Sources of Capital Finance
In the next few postings we will discuss the sources of funds to fund your business ideas. I will use case studies from Zimbabwean banking entrepreneurs. The entrepreneurial bankers used different sources of finance to build up their capital structure. Here I discuss the methods used and alternatives that could have been explored. Although entrepreneurial literature generally focuses on initial capital only, this discussion considers capital financing strategies for the whole business cycle. This is critical because most banking institutions found their capital continuously eroded by inflation and hence needed continuous recapitalisation.
It is expected by most lenders and investors that the entrepreneur would risk part of his own resources to assure them of his belief in the venture. In Royal Bank, Jeff Mzwimbi and his partners used their own personal resources as start- up capital. For the long term capital requirements Mzwimbi offered his equity in Econet as collateral for a loan from Intermarket Discount House. Within Kingdom Bank, Nigel Chanakira and his partners used their own resources, with Nigel disposing of his family home while others, e.g. Franky Kufa, used proceeds from a profit share scheme from their previous employer.
A common form of using personal resources is bootstrapping. Bootstrapping is a way of starting up the venture using meagre personal resources to demonstrate that the business idea works and to generate internal sources of equity. Some bankers used this approach.
They started as advisory services which, after a few years of acquiring credibility and earnings, were converted into merchant banks. Advisory services require minimum staffing and no regulatory minimum capital requirements. Kingdom Bank, Trust Bank and ReNaissance Merchant Bank all used this approach. A few years later, Kingdom and Trust converted from merchant banks to commercial banks. The capital requirements for merchant banks are lower than those of commercial banks.
ReNaissance Merchant Bank traded itself into significant equity capital in 2006 when the minimum capital requirements were increased. A number of banks resorted to rights issues from the shareholders. However RMB shrewdly took positions on a new money market instrument released by the Central Bank, the inflation-linked Open Market Operations Treasury Bill. This yielded excellent results leading to the bank meeting the capital requirements without resorting to shareholder funds.
Placing your own resources even if they are little into the business convinces others on your confidence in the business idea. I am amazed at the may people who try to raise funds from others without even an initial seed capital. Why would investors risk their moneys on a project you have no intention to risk your own resources. Sometimes using personal resources helps you demonstrate the model and how it works before you invite others into the business. Go ahead and start the process.