CHALLENGES AND OPPORTUNITIES OF FINANCING A START-UP

Transcription

1 CHALLENGES AND OPPORTUNITIES OF FINANCING A START-UP Victoria Kisyombe (Dr.) Founder and Managing Director of SELFINA Youth Business Linkages Forum August 2014, AU/UNDP 1.0 INTRODUCTION Many of us are familiar with the entrepreneurial challenges associated with the process of building a business from scratch. The top 10 challenges you will face when starting a business from scratch are: (i) Developing the Vision and Business Idea Developing a business idea is usually the first challenge faced by every entrepreneur when starting a business from scratch. Finding the right business opportunity or Envisioning the Idea is the first true task of an entrepreneur. (ii) Raising Capital for your start-up After developing your idea, the next challenge you are going to face when starting a business from scratch is that of raising capital. (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Assembling a Business Team Finding the Right Business Location Finding good employees Finding good customers Dealing with competition Unforeseen business challenges and expenses Keeping up with industrial changes and trends Exiting the business. One Report Accelerating Entrepreneurship in Africa by Omidyer Network in 2012 covering six Sub-Sahara African countries, namely Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania found that financing, skills, talent and infrastructure are Africa s greatest challenges as far as entrepreneurship is concerned in the continent. In this brief paper we look at the challenges and opportunities in financing business startup in Africa. 1 P age

2 2.0 FINANCING CHALLENGES One of the key problems to addressing youth unemployment and poverty alleviation particularly amongst women and youth is the lack of access to financial capital. The associated problems are: (i) Most youths in Africa also lack assets that can act as collateral and mitigate the risk involved. As a result, capital in Africa remains too expensive for most entrepreneurs looking to build a sustainable enterprise. SELFINA provides a model which helps to overcome this problem of lack of collateral. (ii) Lack of fundable business plans: In many cases young entrepreneurs lack vision or proper ideas about the businesses they want to start. They also lack ability to prepare business plans as well as to sell the business idea and vision to potential investors. This requires young entrepreneurs to improve their communication skills and the manner of presentation. In any case the good story or business idea must be backed by a strong business plan and good persuasion skills. (iii) Limited or inadequate Sources of Finance: The questions put by many finance seekers are where do I get finance, how do I get funded? and when do I get funded? Some of the potential sources of finance are too expensive and have stringent requirement for accessing loans, especially youths who have no collaterals to enable them secure bank loans. Some financiers argue that many of the new ventures are simply not fundable. They note a lack of fundable business plans, citing such issues as the quality and feasibility of the business idea and the lack of commitment of the entrepreneur and his or her business management team. 3.0 OPPORTUNITIES Effective promotion of youth entrepreneurship requires adequate funding. In many cases financial sources include: the government, the private sector, commercial banks, Development finance institutions, capital markets, private equity/venture capital, crowd funding and lease finance. These are in addition to own sources including family and friends. In most developing countries governments, donor agencies and NGOs and own sources are major sources of funding. 2 P age

3 4.0 SELFINA CASE: TAKLING SOME OF THE KEY CHALLENGES In response to the challenges of access to finance, SELFINA has taken a lead role as a pioneer of Micro-Leasing in Tanzania, as an effective and practical way of offering credit to women and young girls. Customs and traditions in Tanzania normally make it difficult for women to own land and other tangible assets. Due to this challenging situation, many women and girls are therefore considered not creditworthy by the conventional financial institutions in the country as they lack tangible collateral assets. This leads to poor financial support hence poor access to basic needs and services for women and young girls. The outcome of this challenge has been marginalization of many women in productive economy as well as in decision making processes at family and community level. SELFINA has responded to this problem first by empowering women and girls through training in business management skills and entrepreneurship skills, helping them to make the best use of their limited resources and also through Para-legal training, to enhance awareness of their rights particularly in land and inheritance matters. To go around this barrier of lack of collateral, SELFINA decided to pioneer leasing in Tanzania as a key financial tool to empower women and girls economically and socially. SELFINA helps women build and grow value-creating, sustainable businesses by enabling them to acquire assets for business on lease, and small working capital loans through a sale and leaseback facility. Through leasing, SELFINA brings financial relief to small businesses that would have no collateral for standard loans from formal financial institutions and helps avoid tying up working capital in fixed assets. LEASE FINANCE AND ITS ADVANTAGES Financial Lessing is a medium-term financial instrument technique for the procurement of machinery, equipment, vehicles and/or properties. Leasing provides financing of fixed assets (equipment, vehicles, etc.) rather than direct capital. Leasing institutions (Lessors) banks, leasing companies, insurance companies, equipment producers or supplier, and non-bank financial institutions purchase the equipment and provide the equipment for a set period of time to businesses for a fee. At the end of the period, the equipment is transferred to the lessee or it is totally depreciated and discarded or sold to a third part. Leasing is based on the proposition that profits are earned through the use of assets, rather than from their ownership and focuses on the borrowers ability to generate cash flow from business operations to service the lease payment, not on the balance sheet or on past credit history. This is why leasing is particularly advantageous for new, small and medium-sized businesses that to do not have a lengthy credit history, nor a significant asset base for collateral. 3 P age

