26th June, 2019
By Julius Masaba
This article was quite long. It would have scared many of you to read because it looked like a state-of-the-nation speech :-). So I had to break it into three parts and this is part one. Some parts of it are fairly verbatim statements from a presentation or lecture I once attended last year and research I have done.
Many times young business owners (entrepreneurs/founders of startups/SMEs) cry foul when it comes to accessing finance for their seed stage, early growth or any other stage. Some complain that the ‘big boys’ already in the market are mostly favoured.
However, contemporary startups and SMEs need to realize that times have changed. There has been a tremendous shift from just starting or setting up a business to make money and end at that. That was for the 19th century. The 21st century is for businesses that are existing to solve pressing needs (problems) in society. These problems are opportunities.
For that matter, there should be a purpose for which a business is formed. I love the word ‘purpose’ and it’s so familiar to the extent that I have always played with it while developing bankable business plans for a host of clients/businesses in various sectors.
I often ask the business owners ‘so, what’s the purpose of your business’. Some know it, others blabber. But hey, who am I to shoot down someone’s idea? The best I always do is advise the idea owner or initiator or business owner to tweak his/her idea a little, to be unique or different or just pursue the idea at his or her own risk.
So, let’s get back on the road. What is the purpose of a business? Most times, the purpose of a business should be;
- A solution for the customers
- What are you giving back to the customer?
- What are you giving back to society?
Let me give you a simple case study of a company (I don’t if it’s a fintech or bank). Between 1995 and 2000. There was a company that leveraged on the menace of money bulkiness, mobility and transfer with in Europe and particularly Germany.
Upon its inception or founding, it had about 2,500 new customers daily, and had about USD1.3 billion. Around March 2018, it raised about USD150 million. That company is none other than N26 (N in between 2 horizontal bars). N26 is a mobile bank.
But during that time, there were a lot of challenges in the continent’s banking system and banking hall mechanisms look inefficient and ineffective. It’s the reason the mobile bank came in – a solution for the customers.
No wonder it was embraced quickly, a spreading so fast like a wild bush fire. The essence of bringing up the above case is to illustrate or show you how an idea sells or gets market if it’s unique and solves a particular long pressing need or problem among or for the masses (society).
Startup owners and or entrepreneurs will then find it easy to access financing even form big entities like insurance companies, savings schemes, investment clubs, social security funds, retirement schemes, pension funds, capital markets; even venture capitalists (VCs) or Angels, etc.
The startup/SME financing market for Uganda and some other countries in the 3rd world is quite complex, but simple when understood. Take for example accessing financing in the Ugandan market, there are avenues one can use (I call them ‘places’ to go to), such as;
- Savings accounts
- Current account
- Fixed deposit account
- Insurance policies
From these places, you are going to get the following financing sources by type or kind;
- Trade finance
- Overdrafts/working capital loans
- Capital expenditure (assets)
- Capital markets (public and private equity)
Now note carefully that the first three (3) sources of enterprise/business financing are found in commercial banks. That is, loans/credit, trade finance and overdrafts. We shall break these down further.
Loans: They carry a fixed rate of interest e.g. 23% (as a December 2018). The commercial bank lending rate is based on the Central Bank Rate (CBR) also called the prime lending rate, (currently about 10% as at Apil and June 2019).
Trade Finance: This is for the trading, export and import sector players, shipping companies, etc. Usually it has a minimum amount. At times it’s in the form of LPO financing. Specific banks offer these, not all. Such as Equity Bank, Bank of Africa, and others.
Overdrafts: These are loans obtained over and above the company’s bank balance or closing figure; an amount withdrawn in excess of the bank balance. This can happen legally. Overdrafts are basically working capital loans.
That aside, let us also expound on the others.
Capital Expenditure: This is financing from use of an asset. This means purchasing property, plant and equipment (PPE) helps a business reduce costs. For instance asset financing may be cheaper than purchasing an item at once. Asset financing comes with discounts, covered repair and maintenance costs, longer time periods and utilizing the asset as you pay for it.
Mortgages: Mortgages are for the future. Imagine a small company that is in need of a small office for its initial operations. As it operates, I can start paying for a two-roomed apartment over a period of five (5) years. This is better than looking for money to purchase that same apartment at once, especially if its cash flows are poor. Infact it saves on rent expenses while it operates in the apartment.
Capital Markets: This is another avenue where financing can be acquired. Under this, you can have private equity (P.E) and public equity. The former is from private companies availing financing by investing in your startup/SME. E.g. venture capitalists (VCs), angel investors, investment clubs, etc.
Public equity is for entities listed on the stock market or stock exchange like the Uganda Securities Exchange (USE), Kenya Securities Exchange (KSE), Dar es Salaam Securities Exchange (DSE), London Securities Exchange (LSE), New York Securities Exchange (NYSE), etc.
Other than those sources being available to the private entrepreneurs and enterprises, the government also has access to such, especially public equity or the stock market. How? Government borrows in form of or by offering Treasury Bills (TBs) from all the three (3) places we mentioned above. TBs last for several days to a year or more.
For example from National Social Security (NSSF) records, about UGX10Tr is taken by government. You should remember that the source of finance or the places to get it from factors in the time period. Here we mean, short-term (0-3 years), mid-term (3-10 years) and long-term (above 10 years).
And as far as this is concerned, the Ugandan financial market is valued differently in a time period for any entrepreneurs looking for finance. So in Uganda, for entrepreneurs/SMEs with short-term (0-3 years) financing goals, there is about UGX12Tr to access, UGX0.5Tr to access for mid-term (3-10 years) financing goals and about UGX12Tr to access if the investment goal is long-term (for more than 10 years).
For individual entrepreneurs or enterprises or even ordinary person looking at 10 years, the best financing option is mortgages and remember that for the Ugandan market, NSSF has about UGX10Tr in mortgages. The remaining UGX2Tr is taken up by insurance companies or sector players and the capital markets (capital markets authority – CMA).
In the Part 2 of this article, we shall explore why Ugandan startups/SMEs fail to make use of such finance sources. I will tell you where they go wrong. I will also disclose to you what cheap and alternative finance sources are available, where and how to invest such finance for long-term internal cash flow goals.
NB: This article first appeared on Medium, by the same author. Click here
About the Writer
Julius Masaba is a private investment researcher and business consultant. He also works with Ablestate, https://www.ablestate.org/ and a WordPress writer/blogger on startups, entrepreneurship, business and finance. He loves tech.