But what is the reality of all the investment choice available for any? Well, this article tends to provide answers to it.
#1. BANK LOAN
Most banks provide loans for startup businesses/SME, but difficult lies from the proper disclosure of information during application to the availability of substantial collateral by applicants. Entrepreneurs may decline from providing detailed information on their proposal for fear that such disclosure may compromise their intellectual property, or result in piracy. The lack of adequate information about a proposed SME segment is likely to result in the rejection of a loan application.
Also most formal financial institutions, like banks, require assets like land, building, vehicle, and share certificates as collateral, while informal sources of funds, require guarantors or groups, to serve as collaterals. The need for collateral, by both the formal and informal financial institutions, is a major obstacle to startup funding, as many of them are unable to come up with the collaterals demanded. Many SMEs, in developing countries, possess movable assets, such as the goods they produce, their machinery, their account receivables, intellectual properties’ rights, etc., which are used by firms in advanced economies, as security to obtain bank loans.
However, most of these assets cannot serve as collateral in developing countries because of their unsophisticated collateral system. As a result for instance, about 99% of movable assets that could easily serve as collateral in the United States are not acceptable in Nigeria.
#2. EQUITY FUNDING
In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. Equity funding refers to any means of financing your business in which you receive money in exchange for issuing shares of your stock. Stocks are equity because they represent ownership in a company. There are multiple methods for raising equity capital, but, depending on how you raise this money, you could be giving up anywhere from 1-100% of your business. These methods includes through private equity and venture capital.
Private Equity (PE) and Venture Capital (VC) have begun to gain some attention in Nigeria as viable means of business financing, owing to the increasing numbers of startup businesses in Nigeria. Financiers of this company known as angel investors might be professionals such as doctors or lawyers, former business associates -- or better yet, seasoned entrepreneurs interested in helping out the next generation. What matters is that they are wealthy and willing to invest hundreds of thousands of naira in your business in return for a piece of the action.
Angel investors gives you money and you sell them equity in your company, but for most startup business, it quite hard to find an angel investors ready to finance a business that is still in conception stage or hasn’t provided any tangible return on any investment.
The upside is that an angel investments can be perfect for businesses that are established way beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy. Many businesses receiving angel investments already have some revenue, but they need some cash to kick the enterprise to the next level. Not only can an angel investor provide this, but he or she might become an important mentor. Because their money is on the line, they will be highly motivated to see your business succeed.
But the downside is that you could be giving away anywhere from 10 to more than 50 percent of your business. On top of that, there's always the risk that your investors will decide that you are the business' greatest obstacle to success, and you could get fired from the company you created.
Angel investors, like banks, also like to see an end game down the road that will allow them to pocket their winnings, whether it is a public offering or your business getting acquired by another company. Whichever the case, they are always looking to make money, most times, more money that you can make.
#3. FAMILY AND FRIENDS
Young entrepreneurs most time delude themselves with the thought of starting a business and having a family or friend to join in to finance it. Just like any investor, a family or friend willing to invest in your business must have weighed the prospect of your idea with the risk involve before adding a kobo.
Most start-up had to face this reality and it has cost them a great deal. Although, there are several cases of family or friends investing in a startup business if they share the same enthusiasm for the business idea, but the challenge lies in finding the right person to share your idea with, without compromising your intellectual property.
#4. YOU
That’s not an acronym, it simply means you are going to be the first investor in your business and the only one truly willing to bear the risk of failure. It’s not just your time or energy, your money has to also go into your business because no one is ever ready to finance a project where the owner hasn’t made a significant input of his own finance. Not much is going to be said about this, if you are willing to start a business them you really have to consider how much of your personal finance you are willing to give to it, before you can start asking any individual or institution for investment.
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