investment.
The Family Investor is not really a classic investor at all, but a supportive family member that “knows you.” Their motivation comes from the interest in supporting a family member or friend.
Their basic investment thesis is that they trust you. This is my least favorite investor because the investment is totally emotional and personal. Based on the financial situation of the individuals involved and the relationships, this can work if everyone comes into the situation with their eyes wide open.
There are stories about people successfully choosing this option, but before you do, make sure your family ties are strong enough to withstand the pressures of doing business.
Have each party sign a promissory note that spells out the repayment terms or, if you are collaborating with a friend or family member, sign a partnership agreement. Do it the Legal way!
3.The Angel Investors
This type of investor is typically an entrepreneur who has enough wealth to help others. Angel investors invest in businesses in which they believe have potential but may struggle to find financing elsewhere.
Think of Mark Cuban, Daymond John and Barbara Corcoran of the famous TV show “Shark Tank”. You approach them with your idea, convince them about its feasibility and if they like it they finance it.
This method of financing however means you are giving up part of your ownership of the company. For instance, Mark may promise to inject Ksh15,000,000 into your company for 50% of its equity. That basically means that you and Mark will be equal owners irrespective of the fact that you are the one who came up with the idea.
Angel investors are ideal because they bring in immense experience and connections.Their investment is based on the idea and there is little emotion around the table (always a good thing).
Considerations when approaching angel investors include:
- How much control does the investor expect?
- How much control are you willing to share?
- What is the investor’s motivation?
- How experienced is the investor?
- Does your venture meet the investor’s investment requirements?
RELATED: 6 Creative Ways To Raise Capital For Your Small Business in Kenya
4.Venture Capitalists
This type of investor expects you to provide solid financial records and proof of high return on investment. As ruthless as they are, venture capitalists (or simply VCs) may invest millions if not billions of shillings and convert your small business into a large firm overnight. But in order for them to do that they will seek to anchor their position in your company’s equity (meaning that you will give part of your company to them).
Venture capitalists prefer well run companies, with ambitious founders and managers who understand their product and market well. Most VCs bring more than just capital, but operational and systems expertise.
They look at the ability of a business to scale, along with good governance and management practice. Consider having all parties sign a limited partnership agreement to spell out the rights and duties of the venture capitalist before opening the doors for them.
So Which Is The Best Way To Fund My Start-up?
The best way to raise capital depends on the stage your business growth trajectory. For instance, if you are just starting out, then we highly recommend sweat capital over loans. Later as the business settles in, you can think of getting a bit of assistance from the family. Once you have established a foundation then you can think of a bank loan. Later on when your business is at the take-off stage you can look for an angel investor or venture capitalist.
In other words, money is available. But in order to access it you need to at least take the first few steps on your own. BIG AMBITIONS with no hard-work and sacrifice may not take you very far.
About The Author
Munga Muchemi is a serial entrepreneur who runs a management systems and web development firm, imobi systems ltd as a business development executive. You can see some of his works by visiting www.imobi.co.ke.
