Small and Medium scale Enterprises (SMEs) are the engine of Ghana’s economy.
In Ghana, more than 80% of enterprises are SMEs. This sector supports employment growth through increased job creation, contributing to 45% of the total employment and 33% of the Gross Domestic Product (Kumar, 2017; Amoah, 2018).
SMEs in Ghana have been highly emphasized, being identified as the means through which the rapid industrialization of Ghana can be attained. Despite the contribution to employment and GDP, SMEs are faced with challenges in financing their operations.
One source of finance common among SMEs is debt financing which is mostly in the form of loans from banks or financial institutions. Bank loans are the commonly resorted source of funding for SMEs; however, quite a number of SMEs in Ghana are at their early stages and are unable to meet the basic credit requirements of banks. At their start-up stage, they do not have the capacity to borrow and meet their debt obligations from these banks.
It is therefore imperative for SMEs to have the knowledge, shop around or explore other sources of finance. Here is a brief overview on 4 key funding opportunities available to any SME within the Ghanaian economy aside loans from Banks or Financial institutions.
1. Angel Investment
Angel investment mainly refers to the situation where established or wealthy individuals take the decision to provide financial support in the form of investment to small firms owned by others. Quite often, Angel investors do not provide only financial support but may bring on board their experience and technical know-how to assist in the operations of the business. This concept is not common in Ghanaian society, but it does not void the fact that they do exist in Ghana. They can be found on professional websites like LinkedIn or even among friends of high-earning individuals and entrepreneurs. Also, The Ghana Angel Investor Network (GAIN) can help put SMEs in touch with angels.
2. Support from family and friends
Here support is obtained from a spouse, parents, family, or friends. Due to the relationship here, you may be tempted to consider this financial support as free money. This is not free money; the fund must be repaid later as the business starts making increasing returns. In certain situations, these close associates may demand a share in the business. It is advisable to refuse this offer and only stick to the plan of paying back the loan if obtained successfully. Business relationships with family or friends should never be taken for granted.
3. Venture Capital Funding
This is a source of funding where a private investor decides to provide funds to an existing SME with the intention of gaining returns on that investment by taking part ownership of the company in proportion to the amount they are investing. They want to be at the table as part owners. This way of financing is suitable for SMEs that are undertaking very risky ventures and finding it so difficult to obtain loans from banks or financial institutions.
4. Partnership Financing
In Ghana, the culture of partnership seems a bit foreign due to the strong belief in running one-man businesses. More than 90% of SMEs in Ghana are solely owned businesses. The idea of partnership financing is mostly suitable for people who have similar, if not the same business concepts. Because they have similar/same business concept or idea, they pull their resources together; mostly from their personal savings or investments to finance the operation of the business which is merged into one; looking forward to growth and high returns. SMEs running or planning to run on this model are advised to make all agreements covering the business very formal.
It is very prudent for any SMEs to explore all funding opportunities available within the market aside the obvious bank loans; especially SMEs that are infants.
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