A news correspondent once asked a Somali nomad how much his house cost. The nomad found the question slightly baffling. He explained that he had built it himself, with materials he had on hand. The walls were made of sticks, woven together and curved into a dome. For protection against rain and sandstorms, he had laid animal hides over the top and lashed them down. He could not say how much the dwelling was worth, because it would never have occurred to him to sell it. When he moved away in search of better pasture, he simply dismantled his house, loaded it onto a camel’s back and took it with him.
Hernando de Soto (De Soto), a famous Peruvian economist known for his work on the informal economy, defined dead capital as “an asset that cannot easily be bought, sold, valued or used as an investment”. De Soto’s work showed that even those who live in slums possess far more capital than anyone realizes. These possessions, however, are not represented in such a way as to make them fungible assets i.e. exchangeable assets. These assets therefore cannot create value for the owners thus they are ‘dead capital’.
De Soto in his book titled “The Mystery of Capital” revealed that most people in third world countries are not as impoverished as portrayed. He found out that the total value of untitled real estate (land) held by the poor of third world and former communist nations is at least US$9.3 trillion. Furthermore, De Soto estimated that the total value of Africans’ informally owned houses and farmland in 1997 was roughly US$1 trillion. These assets are not captured in any land registry known to the legal or financial system in those countries. They are only in possession but not legally recognized to be owned by them. Therefore, these peasants are unable to exercise transferable (ownership) interests and rights in these assets as financial capital in the form of collateral/guarantee for loans, secured assets (asset securitization) or as capital contribution to a partnership.
In the same way, SMEs in Nigeria invest a lot of capital in the form of factors of production (land, labour, financial and intellectual capital) into their business, however they still do not generate as much value (profits) as the capital invested. This is because the capital employed in the business is dead and has not been activated. Some SMEs are afraid to approach a financial institution for a loan because they are not even aware of the capital they possess that they can exchange as collateral for the loan. Some entrepreneurs are selling their business/companies for far less than it is worth because they are not aware that the value of a business is not only the cash in the bank and the business premises. Client list, business name, softwares, equipments and even employees are all capital of a business that has value and can be sold. On the other hand, how can you sell what you do not know exist?
Recently, the Acting President Yemi Osinbajo signed into law, the Secured Transactions in Movable Assets Act, 2017 (otherwise known as Collateral Registry Act). The Act ensures that Micro, Small and Medium Enterprises (MSMEs) in Nigeria can register their movable assets such as motor vehicle, equipments and accounts receivable in the National Collateral Registry and use same as collaterals for accessing loans. This, in turn, will increase their chances at accessing finance and thereby tackle one of the major obstacles faced by MSMEs. However, the question remains – how many SMEs are ready to tap into this potential? That is, how many SMEs have properly documented capital to register at the Registry?
In order to ensure that you are generating value from your capital, you must ensure that it is formally or legally represented and traceable to a functional institution, department or agency recognizable at law. Dead Capital is any form of capital without formal or legal representation. Capital is given life only when it is represented in writing by a recognised authority established by law.
Some practical ways of ensuring your capital is titled or formally represented to enable your business have access to incentives and financial capital include the following:
1. Business name registration with the Corporate Affairs Commission;
2. Software/Intellectual property/Patent registration with the Trademarks, Patents And Designs Registry, Federal Ministry Of Industry, Trade and Investment;
3. Product registration with the National Agency for Food and Drug Administration Control (NAFDAC) and Standard Organization of Nigeria (SON) for product imported into Nigeria;
4. Certificate of Occupancy or registered Deed of Assignment with the Land Registries in all States;
5. Motor vehicle registration with the Federal Roads Safety Commission;
6. Equipment registration (with value above NGN 500,000) with the Industrial Inspectorate Division of the Federal Ministry Of Industry, Trade and Investment;
7. Preparation of a statement of affairs such as cash flow, profit or loss and statement of financial position; and
8. Bank Verification Number
Remember as faith without works is dead so also capital without legal ownership is dead. Therefore, in order to create that confidence in investors to invest in your business and financial institutions to make credit available to you, you must bring to life every capital in your business no matter the size or type.
