Safer to sell shares than take a bank loan

Finally, small and medium enterprises, commonly known by the acronym SMEs seem to have seen the light, as was reported in this newspaper on Thursday this week.
Edward Ojulu
Edward Ojulu

Finally, small and medium enterprises, commonly known by the acronym SMEs seem to have seen the light, as was reported in this newspaper on Thursday this week.

This new development basically means that some companies in this category now consider selling shares to the public as a better option of raising working capital to grow their businesses.

After years of hiding in their small cocoons and operating almost secretively, some now want to go public by applying to be listed on the secondary market of the Rwanda Stock Exchange.

Traditionally, small enterprises in any African country depend on borrowing from either friends and relatives or to some extent banks and microfinance institutions whenever need for cash arose. 

The reasons for this can be three-fold, but the main one is the selfish desire to keep the business as a family enterprise to the benefit of only members of the household.

In other words there is no need to allow in outsiders to share the family fortunes and to nose into domestic affairs since to do so is to unnecessarily expose one’s privacy.

The second reason, which is almost linked to the first one, has to do with fear to expose the company’s dirty past—that may result into penalties especially where a business entity has been evading taxes in one way or another.

Listing on any stock exchange comes with a certain degree of disclosure—opening the company’s past, present and future to scrutiny. This is because no investor can buy shares in a company whose past and present financial status is not known, or in a business whose future cannot be reasonably predicted.

Thirdly and sadly, ignorance has played part in keeping SMEs from looking for funds through the stock exchange. This is where the Capital Markets Authority has its work clearly cut out.

Studies have shown that families hold onto their small business because they simply don’t know that selling shares is the best way of raising capital to grow the business when compared with bank loans.

The reality is that selling shares is the only known way of raising capital without going into debts. In short selling shares brings money without any cost or future obligation to anybody.

This means that whatever money that comes in from new shareholders is neither a debt to the company nor to the proprietor, in this case the family that owns it.

Selling shares to raise capital, therefore, has another advantage of spreading risk by sharing it with other shareholders. Instead of mortgaging family land or a residence for a bank loan to rejuvenate a struggling business, it is safer to invite in new shareholders by selling shares.

It is safer because even if the business failed, nobody is going to attach your family’s land or house because nobody owes the other unlike in case of a bank loan.

On a daily basis, this very newspaper publishes notices titled: Itangazo rya Cyamunara, inviting buyers for properties previously mortgaged as collateral for bank loans and whose owners have failed to pay borrowed money. There is nothing as stressful as losing a home to a lender, especially when the business for which money was borrowed also collapsed. It basically means going back to ground zero.

Selling shares to raise capital, therefore, will spread risks yet bring in interest free capital into the business. In addition, new shareholders come with new ideas to improve and grow the business—a resource that is sometimes woefully lucking in many of our small and family-owned enterprises.

The writer is a journalist based in Kigali