Thread by @ceo_pnp

DAY 11: FUNDING YOUR ENTERPRISE

This begins a new thread on funding tips with focus on micro, small and medium enterprises (MSMEs). What is an enterprise? An enterprise is a for-profit business (for this thread) involved in creating & trading of goods and service at small scale.

Enterprises in Nigeria with sole proprietorship structure are called VENTURES and only cost N5,000 ($14) to register (business name). The owner is fully financially liable and responsible without limitation or accountability checks. Hence, ventures are not structured for equity.

How can these enterprises raise funding since they don't have the limited by share structure and accountability checks are non-existent? Also, growth of ventures are dependent on lifestyle and expertise of the founder hence solely responsible for funder's ROI and business growth.

These issues are what limit funding options of enterprises to mainly securitized or collateral based debt financing and grants. While grants are given to enterprises that have proven record of social impact aside the profit mission, debt financing doesn't require a social mission

Debt financing is hence the most accessible form of funding for enterprises. There are two sources of debt financing used: securitized in-formal debt financing channels and collateral based formal debt financing channels. The ROI for debt financing is a pre-agreed interest rate.

DAY 12: FUNDING YOUR ENTERPRISE

What is collateralized debt financing? This is the kind of debt/loan that is given to an individual or enterprise with an expectation that the debt will be paid back with an annual interest rate (7-32% in Nigeria) throughout its tenure (in years).

At the end of the tenure of a loan, the actual amount borrowed is paid back in full. This is the simplified loan. For other more complicated loan structures, a percentage of actual amount borrowed is paid back monthly or annually with the acrued interest (reducing balance loan).

However, the COLLATERALIZED LOAN has a clause that stipulates the borrower must provide deeds of ownership of a property of similar or higher value to the loan and total accrued interest for tenure of said loan to the lender to mitigate the risk of the borrower's loan defaulting

The deed or property document provided is called a Collateral. However, while the lender has the title deed or document, the borrower is still allowed to use the property in a way that does not reduce the book value of the collateral. Houses can still be occupied but cars cannot.

The issue of getting a collateral to access loans is common with finance institutions like commercial and Microfinance Banks. Microfinance banks however use more of a reducing balance loan and securitization than collaterization. Tomorrow I will share more on securitized loans.

DAY 13: FUNDING YOUR ENTERPRISE

Securitized loans are loans guaranteed by a formal or informal network, assuring the lender the risk of default by the borrower is negligible. The network has access to the cash flow generated by the activity requiring the loan hence the guarantee

Securitization can be as simple as in cooperative loan networks & as complicated as bonds issued by financial institutions. For enterprises simple securitized loans requires: proper record of business past and future cash flow & excellent personal credit history in a network.

Hence, it is important that enterprise founders keep clear and accurate financial records and have strong forecasting skills to determine the past and future business cash flow. Also, small scale enterprises in Nigeria can leverage their organized associations for credit scores.

The credit score from trading associations especially when enterprises are allowed lines of credit by suppliers, can be a basis for determining creditworthiness of an enterprise, allowing it access securitized loans from cooperatives, microfinance
banks & digital fintech lenders

Alongside character references, membership in a network for a duration of time to of prequalify and active participation, credit scores obtained through trading associations and cash flow history remain the strongest determinants for access to securitized loans for enterprises.

DAY 14: FUNDING YOUR ENTERPRISE

How can enterprises access funding for WORKING CAPITAL (money for expanding the size of your routine business activities that directly impact your revenue)? What criteria would determine your eligibility, interest rate and funding size by funders?

Working capital is most common financing need of enterprises.
1. Working capital can be accessed through SUPPLIER CREDIT. Rather pay cash for your purchases from your suppliers, you may be able to access more supplies on credit for up to 90 days at no extra cost or interest.

Access to supplier credit is dependent on your previous trading and payment history with a particular supplier or your trading history with another supplier within the same business network who guarantees you will pay promptly as agreed. Previous payment history is crucial here.

2. Commercial banks also provide working capital but unlike supplier credit that is dependent on your payment history and relationship in a business network, commercial bank would provide working capital as a percentage of historic annual revenue evidenced by financial records.

Again the importance of keeping proper financial records is evident. Commercial banks and microfinance banks use financial history to determine how much loan the business can absorb without defaulting. Working capital loan tenure is 12 to 18 months in Nigeria with interest rate.

3. Cooperative banks and associations also provide peer to peer lending for working capital with easier terms although membership & savings in the cooperative is a requirement. Loans have longer terms (up to 5yrs) & interest rates are lower but loan process is time consuming.

4. Recently, Digital Fintech start-ups also offer working capital loans by using several indices for credit scoring. This may be more favorable for online enterprises and usually requires less time to access (within a week) but interest rate may be higher than commercial banks.

5. Family and friends: if all else fail, family & friends with high net worth are informal options to access working capital. Because of the informality, terms around loan tenure and repayment, interest rate and collateral are determined by participants and some may not be repaid