This blog post considers the role of banks in financing small business start-ups, and identify realistic sources of funds available to an Entrepreneur who wants to start a micro or small business.
Banks and Government Special Funds
The commercial banks are not very helpful. They would rather give money to established businesses with sufficient history and good record keeping in order to reduce their risk. In addition, they want collateral and guarantees which are not within the reach of small business start-ups. Microfinance banks, set up to address the funding needs of small businesses, also have their conditions, though usually less demanding, but charge interest monthly. The interest can be as high as 5% or 60% per annum. How many businesses can access fund at this rate and still be profitable?
Realistic Sources of Funds
You can raise funds from angel investors – investors who look for good business opportunities to invest in. But you need a bankable business idea in terms of its prospects supported by a well written and implementable business plan. And not a bankable business plan with unrealistic profit projections and cash flow forecasts that may not lead to a sustainable business. This is usually the case with many small business owners who hire consultants, who know little or nothing about the business, to write ‘bankable business plan’ from the beginning to the end for them. It does not work. You need to own your business plan. This does not diminish the importance of professional assistance in some areas of the business plan, like research, market and financial analyses and other technical areas.
A sure way to fund a business start-up is your own savings. This is not quite easy though. Many people, unemployed and even some employed, who need to start their own businesses for a brighter future live from hand to mouth, and saving for them is a herculean task. However, if you are employed, then you may want to use the following resources, in addition to savings where possible, to start your own business:
- Housing Allowance or other bulk salary payment in advance (up front)
- Gratuity
- 25% bulk pension payment
Family members and friends can also provide business start-up funds. Your business plan and your ability to convince them that you will put their money to profitable use are very important.
Grants by government agencies and private organisations such as YouWin, Tony Elumelu Foundation, and others. You need to work hard to meet their requirements. Those who get the grants are not from the moon. You can get it too.