5 ways to raise capital to bootstrap your loan business

Starting a loan business can be incredibly rewarding, but the first and often most challenging step is finding the capital to get things off the ground. Whether you plan to offer personal loans, small business loans, or venture into real estate lending, having enough startup capital is crucial. You’ll need money to cover operational costs, legal fees, and, of course, enough funds to lend to your clients.

In Africa, lack of funding is one of the biggest hurdles entrepreneurs face when starting a business. According to the African Development Bank (AfDB), approximately 42% of African small and medium-sized enterprises (SMEs) cite access to finance as the most significant barrier to growth. However, with the right approach and resourcefulness, it’s possible to bootstrap your loan business and grow it sustainably without relying too much on venture capital or large loans.

So, where do you start if you’re looking to bootstrap your loan business? Let’s explore five practical and proven methods for raising capital that won’t leave you with crippling debt or force you to give away chunks of your company.

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Personal savings

The first place to look for capital is your savings. This is often the most straightforward approach but also requires some discipline. Using your own money to fund the early stages of your loan business allows you to avoid the complexities of dealing with external investors or taking on debt.

According to a 2020 report by the African Development Bank (AfDB), around 80% of small and medium-sized enterprises (SMEs) across the continent rely on personal savings to get started. Whether it’s money you’ve set aside over time or proceeds from side hustles, using your funds reduces the financial pressure on your business during its critical early months.

Of course, the key is to plan carefully. You’ll want to ensure you have enough to cover personal expenses while your business grows. This means you should only use funds you can afford to part with without risking your financial stability.

Bank loans

If you’ve got no savings, the next logical step is to explore bank loans. Banks remain a reliable source of capital, especially for businesses with a solid plan and good credit history. For example, Access Bank’s LSETF loan scheme offers financing to entrepreneurs with favorable interest rates backed by the Lagos State Employment Trust Fund (LSETF). This option is attractive for small businesses in Lagos looking to expand, as the terms are generally more favorable than traditional loans.

However, the reality is that securing a loan from an African bank can be challenging. Banks often require a solid credit score and collateral, which may be difficult for early-stage businesses to provide. 

The great thing about bank loans is that they offer relatively predictable terms. You know upfront what your repayment schedule looks like and what the interest rate will be. Remember: the loan isn’t free money, and you’ll have to start repaying it, usually within months. That means you should only borrow what you truly need, and not more.

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Personal investors: friends and family

Now, this one can be tricky, but it’s often an effective way to raise capital. Personal investors, usually friends or family, can be a great source of funds, especially in the early days of your business when banks might still be cautious about lending to you.

Your friends and family are likely to believe in you and your business idea more than strangers, which makes this a great option if you’re short on cash but have a solid plan. According to Fundable, around 38% of startups get their initial capital from friends and family. It’s a familiar path because the terms are often more flexible, and the process tends to be faster than formal financial institutions.

However, be careful. Mixing business and personal relationships can sometimes lead to awkward situations, so it’s essential to be clear from the start. Is the money a loan, or are they investing for an equity share in your business? Whatever the case, you want everything in writing. It’s better to be transparent now than deal with misunderstandings later.

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Asset management companies

If you’re looking for more substantial capital to fund your lending business, another option to consider is raising funds from an asset management company in Nigeria. Companies like Coronation Asset Management or FBNQuest offer more flexible and tailored financing solutions, especially for businesses with clear growth potential.

Asset management firms pool funds from various institutional investors and deploy them into businesses with promising returns. Instead of traditional bank loans, you could secure funds by raising a structured note or through private placements, where investors provide you with capital in exchange for a share of the future returns your lending business will generate.

For example, Coronation Asset Management offers financing tailored to industries like lending, fintech, and real estate (where growth can be rapid and consistent). Raising capital from an asset management company could give you access to larger capital than a regular bank loan. However, the terms may be less flexible than what you would get from a bank as capital from asset managers are usually structured as notes.

That said, this approach is usually best for lenders with where management has history and may have outsized next to liquid assets as collaterals. If your lending business is still in its early stages, it may be better to consider this route after you’ve proven your business model and shown some level of stability.

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Grants and Government programmes

Finally, applying for grants or government-backed programs is a great way to raise capital in Nigeria without taking on debt. The Nigerian government, along with various international organizations, offers a range of grants aimed at supporting small businesses and entrepreneurs.

For example, the Tony Elumelu Foundation (TEF) Entrepreneurship Programme awards $5,000 in seed capital to African entrepreneurs, including those in Nigeria. Similarly, programs like YouWiN! Connect initiative provides funding, training, and mentoring to Nigerian youth looking to start or scale their businesses.

Grants don’t require repayment, making them an attractive option for startups. However, competition is fierce, and applications require significant time and effort. Additionally, some grants are industry-specific, so exploring opportunities that align with the type of loan business you plan to run is worth exploring.

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The right fit for your loan startup

The key is to take small, manageable steps and choose a funding method that aligns with your goals, risk tolerance, and growth stage. Bootstrapping isn’t always glamorous, but it teaches you how to manage your resources wisely and build a resilient loan business. Remember, every big business started somewhere, and with the right strategy, your loan business can grow into something successful and sustainable. Let us help you get started on the right foot. Book a free demo.