Fund your startup without taking on the risk of loans

Uganda Investment Authority points out that these small businesses foster innovation, wealth and job creation. However, while Uganda ranks highly in terms of entrepreneurship, the Trade Ministry says a majority (54 percent) fail to survive beyond five years and 28 percent of small businesses are less than a year old.

Several factors lead to the high small business mortality and one of these is access to capital.

This handicap shows up even from conception of a business idea, causing people to debate between using savings or loans to bring forth that idea.

Ronald Mukasa, a financial advisor, says when starting a business, one of the biggest challenges is uncertainty.

“Many times, even when you do a bit of research, you don't understand the customers, or fully understand the value chain. These make starting a business one of the most challenging times for a business owner because it is packed with uncertainty,” he says.

The question that prospective entrepreneurs should ask is: “Whose money should I use in this uncertainty?”

John Walugembe, the Federation of Small and Medium Enterprises executive officer, says businesses can go either way but oftentimes, a business may fail many times before it works.

“You are less constrained when you use personal savings, than when using other people’s money (loans),” he says.

For instance, every loan comes with collateral, therefore, imagine this being your house and the business fails. Not only will that bring instability in your life, the business will never take off.

“Allow the business to grow organically using your savings. In due time, it will generate the cash flow needed for its growth,” Walugembe says, adding: “It is only with your savings that you have the luxury to make mistakes, more like gambling.”

Will my savings power me to start a business?

Not every big business started big. Starting small allows you to get the bolts and nuts of the business, which reduces the level of risks met and losses suffered.

“That way, you will learn where to put your money, rather than throwing it anywhere. That is the beauty of allowing the business to grow organically because the first few months are for studying the environment. It could also be that you need to let go of the idea or re-angle it,” Walugembe says.

However, many entrepreneurs want to start and fly but Mukasa says it helps to start small.

Picking from the salon story, by the 10th client, you would have discovered where most of your clients are hence pointing you to where you can put your permanent location.

“Therefore, in a way, starting small is a way to collect information about the business and that allows you to somewhat de-risk the business. That is better than taking a loan for an establishment that crumbles in no time,” he says.

Won’t the currency depreciate?

Inflation is part of any economy and that may make one sceptical about saving to start a business. However, Mukasa says that is why one should evaluate the kind of business they want to start, say, its capital requirements.

“If the requirement is big, then savings may not help. However, you must also look at the interest rate risk. It also helps to know that even banks may not be willing to give a loan to start a business,” he says.

Is there a place for loans to start businesses?

Yes, and Mukasa says it is when one has understood the market they are operating in. That means having walked the journey for quite a bit.

“Then you would have understood your clients’ needs, where you will invest the loan and get more productivity,” he adds.

Therefore, it is not impossible to start a business with a loan. However, there is an embedded risk, which is worth bearing in mind.

Sources of cheap loans

While most sources of loans have expensive money, Mukasa says there are a couple of programmes that a budding entrepreneur can use. For instance, Programme Development Model loans are focused on empowering small and starting business people.

“Do not fall in the trap of saying, “I don’t have money, so I can’t start”. It is about balancing the risk as it is a case-by-case basis,” he says.

Is there a less risky way to start a business?

Surely, it is not all gloom when starting a business. For instance, if a pharmacist desires to start a pharmacy, the risk is reduced because they have an idea of the stock needed, its cost, the sources and the regulations of the sector.

“That differs from when a teacher wants to start a pharmacy (drug shop). Therefore, experience plays a great role in de-risking entrepreneurship,” Walugembe says.

Thus, before one starts a business, you must learn about the workings of the sector you want to venture into.

“If it is a different field from what you previously did, you could volunteer, and get a mentor. That is because you must get into something after having a good understanding of it,” Walugembe says.

Cheaper capital

Apart from borrowing, there are other sources of capital for one who needs to start a business.

Family and friends

These can give you cheap loans or even grants to get you started. “Moreover, they can also be patient. But you must also be trustworthy with their money. Nonetheless, you must also understand the person’s character before you borrow from them as some are not as patient,” Walugembe says. 

Idle assets 

After you have evaluated the business you want to start, look around for idle assets. 

“For instance, if you have a garage, you can start a small business, say a salon, a snack business. That will take away the pressure of rent,” Mukasa says.

Supplier credit 

Some people could give you items to start your business. The scenario could be that you only have Shs500,000 yet you need more than 10 bags of cement, spades, machetes, wheelbarrows, paint, paint brushes and trowels. 

“With this deposit and rapport or proof of honesty, the big hardware store can capitalise your business, giving you the ability to start without a loan or enough savings,” he says.

Ultimately, you should only bring external money into a business after you have done a ‘proof of concept’. 

Walugembe says this is after you have understood the clients’ needs, and gained a good customer base as it allows for growth with reduced stress.

“Even with family and friends, when a business fails, a relationship could be lost. That is different from when you have used your money as there is no third party looking over your head because of a financial loss,” he says.

[email protected]