Sourcing funding from debtors
The hunt for finance is an ongoing challenge for most small businesses. Depending on how much you need and what you need it for, there are various funding options to get – and keep you – up and running.
Before you even think about applying for a loan, first ensure that you have a proper bank account set up for business. Not only does this enable you to make and receive payments in the manner that suits you best, it also helps you to build up a payment and credit history with your bank. The longer you have been banking with a particular bank, the better your credit history, the better your chances of securing a loan.
There are several different types of accounts available to small business owners, from basic transactional, current or cheque accounts, through to credit card, savings and fixed deposit accounts. A cheque account (the starting point for any small business owner) typically includes a chequebook, a debit or ATM card and access to a selection of telephone, cell phone or Internet banking services.
How does your business look?
The first questions banks ask when you apply for a loan, are: “How sound is the business plan?” “How strong is the projected cash flow?” “Do you clearly understand the business, and do you have the skills to run and manage it?”
Banks also require collateral in the form of cash deposits or assets. This gives the bank security in case you are unable to repay the loan. It also shows your commitment and willingness to take a risk.
A business-term loan is a relatively simple way to secure funds for any period up to eight years, repayable in equal monthly instalments. This can be used to purchase assets, fund refurbishments or buy a small business. The loan period is not fixed and is determined by your monthly repayments.
An overdraft is quick and easy to arrange, and aids cash flow management because the cash is instantly available when you need it. However, the interest rate on an overdraft is high and using it for an extended period adds to your overheads.
A business working capital loan is a short-term capital facility that allows you to cover short-term expenses. Repayments are structured in line with your cash flow.
A business revolving credit line is a loan where repayments are made in equal monthly installments. Once you have paid back a portion of the loan (usually around 25%), you can withdraw the funds up to the original limit. The fixed monthly payments make for easy cash flow planning.
A commercial property loan offers long-term finance for the purchase or building of commercial or industrial premises such as shops, offices, warehouses and sectional title units or complexes zoned for business purposes. It also covers existing residential properties that are primarily used for business purposes and which have business rights.
Most small business owners find start-up capital from their personal assets, such as savings and retrenchment packages, or by using shares, bonds on a home and insurance policies as security. You should be prepared to invest as much as you can in your business before you expect others to invest in you. However, if you don’t have enough security to qualify for a normal bank loan, there are alternatives.
Donors and funding agencies: If your small business involves innovative research and development or has the potential to make a significant impact in a particular industry, there are agencies that will provide development funds without requiring collateral or repayment. These agencies provide funding via a government department or through a partnership with a major African company that has an interest in the research being funded.
Incentive schemes: Some organisations offer financial incentives such as reduced interest rates and payment terms, bridging finance, import finance and development or rehabilitation funds. These are usually available if a business establishes new facilities in economically inactive areas, creates significant job opportunities, beneficiates natural resources or uplifts a community or environment.
Venture capital and equity funding: This is the process of securing funds (usually from about US$100 000 up to $5 million) through another company to start or expand your business. The funder expects higher than average returns and normally obtains equity in your business.
To buy, or not to buy?
There are various ways of financing assets such as vehicle and office equipment, depending on your cash flow:
Installment sale: This means you can use the asset from the start of the instalment contract, but it only becomes yours when you make the last payment.
Leasing: You use the asset and pay “rent” to the leasing agent or owner. At the end of your repayment period you may buy the asset, refinance it or continue renting it.
Full maintenance lease: This is the same as leasing but includes maintenance, eg, of cars or computer equipment.
Access finance: This allows you to pay extra money into a particular loan account. You benefit from lower interest, but are still able to withdraw that extra money at any point to purchase assets if your business needs them.
Follow these two steps when applying for finance:
1. Set up an appointment with a business banker and make sure he/she receives a copy of your business plan at least three days beforehand.
2. Apart from your business plan, take proof of identification of yourself and your business partners, proof of ownership of the assets mentioned in your business plan and copies of your lease or rental agreements. Be completely open with your banker. If you have a poor credit record, give your banker all the details and reasons why, and a record of how the debt was repaid.
For more information on what type of loan you need, contact a banking advisor at your nearest bank branch.
By:KINGSLEY OPPONG –SEKU/Ghanadailies