For a small business that doesn’t have any assets, getting a loan can be extremely difficult.
Without access to any form of security, micro, small and medium-sized enterprises (MSMEs) attract a high-risk premium from lenders. This means MSMEs will find they’ll either be denied a loan or get the cash at a high interest rate.
As a result, although Kenya has made progress in financial inclusion, MSMEs have generally been locked out of regulated financial institutions, such as banks and deposit-taking microfinance institutions.
However, in true entrepreneurial fashion, alternative financial products that are innovative and hassle-free have mushroomed to fill this gap.
Most of these models enable individuals to borrow or lend money without involving a financial institution.
The Cambridge Centre for Alternative Finance and its research partners, including Energy 4 Impact, carried out an online survey from July to November 2016.
It found that in 2015, Kenya and South Africa raised $16.7 million (Sh1.7 billion) and $15 million (Sh1.5 billion), respectively, in financing from various online channels. However, unlike in South Africa, most of the money raised using these alternative financing platforms in Kenya came from foreigners.
Overall, a total of $62.2 million (Sh6.4 billion) was raised across Africa, with more than 75 per cent of this money going towards funding start-ups and SMEs.
Online audiences are increasingly being seen as a potential solution to the funding challenges businesses face when they try to serve the ‘bottom of the pyramid’. Here are five of the most popular financing models.
1. Equity-based crowdfunding
With equity-based crowdfunding, individuals or institutional funders purchase equity issued by a company.
Basically, you sell a stake of your business to a financier who then funds your idea. This is popular with technology, finance and e-Commerce companies.
Although the models isn’t very popular in Africa, it’s getting there, with shows like Lions’ Den making the model more accessible to start-ups and early growth enterprises.
2. Peer-to-peer business lending
With peer-to-peer lending, someone with money who’d ordinarily be a depositor in a bank lends directly to you.
You don’t need to have assets, a bank account, guarantors or a salaried job to raise the financing. All you need is an Internet connection and evidence of income to prove you can repay the loan.
Examples of peer-to-peer lending platforms include Zidisha, Pezesha, Malaika Africa and Funding Circle.
There’s also BitBond, a German-based lender and the first global peer-to-peer lender that leverages on the digital currency, Bitcoin. It allows borrowers around the globe to apply for a Bitcoin-based small business loan, regardless of location. The Central Bank of Kenya has, however, warned the public against investing in the cryptocurrency, terming it a “bubble”.
3. Debt-based securities
With debt-based securities, the business issuer puts forth a debenture or other bond note against company assets.
This model of crowdfunding involves requesting support and resources from other investors in exchange for interest.
It is similar to acquiring a traditional bank loan, except that it offers the option of competitive and lower interest rates, with more flexibility and options to secure additional resources.
Most debt-based securities portals are located outside Kenya but are accessible to local entrepreneurs. They include Prosper, Funding Circle and LendingClub.
4. Donation-based crowdfunding
With donation-based crowdfunding, donors provide individuals, projects or companies with financing based on philanthropic or civic motivations, with no expectation of monetary or material return.
This is popular in Africa, according to the Cambridge report, and mostly focuses on charity and philanthropic causes, as well as educational and social enterprises.
M-Changa is what Kenyans would call digital harambee. Not only is it a donation-based crowdfunding platform, but can also be used to get equity funds.
There’s also Jamii Funding, which is based in Tanzania but plans to set up in Kenya and can be to used to raise funds for any cause, idea, product or service.
Internationally, you can use GoFundMe or YouCaring, which are crowdfunding sites where well-wishers contribute through PayPal, or credit or debit cards.
5. Reward-based crowdfunding
This model involves individuals contributing comparatively small amounts of money to projects in return for some kind of reward.
The size of the reward is usually a reflection of the amount contributed.
Rewards can range from something as simple as a personalised thank-you note to a production version of the crowdfunded product. This model tends to be popular with enterprises in the art, music, design, film and technology industries.
Some of the best-known platforms for reward-based crowdfunding are Kickstarter and Indiegogo.
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