Introduction

Businesses are constantly searching for new opportunities for growth and expansion. Expansion helps businesses stay afloat, take advantage of new business lines and avoid the risk of stagnation which can ultimately translate to reduced profits.

Essentially, corporate expansion financing refers to the various financial strategies that companies use to fund their growth and expansion activities. Corporate expansion is not only needed for increased market share and the exploitation of opportunity areas, but it is also crucial to the survival of businesses. A key part of expansion entails the acquisition of new assets, increasing employees, offering new products and entering new markets, all of which require proper financing. Without the right financing, businesses cannot increase their market presence, develop new products, enter new markets, or enhance their operations and infrastructure.

This article explores some options for financing corporate expansion and the potential legal considerations that arise in relation to each option.

Corporate Expansion - Financing Options

As a preliminary step, businesses seeking to expand must self-evaluate. The business must identify the objectives of the proposed expansion, the total amount of funding required, and stipulate timelines for meeting obligations and milestones under the proposed financing arrangement. To do this, the business will need to conduct a detailed market research, feasibility studies and financing forecast. Given this, the following financing options are available to businesses looking to expand their operations.

(a) Equity Financing

Equity financing involves raising capital through the sale of a company’s shares. When a company sells its shares, it essentially allows others to have an ownership stake in its business. A major benefit of equity financing is that it does not impose an obligation on the company to repay the capital raised. Investors offer capital in return for owning a portion of the business. Under Nigerian law, only public companies can publicly offer their securities or invite members of the public to subscribe to their securities. Private companies are restricted by law from inviting the public to subscribe to its shares.

There are different sources of equity financing. These include angel investing, venture capital, crowdfunding, initial public offering, offer for subscription, rights issue, and private placement.

i. Angel Investing – In angel investing, high-net-worth individuals or individual investors commonly known as angel investors, provide capital to startups in exchange for ownership equity or convertible debt. Angel investors typically invest in early-stage companies (i.e., companies that are in their early stages of development, often before they have a proven business model or significant revenue). In addition to financial support, Angel investors may also offer strategic advice, mentorship, and access to their professional networks to help startups overcome challenges and accelerate their growth. There are no specific laws regulating angel investing in Nigeria. Angel investing is simply governed by the general laws on investment and tax.

ii. Venture Capital - Venture capital firms pool capital from various sources such as pension funds and funds from various insurance companies and invest such capital in companies with innovative business models, products, or services, aiming for rapid expansion and eventual public listing. They acquire a more significant share of ownership than angel investors typically do. Venture capitalists play an active role by providing strategic guidance, industry expertise and networking opportunities. They often take seats on the company's board of directors and work closely with the founders and management team to help the company achieve its growth objectives. Venture capital firms are typically structured as limited partnerships which are governed by the provisions of the Companies and Allied Matters Act, 2020 (“CAMA”).

iii. Crowdfunding - Equity crowdfunding represents a form of equity financing where private businesses obtain capital from many investors through the internet. Investors provide funds to the business and in exchange, acquire a share of equity ownership in it. This process is facilitated by online platforms, where companies set up profiles showcasing their pitches, financial data, and additional relevant information. Equity crowdfunding in Nigeria is primarily governed by the Securities and Exchange Commission (the “SEC”) Rules on Crowdfunding.

iv. Initial Public Offering - An Initial Public Offering (“IPO”) is the sale of a company’s shares on the stock market for the first time. The IPO market entails a transition where private companies become publicly traded entities. An IPO allows a company to raise equity capital from public investors. Since private companies are restricted from offering securities to the public, it is necessary for such private companies to convert/re-register as public companies to list their shares. Securities offerings, including IPOs, are mainly governed by the Investment and Securities Act (“ISA”) 2007, and the Securities and Exchange Commission (SEC) Consolidated Rules and Regulations 2013 (the "SEC Rules") and other regulations made by the SEC.

v. Private Placement – Private placement is a unique offering method where a company sells its securities to a select group of investors rather than the public. The company can be either private or public, and the securities offered may include debt or equity. Notably, private placements undertaken by private companies are exempt from regulatory scrutiny by the SEC. Private placements are often used by companies to raise capital quickly and efficiently for various purposes such as expansion, acquisitions, or debt restructuring, particularly when such companies are unable to meet the regulatory prerequisites for a public offering or prefer to retain confidentiality and control over their investor base.

vi. Rights Issue – also known as a rights offering, a rights issue provides existing shareholders with the opportunity to maintain their proportional ownership in the company by subscribing to new shares. It allows the company to raise capital without diluting the ownership stake of existing shareholders who choose to participate in the offering. Rights issue is also governed by the ISA and the SEC Rules.

vii. Offer for Subscription - An Offer for Subscription is a strategy employed by companies to gather funds by inviting investors to subscribe to new shares offered by the company. This approach differs from an offer for sale, where existing shareholders may sell some of their shares to the public. Investors within this category automatically acquire ownership stakes in the company, thereby assuming its associated risks. The proceeds from this type of offering are directed to the company and are primarily utilized to expand its operations, aiming for greater profitability. An offer for subscription is also governed by the ISA and the SEC Rules.

