Dr Keen Mhlanga
The business operating environment is flatly becoming complex for both startups and established companies. The Covid 19 global pandemic led to closure of many firms, and to the existing ones survival becomes the primary fundamental. In Zimbabwe 80 percent of companies are very excellent when it comes to the technical aspect, strategy development and business remodeling.
On the other hand, no matter how great a business strategy is, one essential element of financial success is the ability to obtain sufficient funding to grow the business. We cannot afford to overlook the need to use modern methods of financing investment activities of business entities in order to develop the national economy.
Varied companies are using traditional financing, were they acquire a loan or line of credit secured through a financial institution under conventional terms, usually based on the 4 Cs of credit which are character, collateral, capital, and capacity. The process for securing such financing is fairly standardised, with lenders looking at credit history, business plan and assets when assessing qualifications. Many businesses are failing to generate profits at higher rate than the interest on borrowed money, and this automatically breed a specie of corporate defaulters. While many people finance their new companies with their own capital or by borrowing money from family members or friends, there are other options available, but companies must understand that raising funding is never easy, and usually takes longer than anticipated.
The most effective way of financing is through the Capital Market. The Zimbabwe Stock Exchange (ZSE) is the backbone of Zimbabwe’s capital market, with a market capitalisation of $818.9 billion, it is a highly diversified exchange in Africa given listings spanning across all key sectors of the economy, with a total listing of 57 companies.
This is a platform for firms to trade publicly and raise capital. The transfer of capital and ownership is traded in a regulated, secure environment under the Securities and Exchange Commission of Zimbabwe (SECZ). Capital Raising allows companies to grow their businesses, expand operations and create jobs in the economy.
This investment is a key driver for economic trade, growth and prosperity. There is also the Victoria Falls Stock Exchange (VFEX), a wholly owned subsidiary of the ZSE established to kick start the Offshore Financial Services Centre (OFSC) earmarked for the special economic zone in Victoria Falls. This gives companies the ability to raise capital in hard currency and use different securities to raise capital – debt, equity, exchange-traded funds (ETFs) and real estate investment trusts (REITs). VFEX pick up lower trading fees which lead to improved liquidity, enhanced profile within and outside Zimbabwe and lower exchange control risk with the USD as the trading currency.
Financial Securities Exchange (FINSEC) is an Alternative Trading Platform under Section 30 of the Securities Exchange Act [Chapter24:25] as read with the Securities (ATP) rules S.1.100 of 2016. This caters for buyers and sellers of securities, failing to meet main bourse listing requirements but have the objective of buying and selling securities. FINSEC dispense hybrid capital raising options including debt. SMEs may opt to utilise the existing framework and also take the equity financing route. Family owned business should also consider to restructure and let go some percentile holding in order to inject new capital and apply “100 percent of an ant Vs 10 percent of an elephant” nexus.
Farmers may take advantage of the Zimbabwe Mercantile Exchange (ZMX) registered by the Agricultural Marketing Authority (AMA) to operate a commodities exchange. It also operates a Warehouse Receipt System according to the Warehouse Receipt (General) Regulations, 2020. ZMX is operated by the Financial Securities Exchange and was founded as a joint venture between the Financial Securities Exchange (FINSEC) and the TSL Limited representing the private sector and the Government. The exchange-traded commodities (ETC) include, seed oils, tea, macadamia nuts, red sorghum, white sorghum, millet and sugar beans. The warehouse receipt can be used as collateral and it carries the ability to facilitate further trading and borrowing.
Startup companies with high growth potential can pitch their business to Venture Capital firms (VC’s) to gain financial support in exchange for equity. This brings the benefits of potentially gaining investors who can provide advice and business expertise. VC’s mainly focus on fast-growing startups which appear to be stable and lower risk than less established new businesses.
A large amount of time-consuming work and effort often goes into acquiring the backing required and may not be feasible for smaller, riskier businesses. A good attribute to those who prefer retaining their shareholding is that, VC’s invest for a specified period probably plus or minus 5 years. Their investment policy is limited to specific industries, stage of the company and geography.
Another financing option is to target high net-worth individuals known as Angel Investors, these invest their personal money and can make their own decisions on investment opportunities. It means if a business presentation is well articulated and executed they will be instant approval and funding by the investor.
Angel Investors normally target startup or early-stage companies in exchange for an equity ownership interest. They can often provide less finance than VC’s, but have the ability to back riskier and complex prospects, they also bring valuable ideas and advice to your business. When looking for this type of financing, angel investment networks and syndicates are a good place to start.
Crowdfunding, which is the practice of raising funding through multiple funders, often via popular crowdfunding websites may be another preference. There are numerous models of crowdfunding with the most relevant for funding small to medium-sized enterprises (SMEs) including, peer-to-peer lending, peer-to-business lending, reward-based and equity crowdfunding.
Peer-to-peer lending involves investors lending money to an individual for a fixed interest rate. Peer-to-business is similar to peer-to-peer lending but with loans for businesses, instead of individuals, via investors, companies and government institutions. Reward-based crowdfunding allows you to receive funds in exchange for giving your investors a reward, such as a product sample or event.
Equity crowdfunding is analogous to rewards-based but in reverse of providing capital for rewards, shares are offered in exchange for investment. Deciding which crowdfunding model is right for business, is ordinarily dependent on business stage and how much is needed. Equity crowdfunding enables everyday investors to invest alongside professionals and VC’s, with hope for a greater return. This would be through buying back the shares, selling a company, merger and acquisition (M&A) or Initial Public Offering (IPO). This route of finance can benefit companies in more ways than just providing financial support. Pitching a company to a crowd of investors provides valuable market validation and enables it to gain a large base of customers and brand advocates.
Founder and Chairman of FinKing Financial Advisory