Objective statistics shows that SMEs are over 90 per cent of the businesses in Nigeria and they contribute up to 45 per cent of GDP. This is despite being underfunded and unstructured.
When you consider that the current value being derived from SMEs is substantial despite the fact that most of them are subsistence/micro businesses, then you can begin to imagine how big this opportunity will become if they scaled up just one level.
The biggest challenge in terms of financing SMEs in the country is the fact that SMEs do not have the ability to scale to an extent where bank debt will make a meaningful impact. This prevails because of lack of proper financial education of SME operators, Lack of good corporate governance and business structure and Lack of access to equity – our markets for equity is not very developed.
A few SMEs recognize the challenge, whilst many of them believe that the banks should solve their problems, this is mostly because they do not understand that the nature of bank loans do not accommodate an appetite for funding start-ups or for giving loans that behave like equity. Despite increased attention and support for SMEs by banks and the CBN, most SMEs out there still have this perception that the banking industry is not favourably disposed to SMEs. In other to correct this impression, SMEs need constant education on how the economy runs. If the banks lower their appetite for risk and fund the businesses with poor structure and governance, the loans will go bad, shareholders’ funds will be eroded, and the cycle will hurt SMEs even more.
There are however alternative solutions for SMEs which can be facilitated by banks or any other stakeholder in SME ventures. SMEs can be assisted through business trainings/capacity building programs, business incubator can be set up to cater for handholding businesses, a mentoring platform can be created for entrepreneurs so as to open them up to business best practices as well as provide market access.
In addition to the above, there is however still a need to work at developing alternative sources of funding apart from commercial bank debts. Banks collaborating to set up various pockets of SME entrepreneurship funds might help meet the need for patient capital which commercial bank debts can then ride on.
In the interim, start-ups and SMEs in general can take advantage of intervention funds such as the You-Win initiative and other government driven funding opportunities.
Eyitayo Ogunyemi | @eyitayolaw
One of the questions that I usually ask my students during my training sessions for Entrepreneurs is for them to tell me what they understand by a Limited Liability Company and a Business Name, and why they will choose the business option that they are opting for.
Unfortunately, I usually do not receive an answer that captures the basic differences, and it is unfortunate too that many Investors have chosen their business option without proper guidance.
This article proffers keynote differences between a Business Name and a Limited Liability Company in Nigeria. The points stated below are not exhaustive, but they constitute some of the basic differences between a Limited Liability Company and a business name under the Nigerian Law:
DIFFERENCE NO 1:
DO YOU WANT YOUR BUSINESS TO BE YOU OR DIFFERENT FROM YOU?
Business Name: A Business Name is the name and style with which you trade; remember that it is just a “style”, and it is therefore not different from you. Being a mere style, the business does not assume a separate legal entity; cannot sue, nor be sued and properties cannot be purchased in the name of the business.
Another point that you can identify with the above is that, when the owner dies, the business also dies (since in the first place, it does not have a life of its own).
Company: The moment your Company is registered, it becomes a separate entity different from you (otherwise known in law as an “Artificial person”). The best way to understand this severance process is to consider pregnancy, and delivery process- once a child is born, the child has an independent life; can grow, stand alone (with time), and even die. The process of the growth of the child is not hinged, as such, on that of the mother.
By implication, ‘your company’ is considered to be different from you after registration; you can be broke while the company is rich, and the death of the founder does not necessarily mean the death of the company, because the company has a life of its own.
DIFFERENCE NO 2:
DO YOU WANT TO RUN A ONE MAN BUSINESS? ONLY A BUSINESS NAME WILL DO.
Company: If you intend registering a company, it takes two or more persons to form the company. The popular form of company is “Company Limited by Shares”, and at least two people must subscribe to being shareholders in the company.
Business Name: If you are interested in running a one man business where everything will revolve around you and you alone, registration of a Business Name may be suitable.
Note however that you can also register Business Name where you and any other person intend to operate as partners.
DIFFERENCE NO 3:
DO YOU WANT THE VALUE OF YOUR INVESTMENT TO BE STATED IN THE PUBLIC DOCUMENTS OF YOUR PROPOSED BUSINESS? A COMPANY MAY BE YOUR BEST OPTION
Company: If your level of ownership, stake, investment, or interest in your proposed business differs from that of your co-investors and you want this to be recorded publicly, you may choose to incorporate a company (i.e. Limited Company).
