Kayode Omosebi: MSME Financing… Trying Out a More Realistic Approach for 2016

“Life presents a success with two alternative roads, either go ahead or stop there with the present” Lity Munshi.

The need to access new sources of finance by Micro, Small and Medium-sized companies (MSME) in Nigeria is well recognized. It seems that MSMEs still remain almost wholly dependent upon banks, whose ability to lend has become constrained, as the struggle for safety has become more important than the need to create risky assets. It has become a hard call to fund MSMEs; you can’t use deposit from the public (You & I) to fund businesses that are not well structured enough to understand all the risks involved, Haba! It requires some “balls” to get one’s hands dirty in the MSME field.

Financing is probably the biggest challenge that MSMEs face, but if optimized and understood it can become a gain point!

They say it is easier to sell one million units of a product to one million people for one Naira than to sell one unit of a product to one person for one million Naira. The same thing is applicable in business funding; getting one million naira from one person is much more difficult than getting N50,000 from twenty people.

This brings us to a very possible alternative to explore in 2016, called Crowd Funding. Crowd funding entails raising small amounts of money from a large number of people. It is a term used to describe individuals coming together to support and directly fund projects by other individuals and organizations. For MSMEs, crowd funding can be an engine for job creation and development. Everybody is talking about the crowd these days. Crowd funding is grabbing headlines in every corner of the world, as the movement is transcending borders, cultures and even political barriers.

Three models of crowd funding are; Donations, Philanthropy and Sponsorship; Debt; and Equity.
Because it is relatively easier to understand and implement, our main focus would be the debt channel for now. Unless your prospective investors are sophisticated investors, taking money as a loan is generally cleaner than selling them a share of the business for two basic reasons:

• Even small equity owners might believe that they have the right to have a major say in the strategy and operations of the business. You may not want to constantly get business advice from your many investors …too many cooks spoil the broth, as they say.
• The founders of a new business tend to place unrealistic valuations on the business. To avoid giving prospective investors a “bad” deal, a loan that pays a good interest rate might be the fairest approach.

Furthermore, the domestic economy is moving towards a relatively lower interest rate environment, with the CBN dropping the policy rate from 13.0% to 11.0% in a bid to keep borrowing cost low, particularly for the government. Also, with expectation of social reforms and social spending by the Federal government, it is wise to tap into the impending liquidity in the system in 2016. The debt channel, if properly structured can be a Game Changer for your business i.e. Structure the debt to fit into the cash flow stream of the business.

That said, the success of crowd funding in facilitating access to capital can only be as strong as its underlying culture of entrepreneurship. Thus, it is necessary to note the following crowd funding tips;

1. Get a good financial adviser with experience in structuring MSME financing
2. Have a good pitch and story to tell
3. Set realistic goals and time limits; asking for too much or too little can affect your projects’ chances of success
4. Focus on what’s in it for them
5. Adequately engage your first level network of friends, family and supporters
6. Systematically plan your marketing and outreach
7. Understand the power of data and figures
8. Keep expenses low when crowd funding

Dream Big, Start Small, Act Now.” Robin Sharma

Photo Credit: Dreamstime | Edhar Yralaits