Bank lending has always been seen not as alternative financing, but as the most regular source of external finance for many entrepreneurs operating in the Small, Medium and Micro Enterprise space. These entrepreneurs are often heavily reliant on traditional debt to satisfy their start-up, cash flow and investment needs. Despite its common use by small businesses, traditional bank finance does however present challenges to SMEs. This is especially the case for newer, fast growing companies and innovative companies with a higher risk-return profile. Alternative financing methods for entrepreneurs play an increasingly important role in helping businesses meet their financing needs to grow and contribute to their local economies.

The change in financing structure from debt to the adoption of a more sustainable equity-based strategy, represents an important solution to the ever-present entrepreneurial financing challenge. The adoption of alternative channels of funding is in line with a hybrid capital structure accommodating differing degrees of risk and return. It is therefore appropriate for us to examine 3 of these alternatives.

1 – Venture capital as alternative financing

This constitutes a vital source of innovative financing alternative to traditional debt finance for the entrepreneurial sector, as it encompasses the provision of debt and equity financing to privately held firms in the start-up phase. Venture capital is formally defined as a “professionally managed pool of equity capital’’. It is a form of private equity finance which involve investments in unquoted companies with growth potential, in exchange for a stake in the company by the venture capitalists.

Past studies revealed that venture capital backed SMEs contributed more to the society in terms of corporate social responsibility, taxes and staff welfare than non-venture capital backed SMEs. The venture capitalists also took part in the active management of the business they funded and are seldom seen as just silent partners.

2 – Asset-based finance

It represents the channel through which firms obtain alternative financing based on the value of a particular asset generated in the course of its normal business, as opposed to its own credit standing. This constitutes a well-established and broadly used alternative for many SMEs because it can be seen as backed by a guarantee.  This option makes it somewhat more flexible for SMEs to access alternative financing under more reasonable terms than they could from conventional lending channels.

3 – Crowd funding

Crowd funding is gaining momentum as an innovative source of entrepreneurial financing for SMEs. It has the immense potential of turning out to be the largest financier of SMEs on a global basis as entrepreneurs constantly seek flexible ways of raising funds beyond family and traditional bank loans. Crowd funding started in US as an online addition of traditional financing by family and friends where communities combine financial resources to effect alternative financing for members who have business ideas. This new form of capital raising appeared in the wake of the 2008 financial crisis largely because of the problems encountered by entrepreneurs in raising funds.

Reliable and high-speed electronic communication is very important to fully exploit crowdfunding.  Within the African context where internet usage is beset by power outages and slow connections in many parts, people have yet to fully embrace crowd-funding. In addition, the absence of appropriate legislation that guide crowd-funding, the culture of entrepreneurship, willing investors, and the slow pace of e-commerce adoption, are exacerbating the situation.  This is in contrast to some developed countries of Europe and America where the practice is heavily guided by legislation, or some Asian countries where the culture of sharing and giving is an accepted norm

SMEs and Entrepreneurs are vital forces for the sustenance of rapid and healthy development of developing economies and creation of sustainable jobs. Start-up entrepreneurs therefore need to be innovative in choosing the correct alternative financing sources so as to overcome the challenges of working capital and financial sustainability in this era of rapid and complex changes.