Over the last decade, there has been an increase in activity on the private equity and venture capital front across Africa, but many entrepreneurs are still finding it difficult to access financing from these alternative funding sources.
For a long time banks across Africa monopolized the lending business and dictated the terms of lending with high interest rates and huge collaterals that made it difficult for startups and small businesses to access financing.
With no credit rating agencies and poorly kept financial statement by many local businesses, banks preferred to invest their deposits in government securities, like bonds and treasury bills, that guaranteed a good return with minimal risk.
At the break of the new century things slowly started to change, international investment firms noticed African startups as a good destination for their money and more and more in-Africa private equity, venture capital firms and angle investing companies sprung up in hot spots.
Africa quickly became the next land of opportunity and a startup culture soon flourished, as innovation and incubation centers germinated in major cities in South Africa, Nigeria, Ghana, Kenya, Uganda and many other countries.
While the African growth story has been accelerated by technological advancements such as access to the internet that have opened up foreign financiers to African startups, capital still doesn’t come easy for many.
“Small businesses are finding it difficult to secure finance for start-up capital, or to fund growth,” Corneleo Keevy, a credit analyst at Ashburton Investments, said in an opinion piece, adding that “This problem is viewed as greater than the perceived threat of corruption and lack of infrastructure on the continent.”
In a country like Uganda, small businesses have dragged their feet in accepting funding from other financial institutions other than banks and microfinance institutions because they fear private equity or venture capitalists will edge them out of their mostly family-owned companies.
This has necessitated the country’s investment authority (UIA) to start a sensitization program that will educate entrepreneurs in the East African nation how to access fund from these alternative sources.
“Trainees will be exposed to alternative sources of financing for SMEs with emphasis on private equity and venture capital resources in the region and worldwide” Frank Sebowa, UIA’s executive director, said at a media briefing to announce an upcoming investment conference.
“Private equity and venture capital institutions can link their partnering SMEs to international market, managerial advises and also link them to supplies of industrial machineries, because they want to see value for their money which is not the case with commercial banks,” Sebowa added.
Over dependence on commercial banks for financing has held back many startups from growing as fast as they should due to the lengthy and stringent borrowing conditions they are subjected to, coupled with high interest rates that eat into their earnings.
