Empowering Africa’s start-ups with financial savvy: Opinion

Small businesses are the mainstay of modern economies across the planet. The World Bank has stated that small enterprises represent about 90% of businesses and create more than 50% of employment worldwide.

Formal small and medium-sized enterprises (SMEs) contribute up to 40% of national income (GDP) in emerging economies, and informal businesses add a lot more.

However, the African continent remains poor. Per-capita gross national income in sub-Saharan Africa has been estimated around $1,500 in 2020, compared to $63, 000 in the USA and $4,000 in the United Kingdom, according to the World Bank.

Small businesses alone are not the solution to the development challenges of the world’s emerging economies. The key lies in small businesses being able to grow, to scale up, and to transcend their immediate environment. To do this, they need finance.

Investment: Fuelling the quantum leap

Organic growth is always positive, but for a small business to make the quantum leap from start-up to an organisation that can also make a material impact on the economy, requires investment.

That investment can come from loans, grants, venture capital, or equity stakes, but first, business owners must be able to convince potential funders to take a risk and invest. Not enough owners and founders are able to do this, meaning that many businesses do not realise their full potential. Often, funding, when it comes, has to be provided from the savings of founders and their families, which limits the growth that can realistically be achieved.

The finance gap facing micro, small and medium enterprises (MSMEs) is enormous. The International Finance Corporation has estimated that the finance gap faced by formal MSMEs in developing countries is around $5.2 trillion – 19% of the gross domestic product (GDP) of the 128 countries studied.

This represents 1.4 times the current level of MSME lending in these countries. Investor funding does not come spontaneously – it flows from a thorough pitching and due-diligence process. Unfortunately, many small-business founders lack the network and the skills to navigate this process.

The challenge is twofold – MSMEs need to be able to access new sources of funding, and then to be able to speak the language of potential investors and convince them of the benefits of investing in a new opportunity.

The process often boils down to “pitching opportunities” and “pitching skills”.

Read full article at African Business

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