Alternative finance for entrepreneurs
AS we enter 2022, entrepreneurs need to be appraised of alternative sources of finance. Entrepreneurs often develop products and ideas that require substantial capital during the formative stages of their companies' life cycles. Many entrepreneurs do not have sufficient funds to finance their projects hence the need to seek alternative finances. In the Oxford Handbook of Entrepreneurial Finance (Cumming, 2012), entrepreneurial finance is defined as a topic that covers several sources of capital, such as angel investors, venture capital, private equity, hedge funds, microfinance, project finance and more.
Business angels
Van Osnabrugge (2000) defines business angels as private individuals, who often have started their own successful firms in the past and were now looking to invest some of their money and experience gained into a small entrepreneurial firm. Angels are often perceived as the second round of financing a start-up goes through, after the entrepreneur has exhausted all his family and friends’ money, but before he approaches formal venture capital partnerships. e definition above states that angels often invest in small and private firms and it seems that money from friends and family can also be angel investment.
e informal risk capital market consists of individuals known as "angels." ese "angels" are wealthy business people, doctors, lawyers, and others who are willing to take an equity stake in a fledgling company in return for money to "start-up.” Firms that require substantial amounts of money, however, may not be able to receive sufficient capital from the “angel” network because the market is dispersed with little information sharing and the amount of invested capital tends to be small (Gompers, 1994).
Bank loans
Gompers (1994) argues that banks are an important source of start-up financing for a subset of new businesses. Companies that lack substantial tangible assets and are associated with significant ex ante uncertainty are unlikely to receive significant bank loans, however. ese firms face many years of negative earnings and are unable to make interest payments on debt obligations.
e simplest and most common source of short-term finance is an unsecured loan from a bank (Brealey, Myers, and Marcus, 2001). Lines of credit are typically reviewed annually, and it is possible that the bank may seek to cancel it if the firm’s creditworthiness deteriorates. If the firm wants to be sure that it will be able to borrow, it can enter into a revolving credit agreement with the bank. Revolving credit arrangements usually last for a few years and formally commit the bank to lending up to the agreed limit. In return the bank will require the firm to pay a commitment fee of say 0,25% on any unused amount. Most bank loans have durations of only a few months. However, banks also make long-term loans, which last for several years. (Brealey et al., 2001).
Many short-term loans are unsecured, but sometimes the company may offer assets as security which might be a challenge for many entrepreneurs. Since the bank is lending on a short-term basis, the security generally consists of liquid assets such as receivables, inventories, or securities. For example, a firm may decide to borrow shortterm money secured by its accounts receivable. When its customers pay their bills, it can use the cash collected to repay the loan. Banks will not usually lend the full value of the assets that are used as security.
Venture capital
Black and Gilson (1998) define venture capital as investment by specialised venture capital organizations (which we call venture capital funds) in high-growth, highrisk, often high-technology firms that need capital to finance product development or growth and must, by the nature of their business, obtain this capital in the form of equity rather than debt.
According to Gompers (1994), venture capital firms normally provide finance for high-risk potentially high-reward projects. Venture capitalists take an equity stake in the firms they finance, sharing in both upside and downside risks. Most firms that receive venture capital financing are unlikely candidates for alternative sources of funding. A substantial portion of high-tech start-ups have received venture capital, including such present-day industry giants as Apple Computers Microsoft, Lotus, and Genentech (Gompers, 1994).
Crowdfunding
Crowdfunding refers to the ability to obtain funding from multiple backers with each backer providing a relatively small amount, instead of raising large sums from a few backers (Belleflamme, Lambert, and Schwienbacher, 2014). is process is usually performed online and often without standard financial intermediaries (Mollick, 2014). Moreover, from an entrepreneurial perspective, crowdfunding may be used throughout the entrepreneurial process, from opportunity recognition to marshaling of resources and capacity development (Shneor and Flaten, 2015).
In Zimbabwe crowdfunding (Mukando in Shona) has been used to finance rural projects and recently the idea became popular as companies like Econet came onboard to raise funds to assist cyclone Idai victims in Chimanimani. Shneor and Munim (2019) state that the primary crowdfunding models include lending, equity, reward, and donation. Whereas lending and equity are viewed as investment models, reward and donation are regarded as non-investment models.
Government grants
According to Ledgerwood, Earne, and Nelson (2013), grants are primarily used to encourage financial service providers to deepen their outreach, to develop new products and channels, or to support the development of the market. Grants are generally non-reimbursable. Grants can be used to fund technical assistance or as a tool to enable investment in riskier frontier markets and projects (Ledgerwood et al., 2013).
In conclusion, although there seems to be many sources of finance for entrepreneurs, there are many challenges in accessing the funds especially in developing countries like Zimbabwe due to a number of factors. Many entrepreneurs do not have sufficient funds to finance projects themselves and they must therefore seek outside financing.