Business Name: If you register a Business Name, your level of ownership, stake, investment, or interest will not be publicly recorded. If for any reason you prefer to register a Business Name and you want the extent of your ownership, stake, investment, or interest to be clearly spelt out, you can do this preparing a Memorandum of Understanding between you and your partners. You may consult your choice Legal Consultant for further information.
DIFFERENCE NO 4:
DO YOU WANT AN EXISTING COMPANY TO OWN SHARES IN A BUSINESS THAT YOU ARE ABOUT TO START? ONLY A COMPANY REGISTRATION WILL BE SUITABLE
Company: If you operate a company that is registered, and you want that company to own shares in a business that you are about to register, or you are a foreign investor with a company already registered in your Country, you may choose to register the intended business as a Company and then purchase shares for the existing company from the allotted shares of the proposed company.
If the existing company is however undergoing a process of being wound up, it cannot join in the formation of the company to be incorporated.
In a like manner, if you already have a company in operation and what you intend to register is a Business Name but you want your existing company to have a stake in the Business to be registered, you can give instruction to your Legal Consultant to record the existing company as a partner in the new Business Name to be registered.
Business Name: You cannot use your Business Name (as an entity) to own shares in a company neither can you start a partnership in the name of your registered Business Name.
For non- Nigerians (aliens) and foreign companies seeking to do business in Nigeria, once you have complied with Nigerian laws regulating the rights and capacity of aliens who want to undertake or participate in trade or business in Nigeria, you will be allowed to join in forming company in Nigeria.
DIFFERENCE NO. 5:
IF YOU HAVE MORE THAN 20 PARTNERS, YOU MAY HAVE TO REGISTER A COMPANY
Company: Where a business is intended to be carried on as a partnership, and the partners are more than 20 people, the business can only be registered as a company but not as a business name.
Business Name: You can register these three businesses as a business name notwithstanding that the partners are more than 20 are;
a. Co-operative Societies registered under any law in Nigeria;
b. Partnership of more than 20 Lawyers each of whom is qualified to practice as a lawyer in Nigeria; or
c. Partnership of more than 20 Accountants each of whom is qualified to practice as an accountant.
DIFFERENCE NO. 6:
IF YOU HAVE MORE THAN 50 INDIVIDUAL INVESTORS, YOUR ONLY OPTION MAY BE TO START A PUBLIC COMPANY.
Company: Where the total number of persons who intend to own the shares of a proposed company is more than 50 people, the company can only be registered as a public company. In other words, a private company in Nigeria must not have more than 50 shareholders.
There are exceptions to this rule; for instance, where an employee becomes a member/shareholder upon his employment, or where the employee continues to be a shareholder during and upon the expiration of his employment; his tally may not be taken for the purpose of numbering the 50 members.
Consider the following illustrations:
1. If AZ Private Company has 50 shareholders and Bob was given a number of shares in AZ Private Company upon his employment, he is not going to be numbered as Number 51 shareholder; rather, the number of shareholders will still stand at 50 in the eye of the law.
2. In a similar vein, if Bob continues to hold shares as an employee until he stops working for AZ Private Company, and he continues to own the shares after his employment, he is not going to be numbered for the purpose of counting the 50 benchmark.
3. Two or more people, or even an Association or a Group can invest in a company jointly. They are treated as a single member for the purpose of numbering the members of the company. It is however important that your Association or group must have been registered under the appropriate law.
For further information under this heading, you may check my article titled: How to Register Your NGO, Church, Mosque, and Other Associations with Corporate Affairs Commission (C.A.C.)
DIFFERENCE NO. 7:
THE STATUS OF YOUR KEY INVESTORS DETERMINE THE KIND OF BUSINESS ARRANGEMENT
Company: In a company arrangement, your shareholders are considered as the joint owners of the company. The shareholders elect the Board of Directors who are responsible for the daily affairs of the company and also give periodic account of management to the shareholders.
Note however that a shareholder may also be a director or even the company secretary.
Business Name: In a Business Name arrangement, there is no clear-cut difference between the business holder and the director because in most cases, the director is the owner of the business.
