SMALL to medium enterprises (SMEs) have been mushrooming all over Zimbabwe, but surviving the country’s economic rigours remains a major challenge for both the SMEs and established entities.
One of the main issues that affect businesses in general is capital for both expenditure and everyday working capital.
Quite often, businesses are looking for money in the business.
Coming in different forms and from various sources, it can be in the form of equity, debt or internal resources.
Growth in the business comes from understanding these forms of funding so that the correct decisions are made from an informed perspective.
Equity is the form of funding that comes from the owners of a business (shareholders) or investors who have interests in the business.
This form of money is not repaid in the normal course of a business as the reward that comes to the shareholders is in the form of dividends.
An example is venture capital, a form of financing that investors provide to start-up companies and SMEs that are believed to have long-term growth potential.
In Zimbabwe, venture capital investors exist and are looking for such kind of businesses to assess and grow.
These funds are interest free and usually have no fixed repayment periods and would give a business the latitude of growing while increasing the value of the shares in the business. If an entity can secure such funds, the better because it is the most preferred form of funding for any organisation.
This, therefore, means that if an entity is to grow, more often than not, organisations grow by having more shareholders in the business.
It should be realised that as the shareholders have a long-term interest in the business, they will be working to open opportunities for the company so that it grows.
Some of the challenges that SMEs face is that many are run as one-man businesses.
While this may avoid internal shareholder fights, it tends to limit growth and expansion.
Another form of financing is debt financing.
This financing comes from banks, micro finance companies or preference shareholders.
This form of funding tends to be easily available at times, but without proper planning, it also tends to be quite expensive and at times cripples quite a number of companies.
Debt attracts interest and takes preference in terms of repayment.
Therefore, there is need for proper assessments before engaging in debt financing.
In order to benefit from debt, the repayment period should be longer and monthly returns should be more than the interest being charged by the financiers, which makes it critical to engage financial consultants before signing a debt agreement.
Modern Mutumwa is a managing partner at MJV Chartered Accountants contactable on +263 4 746 783/569, +263 8677106423, +263 772 870 706 or firstname.lastname@example.org or email@example.com.