07th August, 2019
By Julius Masaba
Welcome back esteemed readers.
In part 1, we concluded after knowing what sources of finance you can make use of and also highlighted in detail about the places where to find them. In this part, we are going to look at additional sources of startup/SME finance and some examples plus a few case studies.
Truth be told, not all young businesses (startups) or entrepreneurs usually get lee-way in accessing finance. It’s always an uphill task and not a sure deal. What is surely known is, if they do, they will get the finance at a very high cost (interest rate).
And remember the finance providers we talked of (especially commercial banks) most times don’t care whether you are young, small or big, blue chip company. If not, there are ‘plugs’ assisting you to take debt amounts through the back door at even low interest rates – very risky and unethical.
Truth is, startups or young entrepreneurs always complain of the high interest rates. The reason is that banks want to make a return on their customers’ savings and also be able to top up the same savings with ‘something’ at the end of the year.
Not only that, but they also want to reduce exposure to credit risk (cases of default). You have heard countless times banks closing at the end of the financial year with non-performing loans (NPLs) in billions of Shillings. Ask any banker.
Entrepreneurs, startup or young business owners should be aware that excessive demand for bank’s liquidity makes the interest rates go up. There is nothing banks or borrowers can do about it. It’s demand and supply that dictates.
In low developed countries (LDCs) or third world nations/emerging markets like East Africa, West Africa, Indo-Asia (India, Bangladesh, Sri Lanka, Pakistan, etc.), startups and young businesses are advised to approach social security funds and their respective capital markets for finance.
For the case of Uganda, entrepreneurs should look at funds like NSSF, Capital Markets Authority (CMA) for financing opportunities. These fall under the public equity sources. Aside from that, startups and entrepreneurs should have a financing plan or strategy – I mean they should have options, not relying on one prospective source to avoid disappointments.
There are many other sources of startup financing for entrepreneurs, such as;
- Boot strapping – from
- Inner circles – friends, & family
- Grants – from NGOs, government MDAs, for-profit corporations etc.
- Credit – from banks, MFIs, SACCOs, investment clubs, etc.
- Angels/Angel investors
- Private equity & Venture capitalists
- Bartering – with individuals and entities
- Partnerships – from individuals and entities
- Crowd funding
- Donations – from NGOs, government, for-profit corporations, etc.
- Side hustle
Entrepreneurs or startup/young business owners are highly advised to go to banks only if they are looking for working capital, but not in search of finance to use it as capital to start their businesses.
In Uganda, very few entrepreneurs and young businesses have been able to raise finance after several years of operation, mainly from private equity firms. This is because they tend to have convincing traction, a desired sector, amounts required, etc.
Private equity firms are dependable. Some of the most successful private equity firms in Uganda so far include; Development Finance Company of Uganda (DFCU), Quality Chemicals (now Cipla-Quality Chemicals), Biyinzika Farmers (now Biyinzika Poultry International).
Quality Chemicals was joined by an Indian pharmaceutical – Cipla and then went public, just of recent; while Biyinzika gave out some huge stakes to a US based firm through Pearl Capital Partners (PCP) 2 or 3 years ago.
Financing aside, startups and young businesses should have financing and investing plans (short, mid and long-term). As they are in the search for financing, they should also be looking at avenues for investment, because it’s the only way that they will be assured of some income.
Investments are supposed to bring in income and as far as income is concerned, it varies – there are different classes of income owing to the different investment types, such as;
Fixed Income: This is income that you or a business expects or plans to receive after a fixed period of time and it includes; salaries, rent and interest income from Treasury Bills and Treasury Bonds (read about these here http://www.bizcommunity.com/Article/196/516/131435.html. These carry a fixed return (from fixed term investments) to the investor or intended claimant.
Equities: These are private firms that have invest capital in businesses on a private arrangement. They later catalyse the process of having an initial public offers (IPOs). Leading to another type of finance/capital for the business.
Private listed companies then welcome private individuals and entities to buy their shares as an investment, eventually making them ‘public’. Shares carry a non-fixed income given as a dividend at the end of the year. For Uganda, we have many under the Uganda Securities Exchange (USE).
However, there is a poor individual investment in blue chip companies listed on the USE bourse. Ugandans shun buying shares, mostly the long-term. Some fear risk and price volatility while others have a high consumption rate compared to investment. The reason is lack of investment education.
Still Ugandan startups and big companies don’t make it to the USE and one of the main reasons for that is because of their poor corporate governance structure/systems and others are mainly family owned (man & wife, woman & husband, man and other relatives, etc.).
No wonder 80% of USE listed companies are foreign and just 20% are local (Ugandan). The USE bourse has about 17 listed companies.
Real Estate: Every one of us is familiar with these two words. Simply put, this is land, houses, ranches, etc. In the recent two decades, it has been the most selling item in Uganda, selling like hot cake. For most Ugandans in the working class (corporates), number one investment is buying land, constructing residential houses (rentals) and starting to collect rent. Other investments come second.
For the downtown and some uptown businessmen, dealing in real estate (land, houses) is big business. It’s a buy-sell-repeat cycle. In the West, it’s buy-develop-sell-repeat, although in Uganda it has been taking some shape – real estate development and planned residences. It makes money.
However, personally I see it as a sleeping man’s business – there is no value added, no creativity to it, etc. Another bad side to investing in real estate is that, it’s brick and mortar – it’s not liquid at all. You can’t sell it at short notice in case you need spot cash for your liquid-based operations.
We shall start from here next time, with part 3 (last part) of the article.
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.