This article has been designed for information purposes alone and is not intended to take the place of a legal advice. Readers are therefore advised to seek proper legal advice.
The Acting President (Ag. President) of the Federal Republic of Nigeria, His Excellency, Professor Yemi Osibajo (SAN), was the Keynote Speaker at The Platform Nigeria organized by Covenant Christian Centre, which held on May 1 2017.
In his speech, the Vice President discussed the Nigerian Economic Recovery and Growth Plan (NERGP), the progress made so far and future reforms by the Federal Government (FG). The discussion centered on the five critical priority areas needed to achieve economic recovery and growth in Nigeria. These priority areas are:
Stabilizing the macroeconomic environment
Delivering agricultural and food security
Energy sufficiency which is adequacy of power and petroleum products, improving transportation infrastructure
Driving industrialization through small and medium scale enterprises
Delivering an effective social investment programme
These five priorities and their key reforms, as expounded by Professor Yemi Osibajo in his speech, are summarized below:
Stabilizing the macroeconomic environment
In stabilizing the macro-economic environment, the FG has focused on aligning fiscal policy with monetary policy and nudging the Central Bank of Nigeria (CBN) towards the objective of more market determined exchange rates. The FG is also working on replacing the 41 items not valid for foreign exchange with a more trade policy-driven restrictions taking into account those items that are required and locally unavailable raw materials.
It is important to note that the CBN had recently released a circular on thirty-six (36) items that are now valid for foreign exchange (Forex). These 36 items are items that hitherto were not valid for Forex, but are now valid. This new circular is one of the windows established by the CBN for Small and Medium Enterprises (SMEs) to provide access to Forex and ease pressure on the market.
In addition, the FG is in the process of obtaining intervention fund for agriculture through the Bank of Agriculture, and for SMEs through the Bank of Industry, as a means to reduce the high interest in the economy which is also reflective of the high inflation rate in the country. There is also the Development Bank of Nigeria which is the main vehicle for intervention banks. Furthermore, Professor Yemi Osibanjo explained that reducing the interest rates will involve borrowing less from the domestic market, however at the moment, the FG is borrowing substantially from the domestic market which is expected to change in the future.
Delivering agricultural and food security
As part of the Federal Government (FG) plan to diversify the Nigerian economy from over dependency on oil revenue, the FG proposed to achieve three objectives in diversifying into agriculture.
First is the provision of the right inputs, equipment and finance which is expected to increase the yield of farmers. The CBN Anchor Borrowers Programme has provided finance for thousands of farmers, which has resulted in increased local production and in fact, local production of rice has tripled as a result. In addition, a major problem before now was the milling of rice paddy. However, FG supplied 200 mills of various sizes to farmers with a combined effort of the public and private sector to address this issue.
Secondly, FG has sought to provide improved seedlings to farmers including rice seedlings. Thereafter, farmers would be taught simple farming practices that improves crop yield. Both Kebbi State government, IITA and Jigawa State have run excellent rice seed improvement programmes that have been of tremendous benefit. Some of the other initiative under the seedling programme are improved wheat and maize production as well as maintaining our position as Number 2 in sorghum production in the world.
The third objective is the provision of fertilizer. In 2017, there will be a major revolution in the fertilizer sector because the Presidential Fertilizer Initiative came up with a design to solve the problem of obtaining fertilizer once and for all. The Ministry of Agriculture produced a soil map for the country that determined the pattern of fertilizer distribution and this helped a great deal. Using the disaggregated soil maps, the FG was able to provide fertilizer for each soil type in different states in Nigeria. Prior to this, there was no map and fertilizers were given indiscriminately. However, after this initiative, the yield increased from 2 tonnes per hectare to between 4.5 and 9 tonnes per hectare. Also, the FG provided a concessionary working capital loan for Nigerian-based blending plants to enable them produce fertilizer locally.
The next phase of the FG agricultural diversification is the plantations of tree crops such as, cocoa, cashew, shea-butter, coconut, sesame seed, soya bean, pineapple, banana, cassava and sugar cane. These are expected to improve the revenue generated from agriculture.
