Raising Finance

The financial or capital structure of your business is one of the key areas that will influence the outcome of your efforts.  That is, whether or not you will be as profitable as you can be.

Generally, there are no government grants to start or buy a business.  When you have ascertained your start-up costs, estimated income, and operating costs for at least the first 12 months, consider how any shortfall will be funded.  Possible sources of funding include savings, friends, partners, or a bank or other financier.  Lenders will generally require a business plan, including cash flow forecasts and sufficient collateral as security.

Finding the Money You Need

One key to a successful business startup or expansion is your ability to secure appropriate financing.  Raising capital is the most basic of all business activities, but as many new entrepreneurs quickly discover, raising capital may not be easy.  Raising funds can be a complex and frustrating process.  However, if you are informed and have planned effectively, raising money for your business will not be a painful experience.

There are several sources to consider when looking for financing and it is important to consider all of your options before making a decision.

• Personal savings: Most new businesses are started with the primary source of capital coming from savings and other forms of personal resources.
• Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture.  Often money is loaned interest free, or at low interest rate which can be beneficial when getting started.
• Banks and credit unions: The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.
• Venture capital firms: These firms help expanding companies grow in exchange for equity or partial ownership.

Borrowing Money

It is often said that small business people have a difficult time borrowing money, this is not necessarily true.  Banks make money by lending money; however, the inexperience of small business owners in financial matters often prompts many banks to deny loan requests.

To be successful in obtaining a loan, you must be prepared and organized.  You must know exactly how much money you need, why you need it and most importantly, how you can pay it back.  You must also be able to convince your lender that you are a good credit risk.

Requesting a loan when you are not properly prepared sends a signal to your lender and that message is ... "High Risk!"

Types of Business Loans

Business finance can be categorised as short-term, medium-term and long-term.

Short-Term Loans:

Short-term loans are paid back in one or two years.  Types of short-term loans are:

• Credit Cards.
• Personal Loans.
• Bank Overdraft
• Debtor Financing.
• Line of credit.

Bank Overdraft

An overdraft can be used to cover financing shortfalls from day-to-day, according to your cash flow.  The interest will be calculated on your daily outstanding balance and is usually charged on a quarterly basis.  Depending on your financier, an overdraft facility may also incur other sundry fees.

Medium-Term Finance

This is finance usually required for a three to 10 year period and is principally used by businesses to finance equipment, business expansion and development of new products.
Medium-term finance may come in the following forms:

Term Loan - Is a loan paid back over an agreed period (term) where principal and interest rate are paid off in monthly repayments.  This type of facility is commonly used by businesses that wish to structure their loan repayments to correspond with the income produced from equipment purchased or sales of new products.  It may be for a 5 or 10-year period.

Personal Loan - Where it is not possible to arrange a loan in your business' name you could consider, as an alternative, arranging a personal loan.  This can then be contributed as equity or a loan to the business.

Leasing - With this type of facility, the financier would purchase the equipment you require and then lease it to you in return for regular rental payments (usually monthly) for the duration of the lease period.  At the completion of the lease term, you are then offered the option to purchase the equipment at an agreed residual value.

Long-Term Loans:

Long-term loans have maturities greater than one or two years, but usually less than seven years.  Real estate and equipment loans can go up to 30 years.  Long-term loans are used for major business expansions, purchases of real property, acquisitions and, in some instances, start-up costs.

This type of finance is used to fund the purchase of assets such as the business itself, land, buildings, plant or machinery that will directly or indirectly contribute to profit over a period of years.  Term Loans would be the most common way to structure long-term borrowings.

Types of long-term loans include:

• Equipment Finance.
• Commercial mortgages.
• Fixtures and Fittings.
• Construction.
• Vehicle Leases.

How to Write a Loan Proposal

Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender.  Remember, lenders want to make loans, but they must make loans they know will be repaid.  The best way to improve your chances of obtaining a loan is to prepare a written proposal.  A good loan proposal will contain the following key elements:

General Information.  Business name, names of principals, the business address, Purpose of the loan: State exactly what the loan will be used for and why it is needed.  Amount required: Request the exact amount you need to achieve your purpose.

Business Description.  History and nature of the business: Give details of your business's age, number of employees and current business assets.  Ownership structure: Provide details on your company's legal structure.

Management Profile.  Develop a short statement on each principal in your business.  Provide background, education, experience, skills and accomplishments of each principal.

Market Information.  Clearly define your company's products as well as your markets.  Identify your competition and explain how your business competes in the marketplace.  Profile your customers and explain how your business can satisfy their needs.

Financial Statements: Provide balance sheets and income statements for the past three years.  If you are just starting out, provide a projected balance sheet and income statement. 

Personal financial statement: Prepare a personal financial statement on yourself and other principal owners of the business. 

Security: It is likely the lender will seek some form of security from you to protect the loan.  Security requirements will vary between lenders and the type of loan sought.  Some generally acceptable forms of security are:

• Real Estate;
• Shares in Public Companies;
• Surrender Value of an Insurance Policy;
• Personal Guarantee;
• Bill of Sale or Debenture over Assets other than Real Estate.

List all collateral you would be willing to pledge as security for the loan

How Your Loan Request Will Be Reviewed
When reviewing a loan request, the lender is primarily concerned about repayment.  To help determine this ability, loan officers will order a copy of your business and personal credit report from a credit reporting agency.  Using the credit report and the information you have provided, the lending officer will consider the following issues:

• Have you invested savings or personal equity in your business totaling at least 25 to 50 percent of the loan you are requesting?  (Remember, a lender or investor will not finance 100 percent of your business.)

• Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? 

• Do you have sufficient experience and training to operate a successful business?

• Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?

• Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

For further advice about seeking finance, contact your accountant or business adviser.