SMES: How to Attract Fund from Banks, Investors, Donors

About 50% of all small and medium-sized enterprises (SMEs) globally fail within 5 years of their existence. In Nigeria, this rate is even higher. The leading cause of this high startup mortality rate is not the lack of customers or innovative business ideas or bad location, but poor access to finance.

Similarly, contrary to popular opinion, the dearth of funding for SMEs, especially in Nigeria, is not just the result of limited funds from fund providers. It is also the result of the poor corporate governance structures that entrepreneurs have put in place for their businesses. Beyond attracting customers, many Nigerian entrepreneurs lack the basic understanding of what it takes to run a successful business.

Below are 5 simple but powerful corporate governance insights that will make your small business more attractive to banks, angel investors, venture capitalists (VCs), private equity firms (PEs) and donor agencies.

SEPARATE YOUR BUSINESS FROM PERSONAL FINANCES
A major factor that has limited the growth, development and scalability of many small and medium-sized enterprises (SMEs) in Nigeria is the failure of the business owners to separate their business and personal finances. Many Nigerian entrepreneurs run both their personal and business-related transactions through the same bank account, which is typically an individual savings account.

This limits in no small part the ability of such businesses to attract funding because their financial records and key performance indicators like revenue, expenditure and income are difficult to isolate and analyze by fund providers. Before any funder puts their money in your business, they must first assess its financial performance over a given period of time. When this financial performance is difficult to analyze because your personal and business transactions are muddled up, it becomes a red flag.

DOCUMENT ALL TRANSACTIONS
There is a good chance that you run a B2C business where cash-based transactions from walk-in customers are more common than e-payments. If that is the case, then your corporate bank account will not paint a true picture of the volume of transactions and activities that your business witnesses when analyzed by potential creditors and investors.

To augment your bank statement, you must imbibe good bookkeeping practices by maintaining a sales book or, better still, a bookkeeping app where you will record all your cash-based and electronic transactions.

PAY YOURSELF A SALARY
Cultivating financial discipline is critical to your success as an entrepreneur. It’s pointless maintaining a corporate bank account for your business if you are still going to dip into it from time to time to meet your personal needs.

Of course, there is no way that you are not going to take out money from your business to meet personal needs, after all, that is why you’re in business in the first place. But you need to put a structure around it so that it is not done indiscriminately.

If you must take out money from your business, the best way to do it is to put yourself on a salary. Determine what you are going to pay yourself as salary by analyzing your business’ financial performance over a six-month or one-year period. To ensure that salaries do not take up a huge chunk of your operating expense, keep all the salaries you payout to yourself and other employees below 50% of your profit.

If an exigency that requires you to take more money from your business than your salary would ordinarily permit arises, consider the difference between your salary and what you are taking as a loan from your business to yourself, which must be repaid as soon as possible. Doing this will help you plug unnecessary leakages from your business.

LEARN HOW TO INTERPRET A FINANCIAL STATEMENT
In today’s digitally driven world, data is king. If you’re not able to interpret, understand and leverage the data that is emanating from your business, then the world is fast leaving you behind. As an entrepreneur, your business data is your most critical asset. How you leverage it matters a lot.
If terms like balance sheet, assets, liabilities and cash flow sound too overwhelming, then it’s time for you to take a crash course in business accounting. You don’t need to be a chartered accountant to run a successful business, however, a foundational understanding of business accounting is essential.

TAKE YOUR BUSINESS ONLINE
About 60% of the global population currently have access to the internet. In Nigeria alone, there are about 130 million internet users out of an estimated population of 200 million and this number is growing exponentially every day. Today, many people get their information online as opposed to traditional channels like the radio or the television. If your business has not yet leveraged online platforms for branding, marketing and communication, what are you still waiting for?
Building a solid online presence for your business will expand its reach, expose it to a larger market, make it more accessible to existing customers and build its credibility. It is almost impossible for funders to put their money in your business if it doesn’t have a strong and reputable online presence.

CONCLUSION
Entrepreneurship is a fiercely competitive landscape. Little things can make a big difference and give you an edge over your competitors in the market and in attracting investments. Taking these five steps today will help you develop a solid corporate governance structure and stand out from the crowd.

Source: Nairametrics

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