There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.

One key to a successful business start-up and growth is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. But, as many new entrepreneurs quickly discover, raising capital may not be easy; in fact, it can be a complex and frustrating process. However, if you are informed and have planned effectively, raising money for your business will not be a painful experience.

In Tanzania, one cannot obtain a loan from financial institutions if you don’t have a running business for at least six months. So before starting a business it is advised that you source enough fund to keep you running at least for a year.

This information summary focuses on ways a small business can raise money. We will give you some alternatives, strategies, and things to think about in your search for financial help. You will learn how to locate, negotiate for, and maintain sources of money to help you start and expand your business.

Financing Basics

While poor management is cited most frequently as the reason businesses fail: inadequate or ill-timed financing is a close second. Whether you’re starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing or asking for too much or too little.




Before Financing, Ask:

Do you need more capital or can you manage existing cash flow more effectively?

How do you define your need? Do you need money to expand or as a cushion against risk?

How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.

How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.

In what state of development is the business? Needs are most critical during transitional stages.

For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.

What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

Is your business seasonal or cyclical? Seasonal needs for financing generally are short term.

Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

How strong is your management team? Management is the most important element assessed by money sources.

Perhaps most importantly, how does your need for financing mesh with your business plan? If you don’t have a business plan, make writing one your first priority. All capital sources will want to see your plan for the start up and growth of your business.

Types of Financing

There are two types of financing: equity and debt financing. When looking for money, you must consider your company’s debt-to-equity ratio- the relation between shillings you’ve borrowed and shillings you’ve invested in your business. The more money owners have invested in their business, the easier it is to attract financing. If your business has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won’t be over-leveraged to the point of jeopardizing your company’s survival.

Equity Financing

Most small or growing businesses use limited equity financing. Equity often comes from non-professional investors such as friends, relatives, employees, customers, or other people in the tourism industry. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Giving up some of the decision-making and some of the potential for profits are the main disadvantages of equity financing.

Debt Financing

There  are  many  sources  for  debt  financing: banks,  savings  and  loans,  and  commercial finance companies are the most common. The government has developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms.

In addition to equity considerations, lenders commonly require the borrower’s personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity.

Estimating Costs

In order to determine how much money you will need to start, you must estimate the costs of your business for at least the first several months. Every business is different, and has its own specific cash needs at different stages of development, so there is no universal method for estimating your start up costs. Some businesses can start on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to start your business.

To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic start up budget should only include those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs, and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.

The most effective way to calculate your start up costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate before starting your business. The following tool will assist you in performing that task:

How to Secure Finance

In securing finances for business there are several basic ways that one can use. These include

1. Savings

In this, one continuously saves some amount of money in order to have a required sum of capital for establishing the required business. Among the basic ways used by people opting for this approach, is through saving their money in accounts such as fixed deposits. Almost all existing commercial banks and some financial institutions offers fixed account services.

About Fixed Account

Fixed Deposits are accounts opened for fixed contracted periods, currently ranging from 1 month to 2 years. They earn interest at attractive rates, thus providing customers with long term savings growth opportunities.

2. Partnership

Another best option to raise fund to finance your business is through forming a business partnership. Here one looks for people and businesses that can finance the envisaged commerce and include them as potential partners. However for this to be effective, there should be a well-set contract or partnership agreement that will indicate on how each and every person involved in the business will benefit from such partnership.

Types of partnership click here

3. Family and Friends

Using family and friends can also be a better option of raising business capital. Here, a person interested in establishing business can seek for monetary assistance from both family members and friends who can be able to support such endeavors.

4. Guarantee Fund

MSMEs can access loans to fund their business using guarantee funds.

In Tanzania, the government designed Small and Medium Enterprises credit guarantee scheme to provide a guarantee to financing institutions aiming to enhance the creditworthiness of exporters so that they would be able to secure better and larger facilities from the financing institutions.

With the scheme, financing institution are assured that, in the event of default, the scheme would cover part of the loss.

So locally owned MSMEs dealing with exports may take advantage of this scheme to obtain fund for expanding their businesses.

Eligible MSMEs

o Formally registered entity and owned by Tanzanian citizens.

o Having viable commercial projects, which are the basis of requesting the credit facility.

o Ready to offer any enforceable collateral including their personal guarantee, with the condition of allowing assignment of such collaterals to the Scheme

o Having applied for a credit facility from a financial institution relating to eligible projects on which the financial institution has sought a guarantee cover from the scheme

Source of Gurantee Funds[link]

5. Loans

Another option that can be used in securing finance for business is through accessing loans from banks and micro-finance institutions (Get the list of Banking Institutions and List of Micro-Finance institutions that  offer support to MSMEs in Tanzania). Majority of these institutions usually have a special package for MSMEs especially in the amount set and the overall requirements for securing such loans.

More information about Micro-Finance institutions can be obtained from this website

In order to be able to access finance from micro-finance institutions and banks there are general requirements that one needs to fulfill. These requirements include: –

  • Must be a Tanzanian of 18 years and above

  • Must have a business license (Original and its Copy)

  • Must have the business financial statement

  • Business Tax clearance certificate (Original and its copy)

  • Loan application letter addressed to the manager of branch concerned

  • Residential introduction letter from the local government and guarantor’s letter

  • Photocopy of personal identification and guarantor’s identification

  • Personal passport size and guarantor’s (5 each), with blue background

  • Collateral as specified by that particular financial institution. Commonly used are immovable assets like a house, farm, and other things like a car and valuable assets as it may be specified by the source.

