Learning objectives
At the end of this session participants should be capable of knowing The different types of capital sources.
The different ways of raising capital. Which ways will effectively work for them.
“Seed production does not cost but it pays”.
One of the local seed business groups in South Western Uganda were very sceptical about investing in seed production as a business venture so they decided to first start with seed production at the demonstration plot. All the group members were engaged in managing the demo plot from planting until harvesting. After harvesting their products from the demo, they discovered that the little they were able to plant yielded so highly. This gave them the confidence to invest in their respective seed production as a local seed business.
Content
Capital refers to financial resources available for use in a business. Any local seed business group needs money whether from within or outside (internally or externally). There are two general sources of financial capital namely internal and external sources of capital: Internal sources of capital/self-investment
Internal sources of capital are mostly from one’s own savings termed ‘own investment’. Examples include through group investment- through shares, membership contribution/ fees and also through group savings, retained profits generated from sales and later part of the money used for other activities, sales of assets and utilizing working capital more effectively.
A member of Obanga ber LSB group (in blue shirt) in Lira District, Amach sub-county getting his balance from Mr. Charles Opobo after paying for his foundation seed needs during the planning and resource mobilization meeting 2014A (photo taken by Christine Joyce Adong, Agribusiness Expert)
External sources of capital
External sources of capital are from other sources and not from one’s own investment and this can be getting loans usually from banks, venture capitalist and grants usually from supporting partner organizations among others.
All businesses require capital to kick start their activities. It is very important to have self- investment in a business for the different members therefore members are strongly advised to self-invest. Using external sources of capital brings in much needed funding for expansion, but it has its problems or costs. More long term debt will dilute the owner’s stake in the business and that of the lenders will rise, affecting to some extent business decision making.
Note: It is important to consider a variety of funding sources and not to become overly dependent on one.
Comparisons of internal and external sources of capital
Internal sources External sources
Advantages No associated borrowing costs.
No direct debt rise in business.
Owners control not diluted and
decisions not vetted by lenders.
Share capital has no interest
payment hence no drain on company profit.
Shares –no change in control
even if you bought more shares.
Venture capitalist-provide
business help and contacts.
If loan has fixed interest rate and
interest rates increases in future it is a very smart investment.
Disadvantages Owners may take out all money
from business and have no buffer if they need cash later.
With no one to account to,
people may become relaxed.
With shares new investors dilute
control.
Loans has to pay interest even if
not made profits.
Loan if not paid can lead to seizure
of your assets.
Venture capitalists can impose
profits or sales targets.
Raising capital for small business expenses is not the easiest step in starting a small business but it is necessary. One major reason why small businesses fail is because the owner lacks necessary funds. Money is needed for equipment, property and more essentials for your small business. You may wonder how you can raise the money needed to start your small business.
There are two major sources of funding you can seek for your business: internal Vs external capital financing. Listed below there are various methods of raising capital for a small business. Analyse each option below and determine which method/ methods is/are better suited for your particular small business.
Ways of Raising Capital
Saving up your own money. When starting seed production business you may not have all the money needed for start-up costs; however you should have some money saved up for the purpose of starting your seed business. Methods of saving your own money for seed production include buying member’s shares, group savings, retained profits and by sale of assets.
Borrow from Friends and Family. Raising capital for seed production business expenses by asking friends and family for money isn't fun, but hopefully you can win them over with your great seed production business idea. To avoid complications in future make sure to have a written agreement stating terms and details of the loan. You wouldn't want to fight with loved ones over money. Be sure to present your proposition in a professional manner. Show them your business plan, explain to them why they should invest in you, and answer all their questions. If someone is giving you money for your seed production business as a gift, be sure you obtain a letter from them stating the amount of money and that it was a gift. This is a precaution to avoid future complications and misunderstandings.
Getting a small business loan. When raising capital for seed production business expenses many entrepreneurs go this route. However before getting a loan you should be aware that there are many factors associated with business loans such as interest rates,
late charges and collateral. Local community banks are often a great place to obtain a business loan.
During a survey conducted in November 2013 in Northern Uganda, the Agribusiness expert of Ngetta ZARDI visited Stanbic Bank in Apac District and also Centenary Bank in Gulu and these weres their charges for getting agricultural loans. Centenary Bank-19% interest rate on reducing balance, 0.5% for monitoring, insurance fee 0.85%, loan application 10,000/=, loan processing 2%, minimum loan is 100,000/= and maximum 20,000,000/=. Stanbic Bank- loan interest is not fixed but it ranges from 15-20%. Sometimes it also drops. The maximum is Uganda shillings 20 million.
Find a business partner and use their funds. Another way of raising capital for seed production business expenses is to develop a business partnership with a group which is already established in seed production business and is willing invest in your seed production business. Make sure to present them with a persuasive explanation for why they should join forces with you.
Incorporating your small crop production business. Some established farmer groups in crop production may decide to incorporate their seed production businesses with an already existing crop production business one for the purpose of raising capital for seed business expenses. They can get some money from the crop production enterprise and invest in seed production as a business.
Raising money through production and sales of agricultural products
Finding a venture capitalist with an LSB. Venture Capitalists are professionals who invest in businesses that show a high growth potential. Not only do venture capitalists provide funding for their clients by investing in their business but they also provide valuable business advice and strategies. If a venture capitalist decides to invest in your business it demonstrates to others that they viewed your chances of success to be favourable. However once a venture capitalist decides to invest in your business they often have a say on how it should be run. Since venture capitalists invest in businesses that demonstrate very high and fast growth rates, many small businesses do not meet their criteria. For example a seed company investing in a seed producing farmer group.
An example of this is AFOSEN going into partnership with a seed company. The seed company provided sorghum seed, other advisory services for its production and also agreed to buy from them at an agreed price. AFOSEN produced the seed and later sold to them and also paid back the cost of seed acquired from the seed company. The seed company is a venture capitalist in this case.
Grants: grants can be given to a business group to finance its seed production activities. However there are usually specific criteria set that a group must meet before it is given a grant.
Training method
Brainstorm on the different types of capital sources and advantages and disadvantages of different types of capital sources and different ways of raising capital
Q: How much of your own resources will be put into the LSB seed production? Q: How much will come from the members’ contribution?
Q: If you are going to look for a loan, how much money will you be looking for and what collateral security will you be able to offer for the loan?
Q: What are the different kinds of self-investment?
Q: What experiences do members have in regards to raising funds?
Q: How do you raise capital as a group for starting a seed production business? Q: What are the advantages of self-investment and disadvantages of self-
investment?
Q: What are the advantages and disadvantages of other ways of raising capital? Write the answers on the flipchart
Give time for feedback and other clarifications.
Note: Before raising capital for seed production business it is important that you first determine how much capital you need for your seed production. Create a business budget. Take in consideration that entrepreneurs often underestimate how much money is needed to run a business and fail to expect the unexpected. For example what if your equipment gets damaged and you need replacements…do you have a back-up plan? That is why it is a good idea to always have extra money put aside just in case.
Materials:
Flip charts, markers, tapes and illustration charts
Advise/notes to the facilitator
The facilitator should be able to clearly differentiate between internal and external sources of capital
Resources, bibliography
IB Business & Management, a course companion (2009), Page 146-157 (Clark Edition)