SME Finance: Venture Capital, Angels, Crowdfunding and Supply Chain Finance

When a small company’s profits and bank loans are not enough to pay for its ambitions, it must look for money that takes a share of the risk: investors who put in equity, hoping to sell their shares for a lot more later. A few specialist sources exist for this, and each suits a different stage of a business.

Business angels are wealthy individuals who back young businesses; venture capital firms invest professionally and expect to leave in five years or so; private equity funds buy larger stakes in more mature companies; crowdfunding lets many small investors back a project over the internet; and for the supplier of a big company, supply chain finance turns approved invoices into cash cheaply.

Government and development finance institutions offer guarantees and cheaper loans.

This topic explains each source, what investors want in return, how to compute their returns (the money multiple and the internal rate of return), the exit routes, the Nigerian framework, securitisation as a way for larger firms to raise money against assets, and how to choose between sources using amount, cost, duration, flexibility, repayment and effect on the financial statements, with worked examples. The next topic starts the study of business valuations.

The syllabus asks for an explanation of venture capital, supply chain finance, crowdfunding and government assistance. Read small and medium-sized enterprise financing problems and remedies first.

Business angels and venture capital

Business angels are wealthy individuals who invest directly in small businesses, usually by buying new shares. They do not usually manage the company, and hope for a high return from dividends and the eventual sale of their shares. The difficulties: there are few of them, it is hard for a small company to find one, and the total amount available is far less than the demand.

Venture capital is finance provided to private companies by specialist investment institutions, sometimes together with bank loans. It may be equity, preference shares, loans, or a mixture. Venture capitalists take a minority or substantial stake and often a seat on the board.

• What they require: a clear strategy and convincing business plan; experienced, committed management; and an exit route, normally within about five years, since they must realise their investment at a profit.
• Exit routes: a stock market listing when the company has grown; a trade sale to a larger company; or refinancing by another venture capital organisation (or a buy-back by the owners).
• Return: high, because the risk is high and failures must be paid for by the successes. Investments are typically for 3 to 7 years.
• Problems for the company: finding an investor willing to look at it. Most venture capital firms prefer established medium-sized private companies and management buyouts to start-ups, because small ventures offer small returns for the time spent. The owners give up some control and must meet the investor’s reporting and exit conditions.

An investor’s return: money multiple and internal rate of return

A fund invests ₦200m for 30% of the equity of a company. Five years later the company is sold for ₦2,000m. The fund’s proceeds are 30% × 2,000 = ₦600m: a money multiple of 3.0 times and an internal rate of return (IRR) of 3^1⁄5 − 1 = 24.6% a year. But this is the return on a success.

Consider a fund that makes ten equal investments: four fail completely (0 times), four return the money (1 times), one returns 5 times and one 12 times. The total returned is 0 + 4 + 5 + 12 = 21 for 10 invested: a multiple of 2.1 and, over five years, an IRR of only 2.1^1⁄5 − 1 = 16.0%. This is why venture capitalists look for a large potential return in each deal and will not fund a business that promises a modest, safe one.

Private equity funds

Private equity is equity in companies that are not traded on a stock exchange; it includes venture capital and private equity funds. A private equity fund usually takes a large stake in a mature business, often around 30% or majority control, and appoints directors.

In a leveraged buyout the fund buys control of an existing business using a large amount of borrowing secured on the business, then raises value by cutting inefficiencies or driving growth, and sells after some years.

Example: a business is bought for ₦1,000m, with ₦600m of debt and ₦400m of the fund’s equity; five years later the business is worth ₦1,400m and the debt has been cut to ₦300m, so the equity is worth 1,400 − 300 = ₦1,100m: a multiple of 2.75 and an IRR of 22.4%.

It is a route for a private company to raise equity where it cannot go to the market, but at the cost of control.

Crowdfunding

Crowdfunding (peer-to-peer funding) means raising money from many people through the internet to fund a project. There are three groups: project initiators (who produce a business plan), the crowdfunding platform (which presents the projects and handles the money), and the investors (who may want a financial return, or simply to support a project they like). It can be donation, reward, loan or equity based.

In Nigeria the Securities and Exchange Commission has rules for investment-based crowdfunding: portals are registered with the Commission, and micro, small and medium enterprises incorporated in Nigeria that have operated for a minimum period (two years under the rules) can raise funds through them.

Example: a company raises ₦20m from 400 backers at an average of ₦50,000, offering 10% of its equity: the implied value after the money is 20 ÷ 0.10 = ₦200m, and before it ₦180m; the platform charges 5% of the amount raised (₦1m), so the company receives ₦19m. The attractions are access to many small investors, the market test of the idea and publicity; the problems are the platform fee, the work of dealing with many small shareholders, disclosure, and the danger of failing to reach the target.