(b) Debt Financing

Debt financing is another method utilized by companies for raising capital to fund their corporate expansion activities. In Debt financing, companies sell debt instruments like loans or bonds to raise capital. At its core, debt financing involves a company borrowing money and paying it back, usually with interest. Unlike equity financing, the lenders or creditors do not acquire ownership stakes in the business. Typically, businesses that are well-established, consistently generate sales, possess strong collateral and are profitable tend to depend on debt financing.

There are different debt financing options businesses can rely on to raise capital. Below are some of such options.

i. Loans – Traditionally, businesses raise money by accessing loans. These loans may be obtained from financial institutions such as banks and other private lenders’ family or even a consortium of lenders. Usually, the principal is repaid at an interest rate agreed by the parties and the company is required to either repay the loan in instalment or in one bullet. When borrowing from banks, there are different loan facilities with different terms and rates for businesses. It is important therefore for the business to understand the kind of loan facility they want to access and agree on a convenient payment plan. Also, banks usually undertake an assessment of the credit worthiness of the business and requires the company to provide security for the loan.

ii. Bond Issues - Bonds are debt securities issued by companies to raise capital. Investors who accept these bonds become the company’s creditors. Usually, the company is required to repay the principal sum with interest at a predetermined date. There are fixed-rate bonds which allows the business to pay an agreed fixed rate throughout the duration of the bond and floating-rate bonds whose interest rates periodically adjust based on a specified benchmark, such as the Central Bank of Nigeria's Monetary Policy Rate. The issuance and trading of corporate bonds in Nigeria are regulated by the SEC.

iii. Equipment Financing - This form of debt financing involves a company borrowing funds to acquire equipment, with the equipment itself serving as collateral for the loan. This financing option allows businesses to obtain equipment without making upfront payment, which can be advantageous for startups or those with limited cash flow. Generally, the equipment secures the financing, making it a secured loan. Equipment financing encompasses diverse structures, such as equipment loans, leases, or sale-leaseback arrangements, facilitating businesses in acquiring essential equipment while preserving capital and maintaining liquidity for other operational expenses.

(c) Internal Financing

Internal Financing refers to the funding of corporate expansion projects using the company's own resources, rather than seeking external funding sources like loans, bonds, or equity financing. Internal financing is advantageous to companies in many ways. It helps the business to avoid the dilution of ownership that is associated with equity financing and the burden of repaying the principal amount and interest in debt financing options. Internal Financing may be sourced in the following ways:

i. Retained Earnings – Retained Earnings refer to the profits a company has earned but not distributed to its shareholders as dividends. Businesses may decide to re-invest such profit and use the same to fund new projects and development into other markets and products upon the satisfaction of the requisite tax requirements.

ii. Assets Sale – Businesses can generate funds internally by selling off non-core or under-utilized assets. These funds can then be re-directed towards primary business activities or expansion projects.

iii. Reducing Expenses – Businesses can also raise funds internally by carefully cutting costs and enhancing operational efficiency. This allows the company to generate much needed capital for expansion.

(d) Alternative Financing Options

Alternative financing options refer to various methods available to businesses or individuals to obtain funding beyond traditional bank loans or credit lines. These options include:

i. Mezzanine Financing - Mezzanine financing involves a combination of debt and equity, typically offering higher returns to investors than traditional debt financing but with more flexibility and less dilution of ownership than equity financing. It can be structured as a Subordinated Debt, Convertible Debt, or Preferred Equity.

ii. Government Grants and Subsidies - Sometimes, the government may offer financial support for companies looking to expand, especially in industries or regions targeted for economic development. Grants are valuable sources of capital for businesses seeking to expand to novel areas that align with government objectives. Grants are usually very competitive, and businesses will have to meet some strict criteria. Unlike loans or bonds, businesses do not have to repay the grant. Additionally, government may provide Subsidies to businesses. Such subsidies may be in the form of tax breaks or even direct cash payments.

Conclusion

It is general knowledge that businesses seeking to expand need to explore different models of financing. These financing options have unique advantages, drawbacks and regulatory requirements which businesses must consider before exploring them. The financing option recommended by a business must align with its objectives and satisfy the core requirements of such expansion within the ambits of the law.

1. Section 67 Investment and Securities Act (ISA), 2007
2. Section 22(5) of CAMA
3. Also, there are zero-coupon bonds that do not pay periodic interest payments like traditional bonds. Instead, they are issued at a discount to their face value and pay out the full-face value (the amount borrowed) at maturity.