A Complete Guide to Raising Start-Up Money in Nigeria

by Counseal Team

Updated November 26, 2023

To decide which way to go, you need to make some considerations, such as:

  • Knowing and analysing your capital projections and financial needs
  • While you consider what you need to get started, also consider what you will need to keep the business afloat while raising funds.
  • Craft a solid pitch and hone it to almost perfection.
  • Speak to relevant professionals
  • Consider the pros and cons of each type of financing to choose the one that best suits the vision you have for your business.
  • You need to be conversant with your business accounting. It helps you know how much you will need to get started and secure the best financing for your business
  • Connect with friendly business founders who are ready to mentor. You can check out Founder Institute Mentors which is a directory of Nigerian start-up experts spanning across various fields.

Financing Options Open to Business Start-ups

Let’s group them into:

  • Debt financing: This is simply loans. It can be sourced from financial institutions, government agencies, friends, and family. You must pay back your loan with interest within a certain period. If you don’t want to give up control of your business, this is a good option. It helps when you have a history with the lender, e.g., operating a corporate account with a bank. It is a major requirement to get a business loan from a Nigerian bank. 
  • Equity Financing: This provides you with the funds you need for a stake in your business. It could be shareholding or taking up a directorial position for a specified period. The beauty of this is that there is no obligation to repay. It gives you the opportunity to channel more money into your business. The more investors you bring into your business, the less control you will have. To curb this, strive to understand fully the terms of the agreements/contracts entered into.

 Let us break them down into the most available options.

  1. Business loans: This is majorly institutional funding. Banks and other financial institutions have several business loan packages, both for start-ups and established businesses. The government also offers incentives to small and medium-scale businesses to help ease their growth through the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
  2. Crowdfunding: This raises funds by pooling resources from all and sundry. It is usually small amounts of money, but as the saying goes, “tiny drops make a mighty ocean”. In countries like the United States of America, crowdfunding can include strangers on platforms like GoFundMe. Nigeria, for now, restricts crowdfunding, especially for private businesses, unless it complies with the conditions laid down by the Securities and Exchange Commission (SEC). You can, however, do this within your circle of friends and family.
  3. Grants: This is a sizable amount of money given by the government, a charitable foundation, or a specialised grant-making institution to fund your ideas and business projects. As with most money-raising applications, you would have to present and defend your business ideas satisfactorily to qualify. Examples of these include the Canada Fund for Local Initiative grants in Nigeria; the Tony Elumelu Foundation Entrepreneurship Program; the Bank of Industry; and the World Food Programme Innovation Accelerator Grants. These are just a few. The more you look, the more you find one that suits your niche.
  4. Angel Investment: This is a flexible means of raising funds. It could either take the form of debt or equity financing. It all depends on your angel investor and his terms of investment. The Lagos Angel Network is a team of angel investors committed to seed funding and mentoring entrepreneurs. They are, however, limited to Lagos, Ibadan, and Abeokuta. There are also individual angel investors in Nigeria that you can look out for.
  5. Personal Contacts/Networking: These are your circle of friends and family. It also extends to their friends and acquaintances, meeting new people in your everyday life and striking up conversations about your business. This is like angel investors, as it could be debt or investment. It could also be a gift. 
  6. Self-funding: Bootstrapping. If you have it, this is the most convenient way of funding your business. Sadly, this option is not available to everyone.
  7. Venture capital: This is a major source of investment for start-ups. They are private investors who fund your business for a stake in it. They eventually ease out of the business when their investment capital and some profits are realised as predetermined by the Venture Capital Agreement/Contract.

Now, let’s assess the realities of funding a start-up.

The Realities of Funding a Start-up

Funding a start-up is hard, especially when you can’t provide the funding from your personal resources. To successfully address this, let’s consider the costs that need to be covered by business start-ups. 

