How SMEs Can Raise Capital

19 September, 2018 / Blogs

Capital is money or resources set aside for a specific purpose, usually starting or expanding a company. All businesses, regardless of their size, need capital to offset daily running costs, build infrastructure, for marketing, research, and development, customer acquisition, among others. Large companies often have many options open to them as far as financial backing is concerned. However, for small and medium enterprises (SMEs), securing conventional financing can be a great challenge and could mean their death. Luckily, there are a few alternatives through which SMEs can raise capital, as discussed below:

  1. Bootstrapping

This is the act of funding the business from your personal finances. These include savings, income from other investments and pension. This method is an ideal starting point for new ventures, especially if market validation of their products or services is yet to be done.

The advantage of this method is that the owner of the SME has complete control. IT could also be used to convince investors to get on board since it demonstrates the owners’ confidence and commitment to the business. After all, how can you expect another party to commit funds to your venture if you have not done so first?

  1. Angel Investing

This is having successful entrepreneurs and or corporations committing their funds to your business for potential future gains. They are willing to invest at startup or the early growth stage in exchange for equity in the venture. They could be friends or family members but are mostly strangers interested in helping new companies with innovative ideas to bring them to fruition. Some of the angel investor networks in Kenya include;

  • Kenya Angel Investors
  • Adlevo Capital
  • African Business Angels Network
  1. Venture Capital Firms

These are firms that have done market proof and have initial revenues and inject quite a substantial amount of capital into an SME. In exchange, they get equity in the company, which means a seat in the board and a say in the activities of the SME. In some instances, the injected capital can be structured as a convertible debt. A successful example of an SME that pursued venture capital funding is Safaricom-backed logistics company, Sendy, which has just completed a $2 million funding series. Some of venture capital firms Kenyan SMEs can consider are:

  • VC4Africa
  • Safaricom Spark Fund
  • DOB Equity
  • Savannah Fund
  1. Crowdfunding

This is the practice raising of capital by getting small contributions from the public, usually via an online or mobile-based platform. The contributors then receive some sort of reward from the business, which could be gifts, discounts or even equity. This is still a new concept in Kenya but we have some inspiring success stories, such as Enda, Kenya’s first running shoe brand, which raised USD128,187 on Kickstarter. Examples of locally accessible crowdfunding platforms are:

  • M-Changa
  • One Percent Club
  • Kickstarter
  • Indiegogo
  1. Loans

This is where a business borrows from an individual, microfinance institution or a bank an amount which should be repaid after a specified period with interest. Loans can be difficult to access, especially where security is required. However, technology has made it easier to access unsecured loans from mobile-based services such as M-Shwari, Branch, Tala, LoanBee, among others. The main drawback of some of these applications is that they are unregulated and sometimes charge exorbitant interest.

In conclusion, securing finance is not as difficult for SMEs as it once was, and the options outlined above are proof of that. Furthermore, innovation and advances in technology means that the list will keep growing. If business owners think outside the box, or at the very least, do their research, getting capital will never be a problem.

 

The writer is Founder & CEO of Mlinzi.co.ke

 

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