Financing Your Business

The Need for Finance

Businesses need money for one or more of the following reasons:

  • To put the basic infrastructure in place.
  • To get the trading activities of the business moving.
  • Acquiring capital equipment.
  • Purchasing inputs.
  • Carrying out marketing activities.
  • Paying staff.

Sources of Finance

There are several sources of financing that are available to entrepreneurs. These include:
i. Personal Savings: Assets which can be used as leverage in securing other funds.
ii. Friends and relatives: This is often called 'love money'.
iii. Banks: Commercial and Development.
iv. Credit Unions.
v. Partners:

  • Silent Partners: Own a percentage of the business but do not play an active role in the day-to-day operations. You are able to maintain control over your business.
  • Active Partners: Play a role in the business.
    vi. Investors.
    vii. Suppliers.
    viii. Potential Customers.
    ix. Government Special Programmes.

Lending Criteria - The Four C's

i. Character: The financial institution assesses you and the business' past financial history and credit rating.
ii. Capacity: The lending agency determines if the business is capable of making projected profits and marketing its products, has a healthy cash flow, and realistic projections.
iii. Conditions: General economic conditions.
iv. Collateral: Security against the amount of money that is borrowed. It can take the form of the business' or owner's assets.

When Borrowing from Friends and Relatives: Some Basic Guidelines

  • Identify the right person to borrow from.
  • Avoid taking money from persons with ulterior motives.
  • Put the agreement in writing.
  • Treat all friends and family members as business associates.
  • If necessary, choose a legal structure that would prevent them from interfering in the day-to-day operations of the business.
  • State how much money you need to borrow, what you will be using the money for, and how and when you will repay the loan.
  • Show how much you anticipate the loan will make and what they can expect to receive once the business gets going.
  • Do not accept more than a reasonable percentage (about 1%) of your friend's or relative's savings.

Borrowing from Financial Institutions: You Should Know That...

  • You must have a well-developed, detailed business plan.
  • You will need to have collateral.
  • You should have equity of about 20%-25% of the amount you want to borrow.
  • You will have to pay interest.
  • Long-term credit at reasonable rates of interest may not be available.
  • The institutions want to know that you:
    • Are in the habit of saving on a regular basis.
    • Have a sound credit history.
  • Application procedures may be cumbersome and present difficulties for someone with limited literacy skills.

Financing Do's and Don'ts

  • Don't borrow more than you NEED.
  • Don't overestimate your borrowing potential.
  • Don't overlook available financing.
  • Don't underestimate the financial risks associated with your business.
  • Don't neglect to manage the relationship with your lenders.
  • Do forecast the cash needs of your business and yourself.
  • Do know the reputation of investors before you accept their money.
  • Do your loan application when you have time.
  • Do learn how to manage the finances of your business.
  • Do pay back money that you borrow from friends, relatives, and financial institutions.