The entrepreneurial landscape in Nigeria has witnessed a significant change in recent years. Business owners have adopted new ways of seeking financial boosts for their businesses.
Unlike before, when they relied on conventional sources, entrepreneurs now explore crowdfunding platforms for better results. Crowdfunding provides access to potential investors, backers, and supporters willing to contribute funds to their projects. Hence, many business owners are leaning toward this fast-growing method for their businesses.
However, despite all of the benefits, crowdfunding has some downsides you should know. So, this article compares traditional and Crowdfunding financing, focusing on their pros and cons.
Traditional Financing Options in Nigeria
Traditional financing has been the go-to option for entrepreneurs for a long time. It includes bank loans, venture capital, and angel investors. Here’s a brief discussion about each of them.
Bank Loans
Banks give loans to entrepreneurs to be repaid with interest over a predetermined period. It’s a common way for business owners to obtain funds to start or improve their businesses. Here are the pros and cons
Pros
- Banks offer a large sum of capital to eligible entrepreneurs.
- Borrowers with good credit histories enjoy relatively lower interest rates.
- It doesn’t involve equity dilution. That is, you are always in control of the business.
Cons
- The requirements are often excessive, such as the provision of collateral, extensive documentation, etc.
- Long and stressful application processes.
- The repayment policy sometimes may affect the success of new businesses.
Venture Capital
Venture Capital is the money invested in a startup with a promising growth potential. This fund is offered by a financial institution or an individual (capitalist) willing to invest in a new business that guarantees a high return on investment (ROI).
Pros
- Investors are ready to provide substantial funding for businesses that have high-growth potential.
- Seasoned investors offer free expertise, guidance, and mentorship.
- It ensures access to valuable industry connections that will boost business growth.
Cons
- Venture capitalists always love to acquire ownership stakes.
- Potential loss of control over key decisions due to investor’s influence.
- Investors’ high ROI expectation puts undue pressure on entrepreneurs.
Angel Investors
Angel investors are wealthy business moguls or individuals who invest money in unproven startups in exchange for a stake. They will get an agreed percentage of the profits.
Pros
- It is more flexible than venture capital.
- Free mentorship and guidance from experienced entrepreneurs.
- Opportunity to leverage investors’ networks.
Cons
- Limited funding amounts compared to venture capital or bank loans.
- Equity dilution as investors acquire ownership stakes.
- Investors can interfere in a business’s day-to-day operations.
Some Traditional Financing Platforms in Nigeria
Commercial Banks:
- Access
- GTBank
- UBA
- FirstBank
- Zenith
- Union Bank
- Polaris Bank
- Wema Bank
- Sterling Bank
- Stanbic IBTC, etc
Microfinance Banks:
- LAPO
- AB Microfinance Bank
- Lovonus
- NIRSAL
- FINCA
- Addosser, etc
Finance Companies:
- ALC Finance Company Ltd
- Cash-Link Leasing PLC
- Ceviant Finance Limited, etc
Non-Interest Banks:
- Jaiz Bank PLC
- Taj Bank
- Lotus Bank Ltd, etc.
Development Finance Institutions:
Advantages of Traditional Financing in Nigeria
In general, traditional financing guarantees a larger amount of money, invaluable advice, and networking that will benefit your business.
Disadvantages of Traditional Financing in Nigeria
In general, getting financial support from conventional institutions often requires excessive paperwork and a lot of time and effort; this can be stressful and demanding, especially for new entrepreneurs.
Crowdfunding
Crowdfunding is a platform where entrepreneurs obtain the financial support needed to launch their dream business. Though it started in the early 2000s, it wasn’t popular in Nigeria until 2008.
How Does Crowdfunding Work?
Entrepreneurs create online campaigns to pitch their business ideas, products, or services and they solicit financial contributions from people who will enjoy some incentives in return — that’s Crowdfunding.
Types of Crowdfunding in Nigeria
Below are the different types of crowdfunding available to Nigerians:
1. Reward-based
This type of arrangement gives rewards to backers who contributed to your campaign. Rewards can be discounts, early access to products, or any special perks in exchange for their contributions.
Pros
- Build a community of backers
- Attract people interested in your rewards
Cons
- Finance might be insufficient
- Low turn-up of backers
2. Equity-based
This is more like the Angel Investor financing in which backers receive ownership stakes in the business. This means those who donate or participate automatically have a share in the business.
Pros
- Many established investors will show interest.
- It encourages high funds within a short time.
Cons
- Profits will be shared with backers.
- Slow decision-making as stakeholders will review every move.
3. Debt-based
In this arrangement, entrepreneurs receive loans from multiple lenders and agree to repay with interest rates at the right time.
Pros
- Entrepreneurs can negotiate an interest rate.
- More accessible loans.
Cons
- Interest rates may increase the overall cost of launching the project.
- Unnecessary pressure to settle the debt — this might even lead to health complications.
4. Donation-based
This is arguably the most popular type in Nigeria. Contributors support projects without expecting any returns.
Pros
- It doesn’t involve obligations, rewards, or incentives.
- No pressure to impress any investors.
Cons
- Little to no participants since there is no reward.
- The chance of raising sufficient funds is quite low.
Some Crowdfunding Platforms In Nigeria
- FundanEnterprise
- Crowdfunder
- GoFundMe
- Quick Raiz
- CircleUp
- NaijaFund, etc.
Advantages Of Crowdfunding Financing
Crowdfunding ensures access to diverse funding sources without losing your control. It also provides an opportunity to market your products and services.
Disadvantages of Crowdfunding
It’s hard to raise large amounts via crowdfunding financing systems because it takes time and effort to create convincing and effective campaigns. Also, online scammers and fraudsters can deploy it for unhealthy activities.
Which should you choose between traditional financing vs crowdfunding?
Below are the main factors to consider before settling for any of the funding platforms:
- Business needs, goals, and targets: Traditional financing is the right option for entrepreneurs who have established businesses with a clear track record and predictable cash flow and need specific, large amounts of capital. But Crowdfunding is perfect for entrepreneurs with interesting business ideas and don’t mind having many investors.
- Your Industry: Your industry is another factor to consider. While traditional financing is recommendable for businesses with a proven model, like manufacturing, real estate, etc, business owners in the creative industries or consumer products can opt for Crowdfunding.
- Interest rates/platform’s service charges:You don’t want loans that will cripple your business right from the start. Hence, you’ll need to do some maths here. When you have considered your business objectives and niche, compare the interest rates and charges of some top Crowdfunding platforms with other traditional financing platforms to choose the most suitable option.
Sources
https://sfreelancespace.africa/best-crowdfunding-in-nigeria
https://www.cbn.gov.ng/supervision/Inst-FC.asp
https://tstartcredits.com/traditional-lenders-in-nigeria
https://businessday.ng/big-read/article/here-are-top-5-microfinance-banks
