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The 6 biggest obstacles startups face in Africa
Emerging businesses in Africa overwhelmingly fuel the economy and provide the majority of local jobs. Globalization has presented African entrepreneurs with a unique opportunity to expand their services and offerings worldwide at a scale that has never been available before. However, though globalization provides them with countless opportunities, business owners have several challenges to overcome that are mostly exclusive to Africa.
Startups have six main obstacles to overcome: Limited access to financing, weak infrastructure, inconsistent government regulations, globalization, minimal assistance from the government, and cross-border payments.
1. Limited access to financing
By far, the most significant obstacle to startups is a lack of funding. Though the number of businesses is increasing, the amount of financing for these companies has remained largely stagnant. Reports show that a staggering 85% of small businesses are largely underfunded, however a deeper analysis reveals that the overwhelming majority do not have viable business plans. Consequently, banks are reluctant to grant loans to small businesses.
The solution, however, can be fairly easily attained: Small business owners in Africa should acquire formal business management training. This knowledge will assist them in building feasible business plans, which will, in turn, increase the chances of receiving an investment. Once financial institutions will be able to see ROI, they will be more likely to fund these businesses.
2. Weak infrastructure
While business abilities are growing, the infrastructure in most African countries remains lacking. Poorly built roads, frequent power surges, and underdeveloped transportation can challenge a company’s ability to produce and deliver services on time, to the point of inhibiting growth and losing money.
African business owners can overcome these hurdles by investing in their own infrastructure, such as purchasing backup generators to power their factories when power fails to ensure uninterrupted production. They can also combat uncertain supply of raw materials by striking up strong working relationships with suppliers and create large stockpiles to combat delays.
3. Inconsistent government regulations
Most African countries face a wide range of confusing political, regulatory, and trading laws that are constantly evolving. Multiple currencies, combined with increasingly strict import regulations, contribute to very high import costs, thus limiting companies’ abilities to do business with overseas suppliers.
Many companies elect to build strong relationships with local government officials and stakeholders, appointing them to their board of directors, listing them on the local stock exchange, and investing in community development, thus being able to influence local agendas and bring on change.
A two-edged sword, globalisation presents businesses with opportunities of expansion while simultaneously hindering their opportunities for growth. Foreign companies are able to export production to countries with low labor costs, thus increasing competition from foreign companies in local markets. Outsourcing production to countries such as China and India has led to a decrease in production for local manufacturers, sometimes causing them to shut down completely.
The solution is to have a strong and skilled labor force implementing production, hence increasing efficiency and lowering overall production costs, which will rapidly offset the cost of training. This will help keep business local while also allowing companies to expand into the international market with competitive quality and prices.
5. Minimal government assistance
Government assistance to small businesses in Africa is largely inadequate. While some countries, such as Nigeria, have implemented programs to train and assist small companies, in practice these programs are severely limited in scope and reach.
These roadblocks can be easily overcome by developing training and support programs at the governmental level that are similar to the United States’ Small Business Administration that offers financial assistance, training, and counseling on how to best run a business. Local governments should revamp existing programs to offer local businesses the specific support they need. Furthermore, governments should create new policies, based on input from financial institutions, to lower the risk of loan default and increase the instances of financial assistance given to local companies.
6. Cross-border payments
Cross-border payments tend to be inefficient, slow, and expensive for all parties. Each country has local laws and regulations within domestic banking systems, and the lack of one global regulatory system diminishes the ability of financial institutions to seamlessly transfer data and funds. Additionally, local governments each have domestic laws to regulate cross-border payments, causing a difference in regulations between the sending and receiving countries.
Fortunately, a change is on the horizon. Governments are now creating initiatives that dictate how much can be charged and how cross-border payments should be made. More importantly, transnational payment systems are standardizing data formats while simultaneously reducing reliance on correspondent networks. For a more immediate solution to overcome this challenge, however, merchants should work with a PCI DSS certified online payment service provider that has the ability to accept and perform cross-border payments.
African entrepreneurs face large challenges; however, all are solvable. By investing in alternative infrastructures, skilled workforce, and governmental assistance in training and funding, small and medium businesses will be able to increase their local offerings while expanding their business both into neighboring countries and on a more global scale. These short-term investments will, ultimately, pay off exponentially in the long run, positioning African entrepreneurs as local and global leaders in their fields.