Business owners are expected to learn the first rule of business which is “do not run out of money”, the second rule of business is to have proper systems and procedures in place and whatever happens don’t run out of money. It has been established many times over that cash flow is the absolute lifeline of any business.’ Without it, a business can lose steam very quickly, dry up and eventually go bust. Business owners, entrepreneurs, founders and co-founders can all agree that capital is necessary not just to stay afloat but to attain new business targets and objectives. The ‘why’ is always easy to identify but the “how ” is not always clearly defined or straightforward.
There are two major routes for capital raising, either through debt or equity financing. Taking out a business loan with a commercial bank or approved lender is classified as a form of debt financing and considerably expensive given commercial lending rates in Nigeria are as high as 26%. Fortunately stricter application of banking policies are forcing commercial banks to give out lower interest collateral-free loans up to N10m however this may still be out of reach for many entrepreneurs. Equity financing is another option whereby entrepreneurs give out equity in their business in exchange for funds and access to technical expertise. High net worth individuals, private equity and venture capital (VC) firms typically invest in high-risk startup companies with serious growth potential in exchange for equity.
Growing and scaling your business organically without external funding might seem daunting but it is certainly not impossible if the right approach is taken.
Here are some golden rules for founders seeking alternative business financing options to help their SMEs grow and scale organically without borrowing a dime or diluting business ownership:
- Understand your business needs and know your market
To hit those business growth goals first and foremost, you need to understand the market you are operating in to the last detail. There is a rumour that Dangote knows the price of all commodities he trades in at any given time. Business owners must have a good grasp of the fundamentals around the Market, metrics, technology, Audience, consumer buying behaviours, needs and pain points etc. Knowledge of these areas can go a long way to curating a very thorough list of potential services and offerings. These factors can determine how much capital is required to be shored up and whether or not you need to look externally for funding or begin by bootstrapping. A business that relies heavily on tech will require significant capital compared to a catering business at the onset. It is important to pay attention to the market you are in and not take the slightest details for granted. The business world is dynamic whether you are in education, culinary, creative arts, legal or the world of finance. Temporary or permanent short-sightedness can leave a business vulnerable and unable to maximise its potential. This can hinder its ability to take advantage of alternative business financing options for founders. Also don’t be afraid to diversify into complementary areas that can prove to be long hanging fruits, provided that the resources are in place to deliver.
- Pay attention to Corporate Governance and Structure
In the early days of running a business when the excitement levels and the drive is high, it can become very easy to lose track of proper record keeping, auditing as well as paying attention to systems and processes. It’s important to get into the habit of documenting. This is a good habit that helps businesses stay on track. It is not unusual to find some entrepreneurs using personal accounts for business, receiving income for the business in a personal account or paying for personal expenses from a business account. Allowing a loose dynamic structure for too long can eventually harm the business and enable a lot of financial leakages. It is always best, to begin with, the end in mind and get used to proper accounting processes from day one. An entrepreneur should always act as if he is externally accountable even if he or she runs a sole enterprise. With so many free accounting tools available online there is really no reason not to get organised sooner rather than later. Be Accountable.
- Go Lean(er)
It is great to scale but always remember that with scaling comes more business obligations, increased legal, financial risks and capacity requirements. Learning how to manage resources efficiently is perhaps an underrated skill set. Learning how to adequately manage resources at each growth stage prepares business owners for the next stage and increases the chances of business survival. In the business world, it is about the survival of the fittest – in terms of capital, resources, demand, so it becomes absolutely necessary to run a tightly controlled ship where the development of people, processes and policies are regarded as sacrosanct by all from senior management to the most junior employee. Leading from the top can help take the business further.
- Get Smart and Practical
Getting practical means paying attention to solving real problems and meeting the needs of customers. Solutions driven businesses can enjoy good healthy growth trajectories even if the majority of businesses will never attain the coveted unicorn status. To make a case for the possibility of successfully adopting alternative business financing option for founders, the story of Sophie Amoruso, new generation e-retailer and writer of Girl Boss whose business grew on eBay who made her first million dollars in sales without drawing a loan or getting a VC proves that organisations can grow without necessarily injecting 3rd party capital.
- Cash (flow) is KING
Cash is the lifeline of any business, therefore it is critical to pay attention to maintaining a steady flow as it is critical to healthy positive growth and the ability to scale up without seeking funding. Pay attention to the financial books of your organisation. You don’t have to have a first degree in financial management or accounting to get to grips with financial terms and fundamentals. Thanks to the easy access to free knowledge, social media makes it easy to acquire basic knowledge in bookkeeping. Also, many NGO’s now run programmes for entrepreneurs because financial knowledge and its execution is a solid skill that can go a long way towards helping your business. There are also many free online platforms such as invoice NG, wave that can help you keep track of your incomes and expenditure. There are accountancy firms that focus specifically on entrepreneurs which means it has become easier to outsource services but I do not preach over-reliance on professionals. It is really important to develop the habit of monthly reviews, look at ways to reduce costs and overheads, check for financial leakage. And whatever you do, don’t forget to budget and plan every financial year.
- No such thing as a free launch
For entrepreneurs with a low-risk appetite and not willing to give up ownership or borrow at expensive rates, there are alternative options on the horizon to look into. For entrepreneurs looking for visibility, consider the array of very well publicised startup pitching competitions and events now widely available in your communities or states. Developing strong and winning pitch decks can raise chances of winning because the competition is fierce. There are also angel investors, these are individuals who create pooled funds and as a last resource, there is crowdfunding. However there is a legal caveat, crowdfunding officially has not been endorsed as an option by the capital market regulators in Nigeria. Positively, the Securities and Exchange Commission Nigeria recently announced via news agency Channels that it is seeking to adopt a framework for small business regulation which is encouraging news.
Although access to capital remains one of the biggest challenges for entrepreneurs and is a major determinant for future successes it is not the only determinant for future success and longevity. Making a commitment to building a solid business foundation, the pillars of business growth, deployment of strong IT systems and teams, pay attention to legal and compliance, do things properly all the time not most of the time and always be strategic.