Navigating Debt Funding: African Founder Shares Important Insights for Finding the Right Funder
As an increasing number of African startups turn to loans when equity funding becomes challenging to secure, there is often limited discussion about the terms that founders encounter during negotiations. A recent case shed light on the nature of these loan agreements when WiSolar, a leading green digital utility startup, turned down a $1.5 million loan from the Industrial Development Corporation (IDC) of South Africa. WiSolar voiced concerns about terms that could hinder their growth and compromise their objectives.
WiSolar, led by its founder and CEO, Tonye Irims, took a stand against terms that raised concerns about potential hindrances to their growth and compromise of their objectives. The loan, issued under the Energy Resilience Scheme, featured terms such as a terminal drawing date of March 31, 2025, monthly annuity installment repayments from the draw date, and a ten-year term.
Irims emphasized the need for founders to negotiate debt funding agreements more favorably. In this report, he shares insights into what constitutes a well-negotiated agreement and outlines key considerations for founders navigating the complex terrain of debt financing.
- Mission Alignment as Non-Negotiable: Irims firmly states that while “lack of funding continues to be the biggest reason for talent flight and unhygienic job creation in Africa,” the criticality of mission alignment when seeking debt financing cannot be overemphasized. To this effect, he stresses the need for founders to scrutinize funding offers, rejecting any that could compromise the core mission of their companies, thereby safeguarding long-term sustainability and impact.
- Building Respectful Partnerships: Addressing a patronizing relationship with funders, Irims suggests founders seek respect in their dealings. This recommendation implies a call for collaborative partnerships where both parties value and respect each other’s perspectives. Building respectful relationships is foundational for fostering a positive and conducive environment for growth.
- Balancing Transparency and Confidentiality: Irims emphasizes the importance of funding aligned with the company’s objectives while cautioning against unnecessary exposure of sensitive information. Founders can interpret this as an indirect recommendation to carefully negotiate terms that strike a balance between transparency and confidentiality, safeguarding the startup’s competitive edge.
- Value-Added Investments: Criticizing the IDC’s approach as merely providing funding without added value, Irims advocates for more comprehensive partnerships. Founders are encouraged to seek lenders who bring strategic insights, industry expertise, and networks to the table, enhancing the startup’s growth potential beyond financial backing.
- Simplifying Interest Structures: While not directly advising, Irims critiques the complex interest structure, suggesting a preference for clarity. Founders can infer the importance of negotiating for straightforward interest rates and fee structures to ensure financial transparency and mitigate potential challenges in financial management.
- Critical Evaluation of Additional Agreements Incorporated by Reference into the Main Agreement: Irims underscores the need for founders to meticulously assess any additional agreements referenced within the main loan agreement. By critically evaluating these components, founders can ensure a comprehensive understanding of all terms and potential implications for their business.
- Incorporation of Local Law Requirements: Irims raised concerns about potential drawbacks of incorporating local law requirements, such as local component or local content requirements, implying that founders should critically assess the impact on operations. He recommends negotiation for terms that support compliance with local laws without compromising operational flexibility.
- Flexible Fund Withdrawals: Voicing concerns about restrictive fund withdrawal conditions, Irims implies the necessity for flexibility. Founders are suggested to negotiate withdrawal conditions that are reasonable and align with the company’s operational needs, ensuring timely access to funds when necessary.
- Post-Term Planning: The absence of information on post-term scenarios is highlighted by Irims as a concern. Founders are indirectly urged to negotiate for clarity on what happens after the loan term ends, enabling effective long-term strategic planning and avoiding uncertainties in the post-loan period.
WiSolar, founded in 2016, is a South African-based on-demand digital solar company. It operates uniquely as the only company offering prepaid solar for residential use in South Africa. Employing a Power Purchase Agreement (PPA) business model, WiSolar installs and maintains solar systems on customers’ homes, selling power through an app based on consumption. This model allows property owners to adopt solar without upfront costs. WiSolar’s innovative approach is available in South Africa and Nigeria, with plans for expansion into Zimbabwe and Rwanda.
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Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert.
As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard