Funding your small business through the Capital market
Most small businesses are usually scared or intimidated of the capital market. Perhaps, they have some justification to entertain these fears. Over the years, the capital market has been dominated by the large conglomerates. The fact is that it is these companies that have the structure to meet listing and post listing requirements which can be sometimes onerous. However, exchanges over the world have realised that they need to attract the smaller companies to see the stock exchange as a veritable means of raising funding for their business. The London Stock Exchange (LSE) for example set up another exchange in 1995 called the AIM.
This market is an internationally open market where small and growing companies have chosen to join for the purposes of accessing funds. The AIM prides itself as the most successful growth market in the world. And they are not far from the truth. Over 3,000 companies globally have chosen to make the AIM their home. Another shining example is Poland. The Warsaw stock exchange has been able to attract SMEs to list and access funding through its platform.
Typically, what happens is that these exchanges relax the rules that are applicable to larger companies, but still demand a minimum level of disclosure and governance.
Nigeria is also not left out. The Nigerian Stock Exchange has recently re launched its own version of the growth market. Previously, this was called the Second Tier Securities market, but it’s now rechristened the Alternative Securities Market (ASEM). It’s not only the mane that has changed, but the process to listing for small companies is being made easier, and small businesses in Nigeria should take advantage of this. These companies that complain of high interest rates should realise that they technically do not have to pay an interest when accessing funds from the ASEM. This is because what they will be getting will be equity, where the potential investors will be looking for dividends or an appreciation of the value of their shares in the company.
No doubt, there are advantages and disadvantages to using this form of platform, but overall it offers a number of benefits for SMEs. Chief among which are;
•Listing on the exchange offers visibility to a company. It brings down your advertisement cost, because the exchange is a global market place. So, in one instance, your company gets access to a while lot of individuals who could be potential customers.
•Listing on the exchange also increases the chances of the small business in accessing foreign and local partners. These partners know that the company is a well-structured company, by virtue of its listing, and they place a higher premium on the company.
•It also builds the staff morale. Who doesn’t want to work for a visible, well regarded company?
•Listing on the exchange for a small business also ensures that the company keeps proper records, on an on-going basis in order to meet post listing requirements, and invariably this discipline makes the company a better entity.
•Listing on the exchange helps to independently and transparently determine the value of a company, so you see clearly what value you are creating. This makes it easier for other investors to price you if they want to buy a stake in your company.
On the flip side, listing on the exchange can have some disadvantages, like increased scrutiny, because of your public status. Your financial statements are in the public and it’s there for everyone to see. Your strategy, expenses, key board members and all that are in the public domain. If a company doesn’t t have the necessary discipline, they could be penalised when they fail to provide necessary documents to the exchange. Also, the initial process of listing could be long and tedious especially for companies that are not used to keeping records or operating a structured business.
One common concern that Nigerian small businesses have traditionally had is the issue of giving up control of “my own” company. The exchange has tried to address this issue in a sense by specifying a minimum level of shares that a company listing on the exchange should put up for sale (15 %). In essence, the entrepreneur can still own 85 % of his company. In any case, it’s always better to own 40 % of a thriving business than 100 % of a dying business. I also believe that the new generation of Nigerian entrepreneurs are not overly concerned about keeping close control, but more about creating value, expanding and creating great products, whether on their own or with the help of outside capital.
The ASEM has also put a structure in place to help aspiring SMEs that want to access this platform to specifying institutional advisers (these companies help you get to the level of being able to qualify for listing) and designated advisers (these companies help to maintain post listing requirements and they are the interface between the company and the exchange).
The major things that SMEs need to have when thinking of applying to the exchange is;
•A comprehensive business plan,
•Must have been in operations for at least two years
•Must provide audited accounts for not less than 2 years
•Appropriate business registrations
Of course, the business must have a compelling story, great products and a theme that resonates with investors.
The import of this for SMEs is that they must begin to think of the possibilities of listing immediately when they start their businesses. So they must already have business plans, audited accounts and a corporate governance structure, so that if they want to list in future it won’t be much hassles.
Whilst rhe decision to list is strategic and should be entered into with a lot of thought and care, it offers a good route to accessing long term capital for SMEs in Nigeria. Much work is being done within the regulatory environment to ensure that SMEs use this platform… I ask what are you waiting for/? Approach the Stock market today.
Oguche Agudah