They include, but are not limited to:

  • Outsourcing workforce and skills
  • Legal and other professional fees
  • Buying and leasing of equipment
  • Product design and prototype development
  • Payment of utilities and tax
  • Getting licensing and permits
  • Acquiring office space
  • Payment of salaries

For web-based businesses, costs could include:

  • Subscription to professional software
  • Web and application development
  • Purchase of hardware to facilitate web access
  • Cloud Storage

Making a list of your projected costs can help you focus and prevent making financial mistakes. You can build a worksheet to get a better handle on it. It helps you to:

  • Estimate profits
  • Conduct a break-even analysis.
  • Secure loans
  • Attract investors. It shows how focused and diligent you are, especially when you include it in your business plan.

You need to know the challenges faced by start-up businesses to be prepared to tackle them as they pop up.

Major Funding Challenges in the Start-Up Environment in Nigeria

  • Financial management: this can make or break a start-up. It is one prerequisite for obtaining funding. Investors and lenders look into your finances to find out your plans and management skills. Financial mismanagement could stem from mixing your personal funds with your business funds.
  • Lack of Collateral: Getting a loan when you don’t have a credit history and no valuable collateral can be difficult. The best alternative here is to look into government aid, crowdfunding, angel investors and venture capital.
  • Lack of market access: where there is a lack of demand for the goods or services offered, it will be difficult to sustain the growth of your business.
  • Poor financial inclusion and inadequate access to credit facilities: There is a limit to the pool of funds available to start-ups. Banks are reluctant to give out tangible money to start-up businesses because of the fear of failure. 
  • Higher transactional costs in comparison with large enterprises: Large enterprises have the advantage of economies of scale, which makes it difficult for smaller companies to compete with them. This causes an inability to compete against larger firms in terms of innovation, research, and development, which is an important driver of economic growth
  • Lack of entrepreneurial zeal and know-how: Given the challenges that entrepreneurs face as startups, you can easily be discouraged and be tempted to give up. Therefore it is best and advised to do a breakeven analysis.
  • Geographical location puts some at a competitive disadvantage. The internet has mitigated this.
  • High inflation coupled with exchange rate fluctuations: The economy and the political environment play a vital role in how well a startup will strive. The recent economic downturns have made venture capital a little more difficult, especially when it is international. It would take ₦36,000,000 to repay $100,000 in 2019. That same investment will cost you roughly ₦65,800,000 to repay today.

What Investors and Lenders Look Out for

Whoever gives you money will need to be sure that you will use the money effectively and generate a proper return soon. To mitigate loss and challenge their funds properly, investors and lenders have core features in a start-up company that they look out for. They include:

  • Potential growth in the market
  • Competition
  • Location
  • Strength and weaknesses
  • Opportunities and threats
  • Business revenue either globally or locally
  • Cash flow
  • Amount invested by you
  • Outstanding debt
  • Credit history

The lender will look for the 5Cs of lending. They are:

  • Character: this is about your credit history, which summarises the loans you took in the past, how you used them, and the frequency of your repayments.
  • Capacity: What’s your plan for repayment? How can you afford it?
  • Capital: This could be your savings, investment, or loan that you will put towards your loan
  • Collateral: Sometimes, when your credit history is not so good or unascertainable, lenders will ask for some form of security for the loan. A valuable property or another steady source of income usually suffices.
  • Conditions: They will scrutinise your plan for the money and how you intend to implement it. Other factors, such as economic and environmental conditions, will also play a significant role in their decision.

Key Takeaways

  • Have a workable business plan
  • Get your business registered
  • Open a corporate account and use it
  • Organise your financial records
  • Join a business community and build your network
  • Be open to advisory services
  • Be social and information-driven. You can’t afford to wait for information to come to you first. You can always reach out to people. You can also use the internet to find low-cost loan facilities.
  • Use social media to your advantage.
  • Be clear on the amount of funding you require. Don’t take more or less than you need.

I hope we answered most of your questions in this article. If you have any clarifications or questions, we are happy to help. Book a time with one of our experts to get a free audit.

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