Sources of Finance for Business Enterprises In Agriculture

Finance is very crucial and indispensable for the success of any business organisation. No special or business organisation can succeed without funds. Hence, it is necessary to be exposed to the various sources of finance, especially for small and medium scale enterprises which is the subject of this article.

Importance of Finance in Business Operations

First, it is necessary to place finance or funds in its proper perspective with regards to the operations of a business enterprise, be it large or small.
The four traditional factors of production are:

1. Land
2. Labour
3. Capital
4. Entrepreneurship

Today we may add a fifth factor, which is technology, information or technical know-how. Our focus in this article is on the third factor which is capital, otherwise known as finance, money or funds.

In management, we have the four capital M’s viz:

1. Man
2. Money
3. Materials
4. Markets

The importance of capital or finance cannot be overemphasised because no form of business large or small, concept or scope, can succeed without capital. Capital can simply be defined as wealth used in the production of further wealth.

This we say in Economics that demand for capital is Derived Demand because capital is required for the procurement of equipment, machinery, foods and for the purchase of raw materials and for payment of wages etc. It follows therefore, that an organisation without finance is like a ship without a rudder or an automobile without an engine.

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Types of Capital in Business

The capital used in the running of the business enterprise can be divided into two broad categories. These are fixed and circulating capital.

1. Fixed Capital

The fixed capital of a firm is the money needed for permanent investment such as the purchase of land, erection of factory buildings, purchase and installation of equipment, etc.

From the foregoing, we deduce fixed assets of a firm include the land on which the firm stands, the buildings, machines, trucks and furniture which usually depreciate over a long period of time.

The commercial banks are jointly-stock banks or limited liability organisations which owe a duty to their shareholders to make profits.

Consequently, banks usually do not engage in very risky investments such as financing projects that are not likely to be viable, or giving long-term credits or loans and as such, firms have to explore other sources of finance in order to provide the capital needed for their fixed assets.

2. Circulating Capital

This is otherwise known as working capital and it is the money needed for defraying the recurrent expenditure of firms. Working capital is used for such purposes as payment of wages and salaries, purchase of raw materials, fueling of vehicles, settlement of electricity bills, etc. Since these are short-term credits, firms can obtain loans from banks to finance their working capital.

Sources of Capital for Businesses

The capital available to a business organisation can be raised from two main sources:

1. Internal Sources

These include the firm’s own funds or self-financing, money realised from past savings, ploughing back of undistributed profits into the business, mergers and the pooling together of resources as in the case of partnership and joint ventures.

2. External Sources

The external sources of capital comprises loans or all sorts of borrowing from banks, private sources, investment trusts and finance corporations; government subsidy or grants, and capital realised from the issue of shares, stocks and debentures as in the case of public limited liability companies.

Capital Sources for Large and Small Firms

All the various sources of capital summarised above are not accessible to all types of firms. Much depends on the type, age, size and magnitude of the business organisation in question. Therefore, various firms raise their capital from various sources.

1. Small Firms

The main sources from which small firms, such as the sole proprietor and the partnership, obtain capital or funds for financing their business are as follows:

Small firms can raise initial capital from the savings which the proprietor or partners have accumulated over a period of time. Such savings may be targeted saving specifically earmarked for the launching of the business in question.

The owners of small business can also raise capital by borrowing money from private sources such as individuals, relatives and friends. A common feature in West Africa is to start business with funds contributed by the members of the family, a group of friends or an age group from the same village who had decided to go into partnerships or cooperatives.

Another source of capital open to small firms is self-financing through ploughing back or re-investing of profits into the business to an optimum size to enable it enjoy the economies of scale.

In West Africa, the government has on some occasions, given loans to small businesses which they are satisfied are likely to be viable through such organisations as the Nigeria Industrial Development Bank (N.I.D.B.), the Fund for Agricultural and Industrial Development (F.A.I.D.), the rehabilitation commission, the poultry subsidy and oil palm rehabilitation schemes of the ministry of agriculture, the bank for commerce and industry and the agricultural bank.

2. Large Firms

Unlike the small firms, capital is usually not a serious problem for the large business organisation, such as joint stock companies and co-operative societies because they have by far richer and multifarious sources of raising capital for their business operations.

i. Selling of Shares: This is particularly true of the joint stock companies. The chief source of capital for public limited liability company is from the sale of shares to the public. Once a company has received its certificate of incorporation, it can then proceed to publish its prospectus inviting the public to apply for shares and thus subscribe to the capital of allotment or stock certificate which designate them as shareholders of the company by virtue of their having contributed funds to the running of the business.

Shares need not always be paid for in full, but when the company is in difficulty or needs more capital for expansion, it calls on shareholders to pay for any balance outstanding on their shares.

ii. Debenture: Apart from selling shares, a public company obtains loans from the public in the form of debentures or loan certificate to those from whom it has borrowed money. Such creditors or debenture holders receive a stipulated amount as interest on the capital they have invested in the business.

iii. Internal Self-Finance: Occasionally, rather than issue fresh shares or take more loans, a company may decide to set aside a proportion of its profits for purposes of expansion and research. Instead of distributing all profits among shareholders, some of it is ploughed back into the business and this constitutes another source of capital for many firms.

iv. Bank Loans: Commercial banks can more readily give loans to large firms than small ones because these are more firmly established in business and besides, they have got the necessary collateral security which banks demand in case of default.

v. Investment Trusts: Some companies specialise in giving loans for business or credit facilities to firms and other establishments. These are investment trusts, hire purchase and insurance company.

