Nigeria: Potential Sources Of Finance For Emerging Corporates

As many businesses were forced to increase leverage in order to survive the recent economic and financial crisis, the long-standing need to enhance capital structures and reduce reliance on borrowing has become more critical. Indeed, governmental solutions to the crisis, which tended to focus on systems that allowed enterprises to raise their debt, may have aggravated the problem of emerging corporates such as Small and Medium Scale Enterprises (SMEs) and early stage startups over-leveraging (e.g. through direct lending, loan guarantees etc.). Businesses undergoing significant transformations and transitions in their activities, such as ownership and control changes, as well as startups, SMEs and early stage companies attempting to deleverage and enhance their financial structures, all face capital gaps.

Entrepreneurs and emerging corporates rely significantly on traditional debt to meet their start-up, cash flow and investment needs, and bank financing is the most prevalent source of external finance for them. Traditional bank finance, while widely employed by small firms, provides hurdles to emerging corporates, early stage companies and SMEs, particularly newer, innovative, and fast-growing organisations with a greater risk-return profile.

While bank funding will continue to be important especially for emerging corporates including SMEs and startups, there is widespread concern that credit limits may simply become "the new normal" for them. As a result, it is vital to increase the number of potential funding options available to SMEs and emerging corporates allowing them to continue to play a role in investment, growth, innovation, and job creation.

Drivers for Consideration of Capital Raise Options by Emerging Corporates

Many organisations, particularly rising corporates, choose to seek external finance in order to generate enough working capital to achieve their growth goals. A loan can help a company meet short-term finance demands while also providing the capital it needs to expand. It also helps the company achieve its finance requirements by bridging the gap between consumer orders and supplier payments.

Another motivation or purpose for growing enterprises to seek capital raising is to increase their capital base or sufficiency. For example, an industry regulatory body may require companies within certain sectors to maintain a minimum level of capital. To do so, such companies would consider adding extra capital to their balance sheet from time to time, depending on factors such as macroeconomic conditions and the systemic importance of particular banks.

Another reason why emerging corporates or businesses consider capital raising is to expand their operations. This is a crucial motivator for startups, especially those looking to expand their market share. As the market develops, competitors and players leave and enter, creating new possibilities and challenges. For young firms to survive the inevitable bad periods, it is critical that they increase their resources to ensure steady growth.

Potential Sources of Finance for Emerging Corporates

Emerging firms and corporates have traditionally looked towards bank loans and stock finance. Other notable sources of finance that are available to emerging corporates are discussed in subsequent paragraphs:

• Private equity: This is a type of private or equity financing that takes place outside of public markets and involves funds and investors directly investing in firms. The expectations of a return from an equity investment is the major motivator for shareholders. When funds are received, the company's managers and directors will work to offer a return to shareholders through growth plans. Some of the benefits of private equity is the ability to select the investors who will participate in the business. It also allows for flexibility, financial input, and deeper technical capabilities injected into the business.
  
  
• Venture capitalists: These are private equity investors that provide capital to companies with high growth potential in exchange for an equity stake. This is an alternative source of equity capital for startup ventures or small companies that wish to expand or divest but do not have access to equities markets. To obtain venture capital funding, emerging corporations (startups and small businesses) are required to demonstrate strong return profiles to attract investment from venture capitalists.
  
  
• Public Offers: Emerging corporations and businesses can pursue an initial public offering (IPO) or listing as an equity financing option. This is when a company's stock is sold for the first time to the public. An SME, or startup that is listed on a stock exchange (SEC) becomes a quoted firm and, as a result, raising capital becomes easier. Before a listing is considered, the company must have grown and matured to the point where a listing is practicable and potential value from the IPO is fully maximized.
  
  
• Mergers & Acquisitions (M&A): A merger or acquisition is another source of equity funding. It refers to an agreement between two or more existing companies to merge into a new company, or the purchase of one company by another. M&A is done in order to take advantage of synergies between the companies, expand research capacity, expand operations into new segments, and increase shareholder value, among other things.
  
  
• Corporate Bond: This is a debt financing option open to growing corporations (including SMEs and startups). This is a type of debt obligation which is similar to an "I Owe You". When investors purchase corporate bonds, they are effectively lending money to the firm that is issuing the bond. High-quality corporate bonds are regarded as generally safe and conservative investment in the investment hierarchy. Although issuing of bonds may be a cheaper option than bank loans, the process is usually longer as the issuing company requires a credit rating from a rating agency before issuing a bond on the market. Furthermore, for the startups to be able to access corporate bonds, it might require a more developed and stable business model to present.
  
  
• Government-sponsored SME intervention funds: These range from Federal Government loans to intervention funds and provide another suitable option for emerging corporates. Bank of Industry (BOI), Agric Small Medium Enterprise Scheme (AGSMEIS), and Development Bank of Nigeria Loans- DBN are some of the intervention funds that growing companies can explore.

• Specialist Institutions: Another type of debt financing is specialist institutions set up primarily to provide development/project finance, particularly in developing nations. National governments together with private sector contributions own the majority of development finance institutions. These institutions' capital comes from national or international development sources, demonstrating their creditworthiness and ability to provide project financing at a low cost.

Capital Raise approach for a new and existing Emerging Corporates Businesses

Traditional finance options for emerging corporates that are just getting started are likely to be restricted. If you are thinking about taking out a short-term loan, keep in mind the hefty interest rates. For example, a startup in need of equipment can seek an equipment loan in which the equipment is used as security for the loan. If it decides to follow the equity-funding route, a likely option will be with venture capital or angel investors with industry knowledge. The company may need to conduct a business valuation to determine how much it is worth and how much equity it is willing to give up. Let us imagine the company is valued at $1 million and is asking for a $100,000 investment. To get the money, the owner must give up 10% of his or her equity in the company. Potential investors will require an informative pitch deck, business strategy, and financials, such as the company's financial position, to demonstrate the potential for development with their investment.

Companies that have been in operation for two years or longer, on the other hand, may find it easier to raise funds, especially if they have a solid reputation. Prospective investors may find it attractive when a firm is well established, especially if the existing business already has a strong portfolio. It may also be easier to find investors willing to assist with a loaning option to balance cash flow.

Why Consider Engaging Consultants in Capital Raise Process

Emerging businesses must flourish and fulfill their objectives despite risks and limits, necessitating the need for capital raising. Because the sort of capital a company chooses is largely determined by the company's intended use of the capital, it is vital to think about hiring a consultant to assess the company's needs and provide advice on the optimal capital structure of the company.

To establish an optimal capital structure, emerging corporates must discover the proper balance of capitalmix. It is usually a good idea to know exactly what a company plans to accomplish with the funds being raised, whether it is through equity or debt financing.

Having assessed all the financials leveraging certain key performance indicators (KPIs) and given parameters, a consultant will provide unbiased opinion about the financial state of emerging corporates.