Business Funding

It doesn’t exactly require an IQ of 170 to realize that setting up a business or securing funding for an existing one costs more money than what most entrepreneurs have at their disposal. However, this should not be your stumbling block, should it?

The lesson is simple; entrepreneurs may believe that their business ideas are innovative but more often than not, this is far from the truth. I also had to learn the hard way. We often waste a significant amount of time seeking funding which could be sourced if we came up with alternative methods of finance such as “seeding” which is provided by firms for start-ups, ”sweat or private equity’’ or ”bootstrapping’’ such as sharing rent with a business partner and keeping your team small.

The sad reality is; Investors will not release funds unless due diligence has been undertaken by you as a business owner. Ask yourself, “How you will meet revenue targets for the first six months?”  “ Does your business have a competitive advantage over competitors and the potential to expand?”

A common mistake that entrepreneurs make is; focusing too much on how their product/service works and not enough time explaining what problem it solves. Research has shown that consumers are more likely to purchase solutions to existing problems, so highlighting why customers will buy your product/ service will prove more effective when pitching your proposal.

Below are some of the most common reasons why funding is rejected.

• Little or no owner equity, which is money that the owners, shareholders or other members of the business invest into it.
• A poor earning record.
• Low quality collateral. This is calculated at 70%-80% of actual value for land and buildings, 40% for movable assets and 40% for debtors.
• Questionable management.
• Slow trade or loan payment record.
• If it is a start-up business.

I’ve  always thought that banks were flexible but quickly remembered that credit is taken from someone's deposit and bankers need to protect that. Imagine what would happen if you deposited $100 000 into the bank and then I came along asking for a loan for $80 000 at 10% interest rate then failed to pay it off… What would happen to your money then? More importantly, what sort of chaos would we encounter at a global level? Someone would probably have to call you and tell you that your money is all gone! So certain procedures have to be implemented to avoid such a nightmare.

Here are the 6 C’s that bankers use to determine whether your business is credit worthy.

1. Character

This is based on past performances on one’s personal loans, then business credit history is reviewed. So, having a good track record will help your case immensely.

2. Conditions

Bankers will look at the industry sector, usually he/she will want to find out if the market is growing, static or in decline. How you propose to be competitive and if you actually made an effort to research thoroughly before arriving at these assumption is key.

3. Capacity

Credit can be paid back with future cash-flows, so bankers will want reassurance that your business has the capacity to generate net profits and the quality of your team’s credentials goes a long way when this is assessed.

4. Collateral

This is a secondary source of payment, fixed property is a great option because movable assets can only be resold at a fraction on the original price should your business fail to pay off its credit.

5. Credibility

How realistic is your plan? This is where your business plan comes in handy, as it demonstrates your knowledge on the operations and direction of your business.

6. Contingency Plan

With the possibility of change in events within the market, what other options do you have to sustain your business? This illustrates that you as an entrepreneur can think ahead and will give you an advantage when looking for a loan.