Things to consider before applying for a business loan

6. Be prepared to show how you'll use the money

You may want to include projected financial statements for the next 3-5 years. In your projections give a clear description of how you’ll use the proceeds and how you intend to pay the money back.

Be specific. Show how you’ll use the money to open up new markets, introduce new products, or other definite business use that will positively impact your bottom line.

If you’re looking for debt financing, you’ll want to emphasize your ability to repay the loan. On the other hand, equity investors will want to see the potential for strong rate of return.

Factors to Consider Before Taking out a Small Business Loan

1. Know what you need.

If you’re not sure how much cash your company needs to operate or expand, meet with an adviser or an accountant before approaching any lenders. Be prepared to supply documentation to back up your request and to answer lenders’ questions about your finances, business model, and future plans. Also be ready to discuss exactly how the loan will be used. For instance, you might show how the cash will be used to purchase materials, to set up a new location, or to pay additional staff.

2. Consult an Expert

Whether you need help on finding the right loan for your business or a guiding hand that can help you through the application process, don’t feel that you have to go about it alone. Local Small Business Development Centers, Women’s Business Centers, and mentoring organizations for small businesses can help you through the process.

3. Get your business plan in shape

Any business must have a business plan. Before applying for a business loan make sure that your business plan tells the story of your company accurately. Ensure that it is clearly written to the extent that it can attract investors. Cross check the following issues

– How effectively have you demonstrated that you understand how to market your great product or service and turn a profit while doing so?

– How strong is your executive summary? Do your financials show when and how you will obtain long-term profitability?

-How honest have you been in your assessments of the market and your competition?

4. Put your paperwork in order

A standard loan application requires specific documents and numbers. You should take some time before going through the loan process to get this information in order. It’s always a good idea to schedule a meeting with a financial advisor to do this.

Among the documents you’ll need are:

-Organizational papers, such as articles of incorporation, , business licenses, etc.

-Lists of business and personal assets that could be used as collateral

– Names and contact information for at least three credit references

-Accountant-prepared business financial statements (P&L, balance sheet) for the past three fiscal years (If available)

-Business tax return documents for the past three years (If available)

6. Check your credit

Many banks now use “credit scoring” to determine whether you qualify for a loan or not. Commonly used for consumer loans, credit scoring uses factors such as credit history to determine whether or not you’re a good risk. Even if your bank doesn’t rely solely on this method, it will no doubt look at your past payment records to determine your future credit worthiness. There’s also a good chance that you will be asked to guarantee any loan personally, so your personal credit history is also important.

7. Make your applications impeccable

Your financials are probably the most important criteria for helping you get financing, but neatness counts too. Don’t forget about the little things that will help you impress money sources and reinforce your image of professionalism. Make forms neat and easy to read. Dress in appropriate, conservative business attire for meetings. Do everything possible to demonstrate trustworthiness and show that you’re highly capable.

8. Be patient

Finding financing, no matter what stage your business is at, is a time consuming and exhausting process. Many small business owners vastly underestimate the time it will take them to find the money they need, and it’s not uncommon for businesses to run out of cash during the process. Be sure you factor in time for all the tasks you’ll need execute — from refining your business plan to weeding through lists of banks, lending institutions, or outside investors.

Guarantee Fund

Guarantee Fund is used to mean a sum of money given or provided as a cover for predicted losses. For SMES this is very efficient as it provided a cushion on which some of the business losses can be covered by existing institutions.

Who are Qualified MSMEs to access guarantor funds

  • Formally registered entity and owned by Tanzanian citizens.

  • Having viable commercial projects, which are the basis of requesting the credit facility.

  • Ready to offer any enforceable collateral including their personal guarantee, with the condition of allowing assignment of such collaterals to the Scheme

  • Having applied for a credit facility from a financial institution relating to eligible projects on which the financial institution has sought a guarantee cover from the Scheme.

Procedures involved when seeking for guarantee fund

1. Collateral

  • Any enforceable collateral of the SME borrower is acceptable, for example a house, car, farm etc.

  • Assets financed by the guaranteed credit facility

  • Assets under lease arrangements.

  • The financing institution would be required to undertake the same prudence in appraising the collaterals as it would in other credit facilities based on the prudential requirements.

  • The collaterals shall be assignable to the scheme. This condition shall be imposed in the agreement with the financing institutions.

2. Guarantee Fees

  • The guarantee fees shall be 1.5% of the total contingent liability of the scheme at the time of issue of the guarantee and it is subject to review from time to time by the Scheme.

  • These fees apply for credit facilities that do not exceed 360 days, in case of medium to long-term credit facilities; applicable guarantee fees shall be charged 0.75% per annum on the subsequent years and would continue for the duration of the guarantee.

Eligible Projects

All MSMEs on-going activities from different sectors are qualified to access this fund

Source of Guarantee Fund

  • Bank Of Tanzania

  • African Development Bank

  • Ministry of Finance

  • CRDB Bank