Financing fashion businesses in Africa
We know, looking for financial resources, is usually a daunting task and one of the main priorities for many entrepreneurs and businesses. The situation is even harder in some African countries and when we focus on the textile and apparel sector. “Getting credit” is the Doing Business indicator that presents the worse results in Sub-Saharan Africa (SSA), even behind “Getting electricity”. 41% of women-owned small and medium businesses interviewed in SSA for a World Bank study answered that “access to finance” was a major constraint (vs 36% of men-owned SMEs).
Through the Fashionomics Africa initiative, the African Development Bank, wants to support the fashion sector in Africa, and this logically includes easing access to finance. The Bank in itself lends to other commercial banks and finances large investment projects. As part of the Fashionomics Africa initiative, the platform will collect useful information relative to financing your business. Additionally, the Bank is defining the final configuration of the Fashionomics Africa support with a long-term view on supporting the sector and developing partnerships with other financial providers.
Taken from: Hemer, J. (2011): A snapshot on crowdfunding. Working Papers, Firms and Region, Nr. R2/2011, Fraunhofer ISI
If you are considering external financing for your business venture, we suggest that you register as a user in the Fashionomics Africa platform and publish your needs in the “Business Opportunities” section. Our team will help you in case you need some support (write to email@example.com).
Financial alternatives to banks
Some useful definitions:
Seed capitalThe initial capital used to start a business. Seed capital often comes from the company founders' personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage.
Start-upA startup is a company that is in the first stage of its operations.
Business angel or angel investorAffluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.
Venture capitalVenture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. For startups without access to capital markets, venture capital is an essential source of money.
Venture capital and Business angels
Traditional venture capital is structured through “Private Equity” firms. AVCA is the African Private Equity and Venture Capital Association:
The African Development Bank invest in the sector through investments in some of these Private Equity firms, like Africinvest, a Tunisian PE house with investments in retail companies, such as Maille Club Group (Algeria, Tunisia), Folly Fashion (Marwa - Morocco) or SIL (Societé Industrielle de Lingerie - Tunisia).
To attract this source of capital the fashion businesses need:
- An attractive industry.
- Certain size.
- A strong team of founders.
- Good growth perspectives.
- A clear exit strategy (in 3-7 years).
- Attractive financial returns (>30% return on equity).
Through our research we identified that only 5% of the fashion SMEs in the two pilot countries (Côte d’Ivoire and Ethiopia) are getting financing through micro credits. In some African countries the micro finance institutions are well developed. This source of capital can be interesting for certain entrepreneurs and SMEs in the fashion industry but be aware that (based on our research):
- Interest rates can be very high (even higher than commercial banks).
- They will ask you for guarantees (physical or financial assets).
- The documentation is usually as demanding as with banks.
- Amounts of loans are small (usually USD 500-5,000).
The Fashionomics Africa feasibility report covered the analysis of the potential of crowdfunding for the fashion industry in Africa.
The figure below describes the main crowdfunding platforms globally:
Main crowdfunding platforms
- There are over 1,500 different corwdfunding platforms globally
- Most of them are for general purposes niche crowdfunding is rapidly growing
For crowdinvesting, two models are developed:
- "All-Or-Nothing" (AON):
Entrepeneurial firms set as a capital-raising goal below which the entrepeneruial form does not keep any of the pledged funds, and the crowd does not get any reward.
- "Keep-It-All" (KIA):
The entrepeneurial firm can keep the entire pledged amount, albeit at higher fees.
- "All-Or-Nothing" (AON):
- Crowfunding is not developed in Africa yet. In our interviews we detected that crowdfunding was not known
- The leading crowdfunding platform (based on web traffic: 775 ranking Alexa)
- AON campaigns
- Success rate: 43.4% (for fashion projects: 29.2%)
- Stricter acceptance rules then other platforms
- Second highest tracking crowdfunding platform based on web traffic
- It allows AON or KIA campaigns (KIA campaigns have higher transaction fees)
- Success rate: less than 10% or projects reached 100% of goals
- This platform is best for artistic and idea based projects
- Partnership with A&E TV network
- 4% commission fee + 4% credit card handling fee if the goal is reached (8+4% if not)
- Success rate: 11%
Additionally, there have been some crowdfunding platforms focused on African countries. Consult the list below:
Africa-focused crowdfunding platforms
It was created by a group of students at Stanford University, as part of the online course Technology Entrepreneurship