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10 Factors Startups Must Consider When Choosing Business Location

How to Start a Small Business
How to Start a Small Business

Last updated on November 23rd, 2021 at 07:25 pm

The term startup refers to a business in its early stage of operation which is usually owned and managed by one man or partners

Because they start with limited resources, the early-stage decision and management can make or mar the success of the business

In today’s digital age, where businesses are basically done online, entrepreneurs still need to decide where they want to operate from.

For example, a web designer needs a location where power supply is incredibly stable. His location doesn’t necessarily need to be a city.

But for a  manufacturer of biscuits, he doesn’t only need a location where power supply is stable for the operation of machines, he also needs to put into consideration nearness to good road, nearness to consumers, and nearness to raw materials among others.

This is one of the reasons there are hundreds of industries and startups on the Lagos-Abeokuta way, Lagos-Ibadan road etc

The following are the factors that should influence siting of business by entrepreneurs:

Raw Materials

  1. Raw Materials
  2. Funding
  3. Market
  4. Power Supplies
  5. Legal Structure
  6. Labour Supply
  7. Transport
  8. Industrial Attractiveness
  9. Government Policy
  10. Security

Nearness to Raw Materials

Industry should be set up near sources of raw materials. A plantain flour mill for instance will be most suitable in a location where the raw materials can be sourced.

In recent times, we’re seeing more rice factories being sited in Benue, Kebbi, and other states that are known for large-scale rice farming.

The same thing is applicable to an industrialist to site his sugar factory in or near the sugarcane belt.

Funding

In the world of digital wallets, e-banking, USSD code banking, funding shouldn’t be an issue in the siting of business.

Also Read:  15 Practicable Ways For SMEs To Avoid Business Failure

However, it becomes very important when you don’t have access to adequate information on business grants and single-digit loans.

Apart from this, the cost of starting a new business in cities like Lagos, Port Harcourt, Abuja is higher than starting a similar business in Osogbo, Osun State.

The running cost of a business is higher, businesses depend on generator in Lagos than Osogbo where some certain services are cheaper and residents and businesses enjoy better power supply.

Startups must factor funding, most especially, the cost of running the business when it gets off the ground.

Nearness To Market

This is one of the most important factors before deciding where your business should be located.

Your business should be set up near the markets for the finished goods, economists describe this as “market-oriented industries”.

For instance, block industry is one of the popular industries in Ibeju-Lekki, Lagos, at the time of this publication. Do you know why? Real estate companies are building new apartments, it is a rapidly developing area on the Island.

To the owner of the block industries, it’s more profitable for him than to transport blocks from Agege (where his headquarters is located) to Ibeju-Lekki.

Therefore, handling costs will be minimized if the location is in favour of the market site, where goods are perishable.

It, therefore, means, if you are providing consumer services like tailoring, laundry services (https://infomediang.com/setting-up-laundry-business-nigeria), maintenance, and repair of machinery, your location should be a densely populated area.

Nearness To Labour Supply

If you’ve ever worked through Guinness Junction in Lagos early in the morning or around 5PM, you would see how casual workers troop out of some of the industries located in that part of Lagos.

In Economics, industries in that location are termed “labour-attracted industries”. They are located where labour is readily available.

Also Read:  Worst African Countries To Do Business

The thousands of young men and ladies that migrate to Lagos daily are unprecedented that companies have no problem in getting labour.

Startups should be located where skilled labour is easy to get. For example, an industry requiring doctors may find it hard to site in a rural area, as most doctors prefer to live in the towns.

Nearness To Power Supplies

Startups should pay close attention to the amount and the reliability of particular energy before launch.

Market research by InfomediaNG shows that Osogbo, Osun State capital has the best power supply in the entire south-west. However, the state is described as a civil servant state.

Legal Structure

The legal challenges startups face in Lagos are higher than in other states, this ranges from council fees, state fees, and some unaccounted fees from dubious officials.

Yet, the commercial city is an investment destination for businesses because of nearness to the final consumers.

Lagos’ population which is estimated at  21,320,000 is more than some African countries combined.

So, when you see entrepreneurs complain of daily “taxes” and find it difficult to leave the busy city, it’s because of the economic value their business gets from the challenging operating environment.

Transport

To minimize transport cost is to reduce the cost of production and distribution and thus, increase benefits.

Where transport is expensive and unreliable, startups should move near either to the sources of raw materials or to markets to reduce the cost of transport.

Where transport is efficient, there is less emphasis on transport costs. The industrialists may then choose other favourable sites.

Industrial Attractiveness

New industries tend to be established to traditional sites or areas where other industries have grown e.g Sango-Otta, Ogun State. This is because of external economies enjoyed by the new industries.

Also Read:  10 Business Growth Strategies for Entrepreneurs to Boost Survival Rate

For example, sewn industries make use of experts from established industries without having to pay heavily for one.

They can also enjoy the training facilities, maintenance services, and marketing institutions. Such a tendency to stick to traditional areas is called industrial inertia.

Once a firm has become established in an area, it will be reluctant to move elsewhere when expansion is contemplated.

Government Policy

While the above factors may be important to the siting of industries, governments may ignore some of them and decide to locate a job-generating factory in a local area in order to reduce or bridging rural-urban migration or political imbalance.

In this case, the government takes this decision not minding the cost of transporting the raw materials to the production location.

Before crude oil was discovered in the North, Nigeria’s government sited a petroleum refinery in the far North to bridge the development imbalance for political reasons.

Security:

In the 1990s, the population of foreigners in Plateau and Kaduna, and a few other Northern states was high.

Today, insecurity in Southern Kaduna, killings in parts of Plateau and some other parts of Nigeria have reduced the number of foreign companies that want to invest in Nigeria. No company wants to open a factory where its workers would be kidnapped or killed

Wrapping Up

Good location for a startup should be a major factor when planning to implement your business idea. It should be noted it’d be erroneous to generalize the aforementioned factors.

References:
  • Ewa Udu and Agu G.A (1999) New System Economics: A Senior Secondary Course; Onitsha: Africana-FEP Publishers Limited

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