This article is prepared after interacting various participants from West Africa & South Africa
As per the study by the International Finance Corporation which estimates up to 84% of Small and medium sized enterprises (SMEs) in Africa are either un-served or underserved representing a value gap in credit financing. There is no enough capital right, many of the new ventures are simply not able to get funds. Financiers pointing out that there is a lack of good business plans, focusing to issues ranging from the quality and feasibility of the business ideas to the commitment of the entrepreneur and his or her team. The main sources of financing are personal and family loans (45%), private equity (19%), bank debt (18%), government funding (5%), venture capital (5%), angel seed (4%) and other (4%). “Other” funding sources include corporate funding, lease / receivables financing or stock options. Some entrepreneurs in South Africa claim that their businesses are funded using multiple credit cards because most banks are reluctant to provide a loan to businesses but are willing to increase limits on the entrepreneurs’ credit cards expensive, but easy. The majority of respondents are in agreement that the cost of funding is too expensive. The report found that in some cases, banks require 150% of the borrowed amount in collateral. An alternative, government lending, could be more attractive was it not for bureaucracy and nepotism reported by some respondents.
Venture capital in Africa is still an emergent phenomenon and the majority of survey respondents (67%) agree. Entrepreneurs are forced to pursue bank loans which simply are not tailored for start-ups. Banks see start-up investments as high risk, low reward and like to quote statistics that show 9 out of ten start-ups fail within the first five years of operation. Entrepreneurs need to focus on being rigorous business planners and demonstrating their understanding of a particular sector to investors. Entrepreneurs must “know something about everything and everything about something” says the founder of First Rand Group in South Africa, Paul Harris. Finance is not the determining cause of a venture’s success or failure. “Rather, the entrepreneur’s ability to adapt to market changes and cope with uncertainty, as well as their level of tenacity, is greater determinants of a business’ success.” Entrepreneurs also forget about market access. Without multiple product channels, revenues and profits likely stall and this lack of growth makes funders reticent to invest.
Some of the following suggestions are given for enterprise financing in Africa:
Early-stage enterprise financing in Africa;
- Reduce bureaucracy for early-stage companies to access government funding in order to provide ‘softer’ sources of financing for less-experienced entrepreneurs.
- Expand or initiate local angel investing ecosystems to ensure the availability of the most appropriate type of funding for start-ups, especially for entrepreneurs who lack the network of friends and family that traditionally play this role.-
- Provide tax and other incentives to formal, as well as informal (e.g., family and friends), angel investors to make it easier for people who have extra cash to invest in start-up businesses and reduce their risk.
- Provide tax and other incentives for large clients of early-stage ventures to provide supplier credit to incentivise and reduce the risks suppliers take when providing generous payment terms and/or stock to new ventures.
Mid-sized enterprise financing in Africa;
- Leverage indirect personal sources of funding, such as pension funds to fund SMEs, so that more resources are available to fund more-established enterprises where the risks are lower.
- Expand or initiate local venture capital investing ecosystems to ensure that the most appropriate source of funding is available for companies at the mid-level stage of development.
- Use local banking systems to disburse donor or government lines of credit to SMEs to reduce prohibitive interest rates and collateral requirements.
- Provide incentives and support to mid-sized SMEs to practise sound financial management and maintain adequate records, including audited statements.
Later-stage enterprise financing in Africa;
- Create capital-raising engagement programmes with leaders of well-established private African enterprises to inform entrepreneurs about the benefits of private equity funding, as well as the benefits of listing at local stock exchanges.
- Create continent-wide ‘regional champions’ programmes to facilitate access to capital (both debt and equity) for independently vetted pan-African companies that are expanding across the continent.
- Educate entrepreneurs about possible sources of funding outside banking systems.
- Train and assist early-stage entrepreneurs in the intricacies of capital-raising.
- Train the local financial community to evaluate investment opportunities on the basis of future prospects rather than historical cash flows.
By Sunil Taneja
Programme Officer
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