Access to finance is often mentioned as one of the major challenges, if not the major challenge, for women entrepreneurs in developing countries and emerging economies.The reports and articles that are written about access to finance mainly discuss official institutes like microfinance institutions (MFIs) and banks.These almost always ask for collateral, which mainly women are lacking due to legal and cultural restrains. Interest rates are high, so these are also costly options.
Fortunately, there are so much more options than just banks and MFIs. During a brainstorm that we did during our training in Tanzania last November, we together came up with a list of 14 options! Admittedly, trying to find a rich husband is maybe not a very plausible one (hard to find and risk of mistreatment), but that still leaves a number of more serious alternatives as well. All forms of finance have advantages and disadvantages.
These threeF’s are often mentioned as the first funders, and it is true. The advantage of these people is that they are generally supportive, because they like you as a person and believe in you. They are willing to offer low interest rates(sometimes even zero, especially with family) and are relatively flexible when it comes to repayment terms. The disadvantage is the risk to lose a friend when you are not able to repay, and maybe even gossiping about you, further risking friendships and reputation. Another thing that was mentioned is that they do not necessarily understand business, so they are not of practical help. It doesn’t help you as an entrepreneur to develop a mindset of entrepreneurial growth.
Another personal option is to use your own savings and invest them in your business.There is zero interest and it is your own money. However, you can only spend your savings once, and it can take a long time before the funds are sufficient.
Many entrepreneurs, especially starting ones, have a job next to their business. Not only does this guarantee a stable income, taking away the risk of insufficient income from your business, the knowledge and expertise gathered at the job can be implemented in the business. However, at a certain point, for a business to be successful, it will be necessary to completely focus on the business and not be distracted in time and attention by an employer.
Many countries, especially developing countries, know the phenomena of women groups that save together and provide each month another member with a loan. This is a perfect first step to receive a loan for your business. The system has many advantages, such as a low interest rate, minimum requirements, a great network (of potential clients or assistants) and the guarantee that at a certain point in time you will get a loan. Disadvantages are the low amounts and the short repayment periods. Furthermore, you will need to find a group that you know and trust.
Yes, there is such a thing as free money! Free, in the sense that it doesn’t cost you money. However, it mostly takes a lot of your time. The free money we are talking about here is funding that you can get from a foundation. Next to the money, foundations also provide you with assistance, expertise, advice, training and a network. However, writing a good proposal is time consuming, and you will probably have to write a few before you get a positive answer. In order to get the funding, you might have to implement activities which are more of their than your interest. Once you get the funding, most foundations request extensive reporting.
Sometimes foundations and other parties organise challenges or competitions, where the best applicants get free money. Applicants are often invited for informative and network meetings, so that is a plus. Reporting requirements are normally less than with normal grants. If you win, it normally means valuable promotion, increasing the awareness on your product. The minus is that the preparation takes a lot of time, and of course you have to win.
Investors come in different types and sizes. The smallest ones are common individuals. With fundraising actions, you can reach a large number of people who all provide a small amount. Fundraising always starts in your own circle and then hopefully spreads out via this circle to a larger audience. An organised way to do is through crowdfunding websites, but these are not present in all countries. In Tanzania for example, such sites are currently not possible because of policies and regulations. The advantage of fundraising is that you set your own terms. Disadvantage is that it takes a lot of time, and sometimes also money to organise this.
A step up are the so-called angel investors. There are individuals who have an interest in supporting entrepreneurs with their money. One reason to do this, is that they hope the business will become a success, multiplying the money they invested. The majority of them also invests because they believe in entrepreneurs. They mostly were successful entrepreneurs themselves and want to share their knowledge, experience and network with a younger generation. They are flexible in amounts and repayment terms. They can either provide a loan or equity. But first you need to find and convince an angel investor. A personal connection is important. Angel investors also request reports in order to stay up-to-date and think with you.
Even bigger are the venture capitalists. These are sometimes individuals, sometimes organisations, with the same goal as angel investors. The amounts they look at are large, starting from around EUR 250,000. They only provide equity, meaning that they want a share of your business. You need to be ready for this, also in terms of financial planning and reporting and the level and expected growth of your business.
This article started with banks and MFIs and ends with them. Although interest rates are high and requirements are many, there are of course also advantages! They have experience with businesses and can assist you with improving yours. You can get a loan for a longer period and you create a credit history. Many of these institutions are eagerly looking to increase their number of female clients and have special programmes for women entrepreneurs. In many countries there is wide range of different MFIs and banks available, so it will be wise to check what they offer and demand before you make your choice.
A major obstacle when accessing finance are not the external requirements, but the financial literacy capacities of the entrepreneur. The larger amount you need, the better you should be able to plan, maintain, understand and report your finances. Of course, you can hire a financial specialist. Still then, it is wise to at least understand what this person is doing. After all, a main goal of your company is to generate turnover and profit, so it is all about money.
The advice would be to increase external funds step by step and go from people you know such as friends and family to more anonymous institutes such as banks and venture capitalists. The smaller amounts and organisations are good practice for the bigger ones. At the same time, you can build your financial literacy skills, through workshops, trainings, courses and by doing.