4 Leasing has been an important source of medium- and long-term financing for companies, both in developed economies, and in countries with economies in transition. Leasing plays an important role in these countries as an effective means to increase the lessee s asset base, particularly in private and/or new companies and in SMEs, all of which play a key role in introducing innovation and competition in the economy, and result in job creation. WHY LEASING IS IMPORTANT A healthy leasing industry facilitates economic growth, because leasing increases finance flows to the productive sectors of a country s economy, and increases financing options for private businesses. Leasing is an effective mechanism for jumpstarting a growing economy, and is particularly advantageous to developing countries like Tanzania. Some advantages of leasing include: Leasing offers a way to modernize production and develop small businesses. Leasing companies play an important role in the financing of small and mediumsized businesses (SMEs), which require funds to expand, but which often lack credit history or sufficient collateral to access traditional forms of financing. Leasing gives these enterprises an opportunity to create, expand and modernize production. Leasing increases total capital investment in an economy. Leasing is a complementary form of financing that serves as an alternative to traditional bank lending, and increases the ability of companies/clients to source different types of financing for capital investment. Leasing creates competition in the financial market place. Leasing is not as risky as working capital lending, and creates alternative methods of financing businesses in direct competition with traditional bank lending which often requires collateral and extensive paperwork to process. Leasing increases equipment sales. Leasing offers domestic and foreign suppliers new mechanisms for increasing their customer base, and access to new clientele, (i.e. previously poorly financed businesses). IN SUMMARY: In simple terms, a lease is a contract between two parties, where a party that owns an asset (the lessor) lets another party (the lessee), use the asset for a predetermined time in exchange for periodic payment. In leasing, the legal ownership and the use of an asset are separated. Leasing allows enterprises that, either do not wish to purchase equipment because leasing is cheaper, or cannot do so because they do not have the 4 P age

5 required funds and lack access to conventional bank finance, the opportunity to use equipment without having to own it. Leases are broadly of two types, finance leases and operating leases. A typical finance lease is a three party arrangement (Diagram 1) that involves a supplier of equipment, a finance company or bank, and a lessee. The finance company or bank acts as an intermediary between the supplier and lessee by providing the finance for purchase of the supplier s equipment, for the business purposes of the lessee. A finance lease typically extends for a significant period of the equipment s economic life with the risks of equipment obsolescence, maintenance, and insurance being borne by the lessee. In an operating lease, the lease is over a period that is substantially shorter than the asset s economic life. The lessee does not intend to purchase the asset, and the lessor recovers the asset cost through multiple leases and the equipment s final sale. Maintenance costs and obsolescence risks lie with the lessor. SELFINA is engaged in Financial Leasing. In response to the cultural challenge, SELFINA s model allows for transfer of ownership of the assets to the women or girls at the end of the lease period. For most women, it is the first time they get to own an asset in their own name and normally they leverage the asset for accessing further funding. Diagram 1 The three party arrangement in finance leasing Supplier Information after-sales Services Technology Choice Lessee Sale of Object Cash payment of object Lessor Lease Payment Rental Object 5 P age

