Funding sources for micro, small and medium size enterprises in Ghana
Raising capital is crucial to sustaining and growing small and medium enterprises. Across the world, many MSMEs are unable to close deals when raising capital. One may ask, what factors affect the successful closing of a deal?
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Below, we present the key success factors for MSMEs seeking to raise funding.
• Lack of knowledge of competitors
There is not a single industry without competition. Investors tend to lose interest when they realise a MSME they want to invest in lacks knowledge of its competitors. When a business has knowledge of its competitors, it can properly differentiate itself from its competitors and stand out as an attractive investment amongst its industry peers.
Investors are always keenly interested in who are the key competitors in the industry and how the company they seek to invest in compares to its competitors within the industry. A company that has no sound plan to thrive within a competitive industry will struggle to convince investors to close a fundraising deal.
• Cashflows of the business
Can a business survive without cash? If the cash position of the business is low or keeps reducing without any corresponding inflows, investors tend to be hesitant to invest in the business.
A high cash burn rate could potentially be a deal breaker for most investors. In addressing this, MSMEs can give shorter credit periods to customers and negotiate for longer credit periods from suppliers or creditors.
This will ensure that cash is recovered from customers early enough to pay back creditors without having to resort to costly short-term or stopgap funding sources to meet obligations to creditors.
This will ultimately ensure that the business maintains a healthy liquidity profile.
• Outsourcing core competencies
Core competencies are very attractive to potential investors. In a situation where core competencies are outsourced to other companies, the success of the company becomes contingent on the outsourced party.
Investors will be reluctant to invest in the company since the third party will have indirect control of the potential success of the company.
An investor who cannot assume control over the company’s core competencies, through the third party, will likely be uncomfortable investing in the company.
It is important for MSMEs to be aware of its core competencies and remain in full control, building on them internally and crafting its growth plans around expansion of such core competencies.
• Customer concentration risk
Before raising capital, MSMEs must assess their customer concentration risk.
This could be described in ordinary terms as the risk associated with the situation where only a few customers account for majority of the revenue of a company; which business would like one or two customers to drive their revenues?
High customer concentration poses a risk to the company since two or three customers can drastically affect the revenues of the business by simply altering their purchasing decisions.
The bargaining power of these customers is higher in such circumstances, while that of the company becomes relatively lower.
High customer concentration is a deal breaker for investors since the important customers have great control of the success of the company.
Businesses must quickly diversify their customer base to neutralise the concentration risk from a few customers.
• Financial statements
No investor with prior knowledge of the flawed financials of an MSME is likely to invest in the business.
Consistent and accurate financial statements present a true and fair window into the internal and external functions of the business, which provides important insights to potential investors.
The MSMEs will receive funding only after extensive due diligence has been conducted. When raising capital, financial statements should depict a true reflection of the company.
This also demonstrates integrity on the part of the company. When the financial statement does not depict a true view of the business, it serves as a deal breaker for investors.
Conclusion
Capital raising for MSMEs in Ghana over the years has been quite a daunting task. It is essential for MSMEs to assess their options and need for raising capital, including a clear plan for the use of funds as this can have an enormous impact on the performance of businesses.
To improve their chances of securing the needed capital from investors, MSMEs can seek the help of corporate finance experts to guide them through the capital raising process.