What you need to know:
- The failure to access funding, has therefore, made Fintechs to relinquish control by diluting the stakes they hold in companies
Financial technology (Fintech) companies are struggling to secure capital to expand operations, a report by the Financial Technologies Services Providers’ Association, indicates.
The report, which highlights performance of Fintechs, indicates that the failure to access funding, has therefore, made them to relinquish control by diluting stake they hold.
Details contained in the 2023 FITSPA report indicate that 58 percent of the 128 Fintechs operating in Uganda prefer equity over debt financing due to lack of collateral that financial institutions require to advance them loans.
“Most sources of debt ... that Fintechs currently have access to require physical assets as collateral; whereas their valuations are based on intangible assets and intellectual property. Equity is the preference as it would overcome this hurdle,” the report notes, but indicates that by a company issuing equity, it dilutes ownership of existing shareholders.
Uganda has seen rapid growth in Fintechs due to rising demand for financial inclusion. However, such businesses require a sizable amount of capital, which in most cases could only be accessible through debt.
The report, however, indicates that Fintechs are now avoiding debt financing and are sourcing equity, which some analysts say presents certain risks such as diluting ownership and the possibility of introducing undesired changes in the business model and product mix.
“Under debt financing, interest paid on the loan is tax-deductible, reducing the company’s taxable income and potentially saving significant amounts in taxes. Once the loan is repaid, the company’s obligation to the lender ends, unlike equity financing, where shareholders have a claim on future profits indefinitely” a report by Zofi Cash indicates.
The report also notes that by demonstrating the ability to secure and repay a loan, positions a company as financially disciplined with the ability to generate revenue, which makes it a less risky investment.
However, the report warns that whereas debt financing carries a number of advantages, the obligation to repay the loan, regardless of the company’s financial performance, can put significant strain on its operations, which at worst might result into business collapse.
“If the company is unable to meet its repayment obligations, it could lead to financial distress or even bankruptcy. Therefore, it’s essential for companies to ensure they have a robust business model and a reliable revenue stream before taking on debt,” the Zofi Cash report notes.
Credit in Uganda is extremely expensive, especially for small businesses.
Credit in Uganda is extremely expensive, especially for small businesses. Interest rates are currently average at 20 percent for ordinary borrowers while prime borrowers carry an interest of between 15 and 18 percent.