Access to finance
It is often stated and very much believed and agreed that access to finance is one of the common and likely most important hurdle confronting entrepreneurs and small business owners. The unknown gap that exists between those with financial capital and those with potentially great business ideas, leaves a wealth of exploration to be done.
Need for finance
The need for finance occurs for a range of reasons depending on the stage of business development:
* Startups: to fund initial asset purchase and operating capital to acquire inventory;
* Microbusiness: to fund working capital and acquisition
of additional equipment as initial stability is achieved
* Small & Medium sized: to fund expansion and growth, technological advancement, new business development and staff and management training; to achieve export readiness
* Large enterprise: to fund research and development; create additional export and distribution opportunities
Many entrepreneurs and small business owners possess ideas, but do not have available wealth to fund their startups, and this has led to a high failure rate traditionally, not due to lack of a good business idea, but poor access to finance and more importantly the training and mentorship that would make it possible to counter and prepare for this single challenge.
Our traditional sources for funding of business are highly risk averse in an effort to protect their profitability and level of shareholder return. Unfortunately, the gap I previously alluded to is filled with many misconceptions by both lender and borrower on the needs and abilities of the other. So how do we bring them together in a manner conducive to the needs of both parties and most importantly our future socio-economic growth and sustainability?
Objective of lenders
* To increase their wealth
* To mitigate against their minimum level of acceptable risk
* To provide satisfactory return to the owners of the wealth they manage
Objective of borrowers
* To have their business financed
* To achieve funding at the least cost possible
* To meet their obligations and ensure sustainability
A useful model/concept
While we have many traditional avenues for the provision of financing for new and expanding businesses, we collectively need to revisit our local funding spectrum with a view to providing the right type and mix of funding across the varying stages of business at the right time and from the right source.
The above table should reinforce the level of dependence currently placed on the banking and credit union system and why access to finance appears such a challenge. These sources lend from funds over which they have a fiduciary responsibility and as such exhibit a high level of risk averseness and rightly so, in order to protect the owners of the wealth and conform to an ever expanding regulatory framework.
The finance component of business is critical at all stages and we cannot meet our objective of entrepreneurship fuelling economic recovery and growth on our current trajectory, so the creation of angel investor networks, venture capital funds and the attraction of local and international high net worth individuals is paramount to the way forward.
Additionally, different industries require varying levels of capital and financing at the start and midstream, while providing high returns later, yet another reason for the a varied financial landscape to encourage and foster entrepreneurial development.
The local finance and business investment landscape
Commercial banks – as a source of finance have served us well over the decades of business activity in Barbados. The banking sector is very interested in the development of business, but we must understand their inherent objectives as commercial and often publicly owned and traded entities. As illustrated above the banks should come into the financing equation at much later stages than we are accustomed. In earlier stages their simple role should be provision of consumer services – (deposit and savings accounts, credit cards).
Credit union league – have come to forefront in recent years as a supporter of business enterprise through the activities of its members. As a member’s organisation, the objectives are significantly different, and as a result, attitude to risk can be more relaxed, though not ignored. These organisations have already been making their mark locally in the startup and micro business financing segment and are currently strengthening their resources and approach to lending;
Venture capitalism – our initial forays into this area of business financing have not been the biggest success, largely due to misconceptions about this type of finance and some conservatism on the part of potential investee companies. It requires some level of transfer in legal ownership for the investments’ duration, and typically this is a challenge for business owners without an entrepreneurial mindset. Venture capital is often a segway from angel investment.
Angel investment – has never been officially undertaken in Barbados as a part of our funding spectrum for businesses. As a Director of the Barbados Entrepreneurship Foundation (BEF), and co-champion of its finance pillar, we have been working for the past six months on the creation of the regions’ first formal angel investment network – Trident Angels – and we are now in the advanced stages of its setup. This type of investment utilizes a network of high net worth individuals often entrepreneurs in their own right seeking opportunities to invest in new businesses and provides their expertise and experience in terms of mentorship and guidance. As a result the level of accepted risk is much higher, and so the expected return will be as well.
In our effort to utilize entrepreneurship as a vehicle of change and growth, we must see the collective role for government and private sector to assume in providing the level playing field and ensuring real access to the right type of finance. Private capital and government incentives will go a long way towards accomplishing our goal in this regard.
(David Simpson is Immediate Past President of ICAB and a Director of the Barbados Entrepreneurship Foundation (BEF) and serves
as co-champion of its finance pillar.)