One of the important sector the FG is determined to reform is the Power Sector. The major problem has been that the private sector players have not been able to invest in the critical areas of metering, and others that guarantee improvement in the sector. Other issues include complaint about the inability to generate enough revenue to break-even due to lack of a cost-effective tariff and illiquidity in the energy generation, transmission and distribution value chain.
The Federal Executive Council (FEC) had on the 1st of March 2017 approved ₦701 billion CBN facility as a payment guarantee for Nigeria Bulk Electricity Trading Company (NBET) to guarantee payments to the power sector and in turn improve power supply. This fund will be provided to NBET at a 10% interest per annum; the Federal Ministry of Finance would in turn guarantee the repayment of the principal and interest. Indicative data presented by NBET indicates that NBET intends to pay a flat-rate of 80% of the January-2017 generation invoice. This is a good signal, representing the FG keeping to its word.
The FEC also approved that FG continue discussions with the World Bank Group (WBG) with the objective of securing financial support of US$2.5 billion for the power sector. After discussions with the WBG, the Power Sector Recovery Implementation Program (PSRIP) was created. The PSRIP will address issues such as liquidity, transparency, energy sufficiency and governance in the power sector
Driving industrialization through medium and small scale enterprises
In driving industrialization and focusing on MSMEs, the focus has largely being on creating an enabling environment for doing business in Nigeria. Many Medium, Small and Micro Enterprises (MSMEs) complain about the difficulties of obtaining financial and other assistance from government agencies responsible for one approval or the other relevant for their businesses.
As a result, the FG launched the MSME clinics across Nigeria to inform government agencies about their role as facilitators of business not obstacles. At this clinics, small business owners meet with the relevant government agencies to ask questions and deal with issues on the spot if possible.
In terms of industrial infrastructure, the FG is focusing on improving existing Special Economic Zones, and establishing new ones. ₦50 billion has been set aside in the 2017 budget for the existing free trade zones. The plan is to accelerate the implementation of the National Industrial Revolution Plan (NIRP) through the special economic zones. The zones will focus on priority sectors to generate jobs, promote exports, boost growth and upgrade skills with an objective of creating 1.5 million jobs by 2020.
Growing the digital industry and innovation has also been a priority for the government. After the Aso Villa Demo Day, 30 out of over 4000 innovators emerge and the presidency in collaboration with the World Bank through the GEM programme, further selected 81 innovators through a competitive process. These innovators were provided funds for their businesses through the ₦756.3 million fund set aside for the project.
The FG is also promoting innovation hubs in 6 geo-political zones in Nigeria. The hubs are essentially to provide training for a wide range of technology related skills, empowering youths for entrepreneurship and employment.
Delivering an effective social investment programme
The National Social Investment Programme (SIP) was introduced by the FG in 2016. The programme covers the following:
Homegrown School Feeding Initiative which is targeting 5.5 million primary school people in all the states of the federation from primary 1-3. Eleven states are set to fully start the scheme which would involve feeding 3.5 million school children.
Job Creation Initiative aimed at training 500,000 university graduates, who would be deployed to work in their local communities as teachers, agriculture workers and health support workers. The graduates would be receiving a monthly stipend of ₦30,000 monthly for a period of two years.
Conditional Cash Transfer Initiative, where one million caregivers would be given ₦5,000 monthly for a period of two years. The focus would be on the extremely poor and vulnerable in our society and special emphasis is on the North Eastern part of the country where there are a lot of Internally Displaced Persons.
Enterprise Promotion Programme, which is a loan scheme handled by the Bank of Industry. The loan would be available to 1.66 million people, made up of market women, traders, artisans, small businesses and youths and would be from ₦10,000 to ₦100,000.
The next phase of FG reform is anchored on three pillars which are deepening existing reforms, initiating sub-national reforms, which will culminate in the sub-national ranking of all 36 states and the FCT in 2018 and introduction of a new reform area “Trading within Nigeria”, which will push initiatives aimed at improving business processes and regulations within Nigeria, and ease the movement of goods within the country.
Based on the above, the Vice President concluded that the opportunities are limitless for Nigeria, our population is young, vibrant, bolder, more creative and more entrepreneurial than the youths of any other country in our region. Therefore, we must not allow the failures of the past to hold us down or become an excuse for our failure. We must lead and shape the future as the future is already here.