How young entrepreneurs can raise capital for new businesses

With the high rate of unemployment, many young graduates, weary of the long wait for job opportunities, have opted to start their own businesses to earn a living.

Fortunately, many have managed to grow these ventures to big outfits that later mature into established limited companies.

Conversely, lots of business ideas have been drained at the point of inception due to lack of start up capital.

The common pathway for these entrepreneurs is to run to commercial banks for loans. But this has proved futile due to inability to afford worthy assets to guarantee the loan.

In addition most people are oblivious of the underlying fact that commercial banks are risk averse and, therefore, do not provide loan facilities for start up capital. Instead, they are keen to lend only to businesses in their expansion stages.

It is at this point that many drop their business ideas to rue in poverty and crime.

But what are the options available to fund a start up?

You need to work out ways of accessing avenues within your reach, for example some mobilised savings from a one-off contract or a part time teaching job.

Alternatively, you can opt to pledge one of your worthy assets to a friend for a loan to finance your business idea, but after a thorough feasibility study on the future potential and performance of the venture.

You can also mobilise support from well wishers who are in support of your business idea or approach any microfinance institution (MFI) with your business plan for funding.

Before the launch of the government’s youth fund initiative to assist young people jumpstart their ventures, most people shunned seeking financial help from MFIs and consequently, little was known about their role as financial intermediaries.

Microfinance, unlike commercial banks, target the economically active poor to fund income generating activities because the poorest of the poor are unlikely to manage a loan and are in dire need of grants and hand outs.

Apart from the business motives of making income from loans, MFIs have social considerations of poverty alleviation and employment generation and, therefore, they do not usually emphasise on collateral — they lend to the poor who do not have tangible collateral to back up their loans.

Instead, they consider strongly the 3Cs of lending — character, capacity and capital as opposed to the banks’ 5Cs that add condition and collateral. To qualify for loans for start up capital without collateral, you will need to form a group with other potential borrowers.

Each member of the group will receive a portion of the loan for their individual business but they will co-guarantee one another.

The group will serve as a moral suasion to coerce any defaulting member to repay their outstanding loan lest the group faces the penalty of denial of further loans or other members become liable for the defaulter.

One advantage with microfinance lending is that it inculcates the spirit of saving where group members are compelled also to make savings with the MFI from the revenues of their businesses. These savings are not available for withdrawal until the end of the loan term.

The compulsory saving will also serve as additional guarantee for the loan, besides building the asset base of the business.

Elsewhere, you can also approach venture capital firms that provide equity financing to business plans or companies with high growth potential.

There are a number of venture capital firms locally offering equity financing for start ups. For you to win their favour, your idea must demonstrate unique characteristics, with clear competitive advantage besides strong market viability and future positive growth projections.

Because of the nature of the risk, venture capital firms expect to share a percentage of all the revenues generated in future as partners. However, due to their stringent threshold requirements, lots of homegrown business ideas fail at the evaluation stage.

If you are fortunate enough to accrue adequate funds use the money sparingly as you monitor the growth of the business. Do not rush to buy huge machines and equipment or even rent a big and expensive office before the business takes off.

Hire services such as professional centres where you can access a small office within a prime area with secretarial services, instead of renting.

Mr Opiyo is a training manager & coach with Tolerance Employee Financial Advisors. email: [email protected]