Exploring Alternative Financing Options For Small Businesses

Small businesses in Nigeria are presently facing the effect of an economic crunch but there are alternative financing options for small businesses that can be explored.

There are many different types of financing available for small businesses, each with its own advantages and disadvantages.

Before pursuing any alternative financing option, thoroughly research the terms, costs, and potential impact on your business.

It is important to choose a financing option that aligns with your business's goals and financial situation.

Starting a small business in Nigeria

Starting and running a small business in Nigeria involves several steps and considerations.

Here's a general overview to guide you:

● Idea and research

Identify a business idea that aligns with your skills and interests. Conduct thorough market research to understand your target audience, competition, and market trends.

● Business plan

Create a detailed business plan outlining your business goals, strategies, target market, competitive analysis, financial projections, and marketing plan.

● Legal structure

Choose a suitable legal structure for your business, such as sole proprietorship, partnership, limited liability company (LLC), or corporation.

Register your business structure with the Corporate Affairs Commission (CAC).

● Business name registration

Select a unique and relevant business name and register it with the CAC. This is a crucial step to establish your legal presence.

● Permits and licenses

Acquire the requisite licenses, permits, or certifications essential for your industry or location. This encompassing process involves securing local government licenses, obtaining health permits, and acquiring permits tailored to your specific industry requirements.

● Funding and financing

Determine how you'll fund your business. This could involve personal savings, loans, grants, or investments from family, friends, or investors.

● Location and premises

Decide on a physical location for your business if applicable. Ensure the location is suitable for your target market and complies with zoning regulations.

● Business bank account

Open a business bank account to manage your finances separately from personal funds.

● Branding and marketing

Develop your brand identity, including a logo, colors, and tagline. Create a marketing strategy to promote your business, both online and offline.

● Staffing

Determine your staffing needs and hire employees if necessary. Comply with labour laws and regulations related to employee contracts, salaries, and benefits.

● Build supplier and vendor relationships

Establish relationships with suppliers and vendors who can provide the products or services you need to operate your business.

● Online presence

Initiate the creation of a business website and establish profiles on social media platforms, thus enhancing your online visibility and effectively engaging with your target audience.

Alternative financing options for small businesses

Small businesses often need diverse sources of financing to support their growth and operations.

In addition to traditional bank loans, here are some alternative financing options for small businesses:

1. Crowdfunding

Crowdfunding platforms like GoFundMe allow businesses to raise funds from a large number of individuals who believe in their product or idea.

In return, backers may receive rewards, products, or equity in the business.

2. Angel Investors:

Angel investors are individuals who invest their personal funds in startups or small businesses in exchange for equity or convertible debt.

They often provide not just capital but also valuable mentorship and connections.

3. Venture Capital

Venture capital (VC) firms invest in early-stage companies with high growth potential. In exchange for their investment, VCs usually take an equity stake in the business and play an active role in its growth.

4. Peer-to-Peer Lending

Peer-to-peer (P2P) lending platforms like KiaKia connect businesses seeking loans with individual lenders. This can be an alternative to traditional bank loans, often with more flexible terms.

5. Invoice Financing

Invoice financing or factoring allows businesses to sell their outstanding invoices to a third party (factor) at a discount in exchange for immediate cash can be used as alternative financing. This can help improve cash flow.

6. Equipment Financing

If your business requires specific equipment, you can consider equipment financing, where the equipment itself serves as collateral for the loan.

7. Microfinance Institutions

Microfinance institutions provide small loans to businesses and individuals, particularly those in underserved communities. They often have more lenient eligibility criteria than traditional banks.

8. Grants and Competitions:

Various organisations and government agencies offer grants, prizes, and business competitions that provide non-repayable funds to support business growth and innovation.

9. Self-Financing

Using personal savings, assets, or contributions from family and friends can be a source of initial capital for your business.

10. CDFIs

Community Development Financial Institutions (CDFI) offer financing to businesses and individuals in economically disadvantaged areas, focusing on community development and economic empowerment.

Mistakes to avoid when seeking financing for your small business

Avoiding common mistakes when seeking financing for your small business can improve your chances of securing funding and ensuring a positive financial relationship with lenders or investors.

Here are some mistakes to avoid:

● Insufficient research

Not researching the types of financing available, their terms, and the requirements of different lenders.

● Unclear business plan

Presenting a vague or incomplete business plan to lenders. Develop a detailed and well-structured business plan that outlines your business goals, strategies, financial projections, and repayment plans.

● Overestimating borrowing capacity

Overestimating how much you can borrow or afford to repay can be damaging to your business and reputation.

Calculate your business's ability to repay debt realistically based on your cash flow and financial projections.

● Ignoring credit score

Check your credit score, address any discrepancies, and work on improving it if needed before applying for financing.

If not, you may end up applying for financing without understanding your credit score or trying to secure funding with a poor credit history.

● Focusing solely on interest rates

Choosing a source of financing solely based on interest rates without considering other terms and fees could be a big mistake.

Evaluate the overall cost of financing, including fees, repayment terms, and potential penalties.

● Neglecting documentation

Failing to prepare necessary documentation before applying for financing.

Gather all required documents, such as financial statements, tax returns, and business licences, before seeking financing.

● Underestimating collateral requirements

Assuming you won't need collateral or not understanding the collateral requirements of lenders.

Be aware of collateral requirements and have a clear understanding of what you can offer as security.

● Not comparing lenders

Approaching only one lender without comparing offers from multiple sources has proven to be a disadvantage.

Obtain quotes from various lenders and compare their terms, interest rates, fees, and overall suitability for your business.

Overlooking Repayment Capacity:

Remember that seeking financing is a critical step that can impact your business's financial health in the long run. By avoiding these mistakes and making informed decisions, you'll increase your chances of securing the right financing that aligns with your business goals and needs.

Bonus tips for small businesses in Nigeria

Starting a small business requires careful planning and dedication. You would also need to consult with legal, financial, and business professionals.

Here are some additional tips to help you navigate the complexities of setting up and running your business successfully in Nigeria.

● Branding and marketing

Develop your brand identity, including logo, colours, and tagline. Create a marketing strategy to promote your business to your target audience.

● Intellectual property protection

If applicable, consider trademarking your business name, logo, or other intellectual property.

● Accounting and recordkeeping

Implement an effective accounting system to track income, expenses, and taxes. Consider using accounting software for streamlined bookkeeping.

● Legal and regulatory compliance

Ensure you understand and comply with all legal and regulatory requirements related to your industry, taxes, and business operations.

● Insurance

Consider obtaining business insurance to protect against risks such as liability, property damage, and unexpected events.

● Grand opening and promotion

Plan a launch event or promotion to introduce your business to the market and attract customers.

● Continuous improvement

Stay updated on industry trends, gather customer feedback, and continuously improve your products or services.

Don’t forget to visit nairaCompare to get more business financing tips as well as information on loans and savings.