As you start out in business, one of the key things you need is funding. Today, we show you things to consider while Company fundraising in Nigeria
The ability to raise money is crucial to a business’s survival. All firms, whether they are public or private limited companies, are established with the goal of making a profit. Increased revenue depends on higher growth, and firms throughout the world scale up operations to achieve stronger growth.
A prevalent misunderstanding among those who are not familiar with business is that organizations often seek finance because they may have had a revenue loss and are searching for cash to scale up from the loss. The list of reasons why businesses seek financing is lengthy. This idea that a company’s losses will necessitate financing is false. As you will learn by reading this article, it is also impossible. Investors never take the risk of funding a business that consistently posts losses; it is not worthwhile.
The two main ways that businesses obtain finance across the world are through equity financing and debt financing. For companies looking to raise funds, selecting the optimal financing approach has become a challenge. Another tool at their disposal is a hybrid finance strategy, which uses both equity and debt funding.
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This research looks at several financing alternatives and company fundraising solutions in Nigeria. The procedures to use when deciding which financing option is best for your company are enlisted below.
Contents
How to choose the best finance solution while company fundraising in Nigeria
It is generally acknowledged that deciding which financing option is best for a company is the first step to financing. When a business offers shares in exchange for investment, this is known as “equity financing.” In this case, the investor becomes a shareholder in the company and is not entitled to the return of their money with interest. The shareholder is entitled to dividends on his share, though, after the directors have declared them.
As opposed to equity financing, debt financing involves a loan structure. In this case, the investor’s money is returned along with the interest that is due on the debt. The investor does not hold any stock or have any involvement in the operations of the company.
While some options are more favorable for the funding of certain companies, others are not. The best course of action is to consult professionals before choosing the funding style you intend to take. It’s important to understand the conditions to watch out for when raising money for businesses.
1. The investor’s expertise
When deciding whether to use an equity financing strategy or a debt financing strategy, the investor’s expertise is a key factor. An investor with extensive knowledge of corporate management or the industry practices in which the company operates is attractive, hence the company’s adoption of equity financing.
It is obvious why a company will choose equity financing over debt financing. In such a case, the investor can contribute his expertise to the company’s success.
For instance, a company choosing to invest in their company with Aliko Dangote, the richest man in Africa, would probably prefer the equity financing option. This is likely due to Dangote’s track record of successful business management.
2. The nature of the product or service the company offers
A debt financing option might be the most effective for raising capital. This is if the company provides a cutting-edge product or service that is new to the market. While raising capital, the business founders can maintain control of their product or service by using debt financing.
If given shares in the company, high-net-worth investors would probably jump at the chance to seize control of it. Investors may view the company from a variety of perspectives and aim to control the earnings in the future. A debt financing strategy would preserve the company’s management structure.
3. The duration of the project
The length of time needed to complete the proposed project is crucial to selecting a financing method. Equity financing projects are likely to be chosen for projects that take longer to complete. Businesses use planning strategies to their advantage.
It can be very risky for the business to have a long-lasting project and debt financing, especially if the company doesn’t generate much revenue annually.
For instance, if a Nigerian business requests funding to build a factory in Kenya, it will probably take years to complete the project. If the factory construction process takes five years and the funds needed to complete it are borrowed and due after that time, there will be interest due at the end of each year the loan is outstanding, which may likely lead to insolvency.
Even more damaging is the fact that the company hasn’t yet begun operating in Kenya, for which they obtained the loan, but has already begun paying the loan’s excessive interest.
This is similar to the Dangote Refinery, which began construction in 2016. The Dangote management sought a $3.4 billion loan from the Nigerian National Petroleum Corporation (NNPC) in 2021. The management opted for a 20% equity stake in the refinery as a consideration for the investment.
As of the date this work was published, the Dangote refinery is yet to be completed. The adoption of the equity financing method by Dangote saved the company millions of dollars in interest payable from 2021 to this date.
4. The amount of funding
Equity financing is more appropriate for funding larger amounts. The likelihood of the business paying the interest and the principal sum increases with the small size of the loan offered. For instance, a business with a 20 million dollar annual revenue seeking a 15 million dollar investment will be wary of using a debt financing structure.
The market’s shifting demand for a company’s shares affects the share price of that company. Companies can take advantage of the high demand for their shares to increase the price at which they are sold. This gives investors a considerable equity stake while still receiving the necessary funding.
Conclusion
Those are some of the things to consider as you go into Company Fundraising in Nigeria.
Most businesses routinely raise money as part of their daily operations. If growth prospects appear positive, businesses will use debt or equity financing structures to leverage extra money.
The details listed above serve as a checklist to aid firms in choosing a financing plan. However, the chosen funding strategy is a collaborative effort between the firm and the investor, with the latter frequently exercising the most influence.