Such companies usually have on their staff, a panel of economists who are charged with the responsibility for undertaking feasibility studies of projects for which loans are being sought before recommending the approval of such loans on basis of the financial viability of the applicants’ firms.

vi. Finance Corporations: These are set up by the government to finance projects which are vital for a country’s economic development e.g. Agricultural Credit Corporation and Industrial Development Corporation. The latter provides capital for the establishment of basic industries, food processing factories and pioneer industries. Government can also provide capital for resuscitation of businesses that have fallen on evil days.

The Rehabilitation Commission and the Cooperation for American Relief Everywhere (C.A.R.E) were actively engaged in such ventures in the immediate post-war Nigeria.

The public statutory corporation is in a distinct class of their own in terms of capital procurement for business because these are fully financed by the government and besides, although they are expected to pay their way, they were not established solely with the profit motive as a predominant objective. Thus, the government will usually come to their rescue anytime they are genuinely in financial difficulties.

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Survival Strategies for Small Firms

From the foregoing analysis, we see that large firms have more sources of capital and so can afford to grow. The small firms, on the other hand, are not so lavishly financed and so most of them remain small.

Nevertheless, these small units of business organisation are able to hold their own and remain in business in the face of several odds, such as, paucity of finance and fierce competition with the giant oligopolies, i.e. the large firms.

There are reasons why the small firms survive side by side with the large business and commercial establishments.

First of all, it must be realised that the growth of firms is a dynamic phenomenon which is a continuing process with several interacting factors. New firms are born continually and most of them start on a small scale. There is a considerable amount of prestige attached to being in business on one’s own and entry into some businesses is fairly easy.

Besides, there seems to be an unending supply of potential entrepreneurs who are ready to venture into the exploitation of some new ideas or favourable market opportunities. Some of the small firms of today will grow into the large firms of tomorrow. Many will die in the wake of competitions, but other new small firms quickly emerge to take their places.

Some aspects of our economy are associated with small scale production e.g. weavers, tailors, and tinkers operate quite economically in their small firms with very little overhead costs and so remain in business in spite of the large factories engaged in similar production. Such small firms are more flexible than the large firms and also less vulnerable during periods of depression.

Another advantage which contributes to their survival is that they are able to add variety to their products as well as pay attention to details according to the specifications of their individual customers. These small firms open at odd hours, give personal attention to their clients, are not subject to bureaucratic control like the large firms, and so can afford to remain in business.

Furthermore, the existence of the small firms does not jeopardise the interest of the large firms nor threaten the quasi-monopoly of certain trades. They only fill the vacuum created by the giant oligopolies and so both of them can exist side by side.

In addition, there are obvious obstacles to growth, chief among which are lack of capital for expansion and security of high-level managerial personnel.

Where long distance transportation is expensive, as in West Africa and many of the underdeveloped countries, operating on a small scale production at a few points, particularly if the necessary raw materials are located at different places and the finished product is bulky and expensive to transport.

There is a limit to growth of any firm beyond which diseconomies of scale set in. As a business concern grows in size, there is increased risk of borrowed capital, and higher magnitude of losses in the event of failure.

In terms of personnel, there is a tendency for management to deteriorate in efficiency as a business organisation expands because there are far too many departments and branches to be coordinated, more people are involved in decision making, and formidable difficulties of communication emerge.

As the organisation becomes more bureaucratic, there is considerable loss of interest and decline of morale. These risks and defects associated with increased size and scale of production tend to keep firms smaller in size.

Security and logistics reasons, the fear of war and possibilities of economic blockade could influence a country to adopt the policy of establishing several small industries in various parts of the country rather than supplying the whole country from one giant firm. If such industry is captured or destroyed by the enemy during war, the nation would have no alternative source of internal supply.

A common feature of West African entrepreneurs is their unwillingness to combine with others resulting from the fact that they are mutually suspicious of one another. There is the unusual love of freedom coupled with a desire for quick return on investments and many of the businessmen are reluctant to take risk on a large scale.

There is a limit to what a single person can do and so, as a result of lack of capital, managerial expertise and other constraints, many business units in West Africa remain small. On the other hand, SME’s collapse mainly because of mismanagement of funds and mal-administration.

Small and Medium Scale Equity Fund Scheme in Nigeria

The topic of this article is in consonance with the workshop theme of the 14th Enugu International Trade Fair which is on Empowering Small and Medium Scale Enterprise for Sustainable Economic Development.

Coupled with the fact that the managers and staff of small and medium scale enterprises have been invited as participants at the workshop; it is necessary to examine the new government policy aimed at encouraging the growth of small and medium scale equity fund scheme.

Under the federal government policy on small and medium scale equity fund scheme which is administered by registered banks with the supervision of the Central Bank of Nigeria (CBN), banks are required to set aside 10% of their pre-tax profits for small and medium scale enterprises funding.

Equity participation is between the beneficiary enterprises and the funding banks. Owners of such businesses are allowed to use the land on which the business is situated as collateral; while the banks provide funds for direct purchase of equipment from manufacturers as their own equity participation in business.

A special account is opened for each SME benefiting from which disbursements are made in gradual liquidation of the investment capital.

It is a matter for regret that many small and medium scale enterprises promoters, proprietors and managers are ignorant of the existence of this very important laudable scheme, due mainly to lack of public enlightenment about the scheme and to the lethargy on the part of the banks to enthusiastically participate in the scheme.

Something drastic must be done to create awareness and ensure proper utilisation of fund, including establishment of a special bank as a receptacle for the 10% equity fund scheme and a special department in CBN charged with monitoring of the fund.

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