Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Dr. H. Kwame Afaglo
©2010
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Informal business start-up in most African states is relatively easy, however it lacks enough capital for formalising the enterprises and relatively difficult to operating on a continental base.
Due to the inherent weakness of low start-up capital, self-restricted customer base and the non-acquisition of patent
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies for products, logos and ownership, African small businesses hardly grow into medium or large scale enterprises.
Inasmuch as there are other business expansion oriented challenges for African entrepreneurs, this presentation focus on the sources of capital for African new start-up businesses. The intent is to enable petty traders and micro-firms
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies to grow from small to medium scale enterprises and eventually into transnational corporations in the immediate long term.
Insufficient start-up capital of African micro-firms including petty traders coupled with limited customer base accounts for the significant first year fold up of these establishments.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Besides innovatively thought out products and knowledge based enterprises recommended for African micro-firms, entrepreneurs must be aware of;
how much capital is needed to start their business,
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies running cost,
cash flow for the first three years,
growth per incorporation,
increase revenue from continental expansionism.
The foremost thought of start-up capital is an important approach to materialising a
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies business entity and the nine (9) sources as;
Own funds.
The first source of funds is the entrepreneurs own money that should form part of the equity of the enterprise. It is important that the owner of the business invest a significant portion his or her own money as start-up capital, since other parties will definitely appreciate it and it also serves as a point of trust in the venture.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Customer advanced payment.
In some circumstances, customers make advanced against an order to be fulfilled in the future. Say, Virgin Atlantic has some clients made payment against its space flight in 2015 there about.
Some firms require initial partial payment (deposit) whiles ordering an item(s) and the remaining payment to be received upon completion of work.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies This source of funding is conditional, in that provided the entrepreneurs have built a good reputation for themselves and clients or consumers have confidence in their abilities to deliver.
Family and friends investment.
Much as family and friends wish to contribute to close relations entrepreneurial ventures, it is proper their contributions
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies forms part of the equity and must be in a written contract format. This way, family and friends investment into business either as part of a start-up capital or re-capitalisation of existing firm are relatively secured than the current informal arrangement.
Customer credit payment scheme.
Some investors opt for credit schemes as mode of payment that attracts an interest
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies rate of a little above stipulated commercial bank lending rate. This scheme is most suitable for business-2-business (B2B) transactions, since their credit rating can easily be
determined.
Further this capital sourcing technique is an opening into the distinct finance brand of the venture. Which is another
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies business entity that forms part of the portfolio.
Micro-finance (‘Susu’ scheme) fund maturity.
Developing economies are associated with micro-finance institutions as ‘Susu’ schemes typically of Ghana. Here, sums are contributed periodically and the accrued sums handed over to a member as maturity. Maturity is rotational (from one member to
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies another periodically) and based on continuous contributions. The maturity sum (accrued for a specific and agreed period) for an investor could serves as start-up capital .
Withdrawal from life insurance policy
Mostly associated with employees who have contributed towards life insurance scheme(s), and have a right to access
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies some of their fund in the form of a loan to pre-finance their new business. Life insurance policies normally permits contributors to take loans based on at least two years of their contributions. This is another source of start-up capital for employees who intend to become entrepreneurs and wondering the source of funding their venture(s).
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Commercial bank loans.
Besides entrepreneur’s personal capital for new businesses, it is recommended that commercial bank loans be sort for as an addition or re-capitalising the firm. If not for nothing at all, commercial bank loans could serve as source for cash flow to keep the business afloat.
Fresh entrepreneurs must be aware that
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies their innovative thoughts will remain as a dream provided they can source for funding to actualise their dreams. Hence, entrepreneurship is a risking it all concept.
Further, it is worth adding another source of fund as start-up capital that is preferably the commercial banks. Unfortunately the commercial bank lending rates in most African states are inhibitively high and
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies deters fresh business start-ups. This is one of the major causes of the slow economic growth of Africa that should be driven by buoyant entrepreneurial activities.
Table 1 on the next slide indicates the comparative analyses of commercial bank lending rates of some West African states and some advanced economies.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Commercial bank lending rates
Table 1. sourced from WAMI and Worldfactbook
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies It is evident that the lending rates of West African states are deterring and extremely high as compared to economies as Korea South, Japan and United States of America (US).
The high commercial bank lending rates pertaining in developing economies accounts for another voluntary inhibitor to growth of entrepreneurial ventures and limited number of new business start-ups.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Private loans.
Although relatively easy to access it attracts higher and punitive interest rates, of which is only good for poor or bad credit entrepreneurs.
Equity and partial ownership.
At a stage it is financially prudent you float part ownership to other interested parties and individuals to raise enough capital for either new start-up business or expansion.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies It could be going public by floating shares or having some select individuals to buy certain defined shares that gives them its equivalent ownership percentage.
Recommendations
Developing economies ventral banks need to re-compute their interest rates and make them attractive form ventures to boost the economies.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Governments are to set up local and community based Entrepreneurial Development Centres (EDCs) that assist individuals and groups to access loans and grants for small to medium ventures at attractive rates.
An EDC is to ensure it does not only facilitate loans but get entrepreneurs to formalise their ventures per registering them and obtaining patent for their products that needs to be.
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Reference
Home Based Business fact Sheet (2008) Capital Sources for Your Business Available from http://umaine.edu/publications/3008e Accessed on [12th October 2010]
Business Start-up capital Sources – African Economies : Business Start-up capital Sources – African Economies Thank you