How To Raise Capital for Small Medium Enterprises (SMEs)

What is Capital? Capital refers to the resources that are required for the setting up and running of a business. Whether you are an entrepreneur, a startup, or an established business owner, knowing how to raise capital can often mean the difference between success and failure. Capital assists in fostering the growth and expansion of businesses as well acting as a cushion for businesses during hard economic times. 

What is Capital?
Capital refers to the resources that are required for the setting up and running of a business. Whether you are an entrepreneur, a startup, or an established business owner, knowing how to raise capital can often mean the difference between success and failure. Capital assists in fostering the growth and expansion of businesses as well acting as a cushion for businesses during hard economic times.

Generally, there are two main types of capital: debt capital and equity capital. Debt capital involves borrowing money and returning it, usually with interest. Meanwhile, equity capital involves selling a business’ stocks or shares in exchange for funding. 

The following are some of the ways in which your SMEs may raise capital for its business:

1. Personal savings - Investing your own money is one of the ways in which business enterprises raise capital for their business operations. Most businesses start with capital raised from its owners’ personal funds. The founder is the person who most understands the purpose of the business, the vision and the goals expected to be attained by the business. Therefore, when starting out a business, it is not odd for one to raise capital out of their own pocket.
2. Family and friends - SMEs can consider seeking financial support from their network of friends and family members who believe in their vision. This informal funding option can provide initial capital or bridge the gap until the business becomes more established. However, it is essential to formalize these arrangements through legal agreements to avoid any potential conflicts.
3. Angel investment - At times businesses may raise funds through the goodwill of other parties. As long as a business owner is able to articulate the purpose and need for the business, angel investors may be willing to provide funds in support of the business. Angel investor, also known as private or seed investors, refer to persons who provide financial backing for small and medium-sized entrepreneurs, typically in exchange for ownership equity. The funds angel-investors may provide may be one-time investments or ongoing injections to help the business through its difficult early stages. Angel investors provide more favorable terms compared to other lenders, since they often invest in the entrepreneur starting the business rather than the viability of the business. In addition, they often bring valuable expertise, industry connections and mentorship. Some angel investors invest through networks that have been built to pool capital together or through crowdfunding as will be discussed below. Therefore, if a business has no qualms about losing part of its ownership, this could be a viable way of raising capital.
4. Loans - Another route in which business enterprises may take in raising capital is through approaching banks or microfinance institutions for loans. It has been proved and tested, time and again that loans are a reliable source for raising capital. However, securing bank financing can be challenging due to the strict lending criteria. To improve the chances of approval, SMEs should have a strong business plan, collateral, and a good credit history. It may also be beneficial to explore government-backed loan programs designed specifically for SMEs. A good number of banks offer loans, with terms and conditions designed specifically for SMEs in Kenya through various programs. They include SME Bizna loan by Stanbic Bank, Jenga Bizna loan offered by Family Bank, the Wezesha Biashara and Absa She Account by Absa, among others. Aside from banks, small and medium-sized enterprises can approach microfinance institutions who require minimal documentation and are well-suited for small businesses.
5. Crowdfunding - Crowdfunding is the practice of raising money or funding a business by getting small amounts of capital from a large number of people. As an SME, one can make use of websites and social media as platforms to conduct campaigns for raising capital. Such platforms prove to be resourceful as it allows business enterprises to have easy access to a large pool of potential investors, beyond the scope of the traditional circle of owners, friends, family and financial institutions. Such investors could range from the likes of large investors to simple retail investors. Popular examples of crowdfunding sites frequented in Kenya include M-Changa, Kickstarter and Indiegogo.

How can we help?

At CM SME Club, our team of experienced legal managers will help you in choosing the best capital raising option by providing legal expertise and guidance through the process. We shall also assist your business in understanding the compliance and legal requirements, assessing the pros and cons, conducting due diligence and negotiating and drafting contracts. Contact us today via email or call +254 745 342 125. 

Published on Aug. 22, 2024, 1:10 p.m.