6 Types of assets that SELFINA offers for lease include: Maize milling machines, sunflower oil pressing machines, water pumps, refrigerators, freezers, sewing machines of various types starting from simple sewing machines to industrial sewing machines, small tractors, irrigation equipment, beauty equipment, motor cycles etc. SELFINA S IMPACT SO FAR SELFINA has financed more than 25,000 women with credit worth USD 16 million through lease finance impacting 200,000 people. More than 125,000 jobs have been created which in turn have had a profound multiplier effect as these women in turn invest in others. Some examples of SELFINA s success stories include: Video: Joyce who leased a sunflower machine which she has used to grow her business. Today Joyce supplies high quality edible sunflower oil to prominent supermarkets in the country but has also penetrated the European market by exporting sunflower oil to Switzerland. Joyce has just leased two more machines from SELFINA to increase the production of sunflower oil. Above all Joyce pre-finances women who grow sunflower seeds and supply sunflower seeds to her factory. Hilda who leased a water pump in an area where the city water services have been limited for many years. With the lease of the water pump, Hilda continues to enjoy an assured supply of water in her home. She also uses the pumped water for her backyard vegetable garden, for her animals, but more important she sells water to the community around her. Above all, by having water, a host of businesses opened up for Hilda. She was able to open a laundry business and a bakery business. The leased water pump became her eureka! Saidat used to run a small business at a market place. After leasing two milling machines from SELFINA, her business has grown. She participates in stimulating the rural financial services by buying maize in bulk from the rural areas then brings it to the mills in the city where on average she grinds and packages about 100 bags daily. Today Saidat has her own brand maize meal under the name Saidat. She has become an important businesswoman within her community. From the income she generates 6 P age

7 she has constructed two houses. She rents out one house and lives in the second house with her family. Rahel in Mbarali, Tanzania, leased a tractor for ploughing her family rice field but also for hiring out to her neighbors within the village. This leased tractor allowed them to plough in the months of December in time for the rains. It was also possible for them to increase the acreage leading to bumper harvest from 20 bags of rice to more than 1,500 bags per season. The increased income has allowed them to pay for children s school fees, improve their home, construct a good and secure storage facility and buy a combine harvester. Rahel also hires out her tractor to other farmers in the village thus generates more income but also improves the productivity of other farms by ploughing early in time for the rains. Rahel is now on a waiting list for leasing a bigger tractor from SELFINA. Justina in Mlandizi, Tanzania, was raising only 100 laying hens when she first approached SELFINA for financial support. After qualifying for a facility, SELFINA, the lessor, buys day-old chicks from a hatchery and leases out to Justina. Over the years she has increased her stock and today Justina has 2000 laying hens. This has profoundly increased her income. Justina and her family have prudently used the income from the poultry business to construct a good family house. IMPACT ASSESSMENTS OF SELFINA S LEASING PRODUCT SELFINA has been working with independent professionals to track the impact of its leasing product in Tanzania. The reports clearly indicate there is a huge impact in women s lives, their families and those around them. For example the studies indicate that most women use the income generated for paying children s school fees, home improvements, paying for hospital bills, growing their businesses etc. Further results indicate 40 % create for themselves, 55 % create jobs for 1-3 other people, 5 % create jobs for 3-6 or more people. Yet other studies show that a positive correlation exists between length of time in SELFINA and revenue growth. The longer an individual is with SELFINA, the greater the growth in revenue. The impact of SELFINA s leasing model has generated praise beyond Tanzania including the World Bank, World Economic Forum, The International Alliance for Women. In June 2014, Victoria Kisyombe, the Founder and Director was honored with a prestigious Global Leadership Award for Africa by Vital Voices Global Partnership founded by Hon. Hillary Rodham Clinton. 7 P age

8 5.0 WAY FOWARD Africa needs confident and brave young people who can conceive good business ideas and manage to access capital. We all agree that their biggest challenge is access to finance. Governments must also create an enabling environment for promoting and developing entrepreneurial ideas among young people. This can be through giving them free advice and resources like the Internet. Seeking capital to start up businesses is also crucial. But the most important thing that young people need is mentorship. They need support and advice as they endeavour to develop the ultimate business for their employment and wealth creation. Likewise, linkages like this one organized by AU and UNDP serve as an important platform. The use of financing options like Lease finance which is used by SELFINA can be an important mechanism for accessing financial capital by entrepreneurs including youth and women who face this problem more intensive. 1. Please visit this Website: 2. SELFINA SHORT VIDEOS: See us on Facebook: 4. Follow us on Twitter: 5. #selfina 8 P age