INSTRUMENTS OF BUSINESS FINANCE IN NIGERIAN ECONOMY

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Last Updated on November 23, 2020 by Simnify

Content
[1.]    Definition of Business finance
[2.]    Basic instruments for Business finance
[3.]    Differences between shares and stocks
[4.]    Sources of fund for Business
[5.]    Problems of business finance in Nigeria
[6.]    Suggested solutions to problems of business finance
in Nigeria
[7.]       Summary

DEFINITION OF BUSINESS FINANCE
Business financing involves the sourcing and management of fund by enterprise. Business finance is core to the effective mobilization and harnessing of financial resources in any economy that is desirous to grow. We are going to learn in this treatise the importance of different instruments for business financing. We have  x-rayed the common problem of business finance in Nigeria culminating in the high mortality rate of these businesses. In conclusion we suggest way out of these problems and the need for government to address the issue squarely if the vision 2020 is to be realized.

BASIC INSTRUMENTS FOR BUSINESS FINANCE
The basic instrument of financing business includes:
a.    Shares    
b.    Debentures    
c.    Bonds

SHARES
A Share is the individual portion of a public limited company’s capital owned by a shareholder. Shares are divided into different classes.
i. Ordinary shares
ii. Preferred ordinary shares
iii. Deferred Ordinary shares
iv. Non-voting ordinary shares
v. Preference Shares

1. ORDINARY SHARES
Ordinary shareowners are normally owners of the business who hold the voting control of the company and the right to participate in the profit. They are considered last. They do not have fixed dividend. Their dividends are flexible depending on the performance of the company.

2. PREFERRED ORDINARY SHARES
They are shareowners who have a right to a fixed dividend that must be paid after the payment of dividends to the preference shareholders.

3. DEFERRED ORDINARY SHARES
They are shareowners whose rank for dividend comes after the preferred ordinary shareholders have been considered. They are entitled to profit only after ordinary and preferred ordinary shareowners have been considered.

4. NON-VOTING ORDINARY SHARES
These are those whose equity does not have a vote though they are entitled to a share of the profit.

5. PREFERENCE SHARES
They are those whose owners’ claim must be settled out of profit available for dividend. Also, they must be paid back their capital before any ordinary shareholder in case of winging up.
DIFFERENCES BETWEEN SHARES AND STOCKS
a. Shares are units of capital transferable only in their totality or entirety. Stock is the mass of the capital from which any part is transferable.
b. Shares may be partly paid but stock must be paid full.
c. Shares are usually numbered while stocks are not identified in this way.
DEBENTURE


Debenture is a document issued by a company, acknowledging the fact that the company is liable to pay a specified amount with interest. The amount raised becomes part of the company capital structure. The debenture holder are creditors, they are outsiders and as such have no voting right in the Annual General Meeting. There are two types of debentures :-
(1) Convertible debenture
(2)Non-convertible debenture

1.    CONVERTIBLE DEBENTURE: These are debentures which can be converted to equity (that is, they become part of ordinary shareholder), after an agreed term. This benefit makes the interest attached to the debenture to be lower than non-convertible debenture holder.
2.    NON-CONVERTIBLE DEBENTURE: As the name implies, the debenture cannot seek to become part of owner of the company by converting their debenture into ordinary shares. They have higher interest rate than the convertible debenture holders.
BONDS
Bond is a debt instrument in which an investor loans money to an entity (corporate or governmental that borrows the fund) for a defined period of time at a fixed interest rate. Bonds are some of the instruments used in the money and capital market to finance short and long term projects and activities. Bonds are otherwise called fixed income securities. This is because they have fixed interest rates. The issuer will state the interest rates that will be paid and the loaned funds (principal) that are to be returned. The interest is usually paid every six months (semiannually). The bond ranges from 90 days (Treasury bill) to 30 years (government bond).
SOURCES OF FUND FOR BUSINESS
Finance represents a very important ingredient for the survival of a business venture. Most of the time the amount that the owner of business started with as take-off grant may not be enough for needed business expansion. Hence, there is need to know other sources of fund available. We can classify the sources of finance into three.
(1)    Short term  sources—due within one year repayment
(2)    Medium term sources—due in more than one year but within three years repayment
(3)    Long term sources—available for five or more years
The following are specific sources of fund open to an entrepreneur :-
(a)    Bank overdraft
(b)    Self-funding
(c)    Personal saving
(d)    Loan/contribution
(e)    Angel funding or Donation
(f)    Venture capital
(g)    Hire purchase
(h)    Commercial paper
(i)    Trade credits/creditors
(j)    Debt factoring
(k)    Invoice discounting
(l)    Bill discounting
(m)    Accruals

PROBLEMS OF BUSINESS FINANCE IN NIGERIA
Most of the problems encountered by average business in Nigeria are finance centered and this has nosedived or spiraled into other problems as highlighted below:
1. Lack of Funding and Financial Service
Paucity of fund and lack of concerted effort on the part of government to take decisive action to move businesses forward has been one of the militating problems confronting business in Nigeria. Financial institutions that are supposed to support businesses are not forth coming; they prefer to invest in businesses that are very short-termed. The result is that these businesses are limited in capacity-building; while most of them lay their staff off and relocate to other better business-friendly environment.
2. Poor state of Physical InfrastructureIn spite of limited finance or fund, the average business in Nigeria has scramble for the available inadequate infrastructure like water, telecommunication and the transport system.
3.Non-access to medium and long term credit facilities, poor financial intermediation and lack of venture capital.
4. Poor market information and lack of market access.
5. Harsh business operating environment resulting in high cost of doing business and unfair competition from imported goods.
6.High mortality rate of small scale and medium scale business.
7. Weak sectional linkages resulting in lack of synergy liability.
8. Inadequate government support.
9. Lack of data for effective planning.
10. Diversion of fund for unproductive use by business men. Sometimes when this fund is made available the businessmen often divert the fund into other unproductive use. We have had instances when people take bank loans only to celebrate their birthday and sometimes to marry another wife.
11. Cut-throat interest rate being charged by the financial institutions is suicidal in the harsh economic environment like Nigeria. The interest rate is as high as 20-24%, besides the administrative charges. This has led to the death of so many businesses.
SUGGESTED SOLUTIONS TO PROBLEMS OF BUSINESS FINANCE IN NIGERIA
1.    The creation of a conducive policy regulatory environment.
2.    Access to formal credit and complementary financial services on a sustainable basis.
3.    Promoting access to requisite information and business development services to enhance the capacity of the sector.
4.    Advertising, infrastructural bottlenecks (workspace, roads, sanitation, utilities etc.)
5.    Promotions of effective research development systems for the growth and competitiveness of small and medium scale Enterprises (SMEs).
6.    Improving Small and medium scale enterprise’s share of local/export markets.
7.    Promoting the transportation of informed SMES to formal sector through sensitization/simplification of registration of registration procedures, to ensure full integration into the economy.
SUMMARY
(1.) Shares are the interest an investor has in a business; shares are divided into :
– Ordinary shares
– Preferred ordinary shares
– Deferred ordinary shares
– Non-voting shares
(2.) Finance is a very important ingredient in a business; there is the need to know how funds are made available for business purposes.

(3.) Sources of fund are classified into three:
– Shorter term
– Medium term source
– Long term source.
Author: Simnify

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