Supply chain finance

Supply chain finance works for a smaller supplier selling to a large buyer. The supplier sells the invoices, once the buyer has approved them, to a bank at a discount, receiving cash early.

The bank pays an amount based on the credit risk of the buyer, usually a large company with a good rating, not the higher risk of the supplier, so the supplier receives more cash than through ordinary factoring. The buyer pays the bank on the due date and can negotiate longer payment terms: it is described as a win-win.

Example: an invoice of ₦80m due in 120 days: discounted at the buyer’s rate of 17% a year the supplier receives 80 × (1 − 0.17 × 120 ÷ 365) = ₦75.53m; at the 27% a year the supplier’s own credit would cost it receives ₦72.90m, a difference of ₦2.63m.

Government and development finance

• Credit guarantee schemes reduce the risk that banks take in lending to small and medium-sized enterprises (SMEs). The Central Bank of Nigeria’s Small and Medium Enterprises Credit Guarantee Scheme guaranteed loans of up to ₦100m by participating banks to businesses in manufacturing, the agricultural value chain, education and other agreed activities; the Agricultural Credit Guarantee Scheme gives similar cover to banks that lend to farmers.
• Equity and cheap loans: the Small and Medium Enterprises Equity Investment Scheme required banks to set aside 10% of their profit after tax for equity investment in and cheap loans to SMEs. (Schemes are changed, replaced or closed over time, so check their current status before relying on them.)
• Development lending: the Bank of Industry and the Small and Medium Enterprises Development Agency arrange loans at below-market rates, with advisory and technical support, and in recent years brokered billions of naira in single-digit-rate loans with state governments.

Securitisation

Larger companies can raise money against assets or future cash flows by securitisation. Company A sets up a special purpose vehicle (SPV), Company B, and transfers an asset (or the right to future cash flows) to it; B issues securities to investors for cash; the cash is paid to A. In substance A has raised cash using the asset as security.

If A has a rating of BB but the asset is rated AA, securitisation lets A borrow at AA rates. Accounting rules may require A to consolidate B. It is used mainly by financial institutions and larger businesses.

Comparing the sources

The factors to weigh in any choice are the amount needed, the cost, the duration, the flexibility, the repayment obligations and the impact on the financial statements (gearing, ratios, control).

The ideas in more depth

Why investors insist on an exit

A minority share in a private company is hard to sell. A venture capitalist therefore agrees with the owners at the start how and when it will be able to cash in: a listing, a sale of the whole company, or a purchase of its shares by the owners or by another fund. Without a plan for the exit the investment is a trap.

The need for an exit also shapes what the company does: a business with no prospect of becoming big enough for a sale or listing is not suited to venture capital.

Why the cost of equity from outsiders is high

An outside investor in a small company takes risk that cannot be diversified in the company’s own shares, receives no regular dividend, cannot easily sell, and expects to lose on several investments for each success. A required return of 25% or more is not unusual. The owner must weigh that cost, and the loss of control, against the alternative of growing more slowly from retained profit and bank loans.

Sources and references

• The Investments and Securities Act 2025 and the Securities and Exchange Commission’s rules on investment-based crowdfunding, on private placements and on private companies’ securities; the Companies and Allied Matters Act 2020. The schemes of the Central Bank of Nigeria and development agencies are changed from time to time.

These points are stated as at 5 November 2026.

Worked examples

1. Proceeds.
   30% × 2,000 = ₦600m; multiple 3.0.
2. IRR.
   3^1⁄5 − 1 = 24.6%.

1. Value after.
   20 ÷ 0.10 = ₦200m.
2. Cash.
   20 − 1 = ₦19m.

1. Discount.
   0.17 × 120 ÷ 365 = 5.59%.
2. Cash.
   80 × 0.9441 = ₦75.53m.

How to answer in the exam

• Match the source to the stage and the amount, and explain what the provider wants.
• Calculate the investor’s return where figures are given, as a multiple and an IRR.
• State the exit routes for equity investors.
• Compare sources by amount, cost, duration, flexibility, repayment and effect on the statements.

Common mistakes in the exam

• Recommending venture capital to a business without an exit route.
• Forgetting that venture capitalists want a seat on the board and an exit.
• Calculating the return as a simple total, not per year.
• Confusing business angels with venture capital funds.
• Saying that supply chain finance is priced on the supplier’s credit.
• Ignoring the platform fee and dilution in crowdfunding.

Quick revision

• Angels: individual equity, small; venture capital: institutions, 3 to 7 years, exit needed.
• Private equity: large stakes in mature firms; leveraged buyouts.
• Crowdfunding: platform, initiators, investors; supply chain finance: buyer’s credit.
• Compare by amount, cost, duration, flexibility, repayment and statements.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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