The title of this article, perhaps, looks simpler than it is to access finance. If you are reading this piece, chances are that you have been cracking your brain on how to raise funds for a business or an idea. That idea might be a million-dollar idea that can only be effective through a multi-million dollar investment. If you'd like to know how the process of starting and financing a business can be made seamless, you can read our article on Demystifying Startup Funding for Entrepreneurs
What I have done in this article is to summarize three options in raising capital for your business.
Option 1: Bootstrapping
To bootstrap simply means pulling yourself through to grow the business without any external funding. By implication, you allow the business to grow at its pace. If you want to bootstrap, you must make sure that you are cautious with how you spend company money, particularly the income. Bootstrapping allows you to keep control and ownership of your company. Since you are not going to be involved in trying to convince investors to invest, chances are that you end up keeping your trade secrets.
If you are successful at bootstrapping and you later decide to attract investors, your business valuation would have increased and you can get more funds for less equity at that point from investors. If you're considering other financial options outside bootstrapping you can read our article on How Else to Raise Finance after Bootstrapping.
Bootstrapping may be a good option when your industry has little or no pressure, but where your product is competitive and there are a number of giants within the industry, you may need to move faster and bootstrapping may therefore not be your best option.
Option 2: Issuance of Equity
Here, you place value on your company shares and then invite investors to purchase from those shares. When you raise capital through the sale of shares, it means that you are making your company fluid and that those you allocated shares to become co-owners.
If you intend to sell your company’s shares to raise money, it is better not to allocate the whole of your company shares at the point of registering with the corporate affairs commission. The law mandates that 25% of total shares must have been taken by the first set of shareholders. Precisely, section 99 (1) of Companies and Allied Matters Act provides that:
“… not less than 25 percent of [that] capital shall be taken by the subscribers of the memorandum.”
By implication, 75% of your company shares can be kept for the purpose of raising funds.
If your intention is to raise funds with your shares, then, it is important that your directors are professionals and that you also have good accounting records. One of the things that potential investors dislike is to see a company have amateurs on board as directors. If you are also going to have your family members as shareholders, it is better to register another company as a special vehicle for this purpose so that your family members are shareholders in that company. Investors do not (usually) want to be a part of a company with debts, so try to clear company debts if your intention is to sell equity.
There are no taxes in Nigeria on the allocation of shares. Even in cases of share transfer, section 30 of the Capital Gains Tax Act exempts any gains realised by a person from a disposal of shares from capital gains tax.
In addition, the Stamp Duties Act also exempts instruments relating to the transfer of shares (i.e. share transfer agreements) from the payment of stamp duty.
Option 3: Loan
If you do not have the means to bootstrap and you do not want to issue shares to investors, your next option might be to raise funds in the form of a loan.
On the face of it, debt is a lot cheaper than equity because what your company will pay back (principal sum and interest) is predictable and you can set your mind on it. Where issue may arise is when your company is unable to repay in which case it may be exposed to the risk of court action and in the extreme case forced to wind up.
When you call for a loan, you might want to make it convertible to equity so that if you are unable to repay at the appropriate time you can value the debt and convert to equity at an agreed price per share. Otherwise, the loan may continue to attract interest until your company is able to repay.
If you desire to factor in the tax implications, you can be guided by the Companies Income Tax Act. Section 24 of the law is suggestive that tax may be levied on the interest on a loan (but not the loan itself).
The Bank of Industry as a finance institution provides financial assistance to business owners in Nigeria, to know more about the eligibility requirements for BOI loans, see our article on SMART WAYS TO ACCESS BOI LOANS FOR SMEs.
In a relative sense, debt is cheaper and not of a permanent nature provided you have the capital to repay. However, you may prefer to raise equity funds if you are able to place a high value on your per unit share price. Besides, you are not under obligation to pay dividends if it is not realistic and your shareholders cannot ask that the company be wound up for failing to pay dividends. Otherwise, you may continue to grow the company on self-assessed funds by which you can keep hold of management control. For a comparative analysis on the types of capital you can see our article on DEBT CAPITAL VS EQUITY CAPITAL.