|
|
|
|
Financing
Your Business
Many
new businesses will exhaust their financial resources during the
start-up phase, and will eventually seek an additional injection of
capital resources to continue growth.
Some
people say it takes
money to make money and though not entirely true many businesses need
money to get started, to operate, and to expand and grow.
Why
does
your business need finance?
It
is important to clearly define what the funds will be used for. If it
is to buy your new “Merc” or to give yourself a raise, chances are you
will struggle to obtain your business
finance.
Business
finance is
generally used to acquire assets which are employed to help the
business achieve its profit-making objectives, some examples are:
-
Purchase capital items - plant, equipment, land or buildings
-
Increase holdings of trading stock and supplies;
-
Fund research and development;
-
Expand distribution or develop new markets.
Types
of
Finance
There
are two main types of finance available to small business:
Debt
Finance
The
majority of small businesses use debt finance, by borrowing from banks
or other financial institutions. Debt finance is provided subject to
specific terms and conditions for repayment (eg, overdraft or bank
loan). The lender (e.g., bank) will evaluate the risks of a business
and seek security (collateral) to cover the risk of default. The
borrower repays principal and interest.
Equity
Finance
An
investor provides funds in exchange for
a "share" in your business. Equity investors provide total risk
capital, and have no security to call upon if the business does not
perform as
expected. Equity finance may be sourced through a joint venture,
venture
capital funds (such as the Stock Exchange's new Enterprise Market), or
indeed private
investors commonly known as "Business Angels". The equity investment
process is more complex and time-consuming than the process involved in
raising
debt finance.
Applying for Finance
Bank
overdrafts and loans (debt finance)
are the most important source of funds for small business. When seeking
finance, it is usually necessary to make a formal application to the
financial
institution.
Because
the bank (lender) can only make
decisions based on the information you supply, you should try to give
them as
much detail as possible on all matters relating to your business
venture.
Remember that banks do credit reference checks, so there is no point in
withholding information.
What
does the bank look for?
Applicants
must be able to demonstrate that
they have a plan, and that they manage their finances and cash flow
carefully.
The real issue is giving the bank confidence in your ability to repay
the debt.
You
need to convince the bank that your
proposition is practical and that your business will be able to service
all
borrowings. The lender will have to be confident that you have the
skills and
ability to manage your business in order to repay the loan and interest.
A
well-researched and well-presented application
is critical. Be prepared to seek and accept independent, professional
advice
from your accountant.
Banks
look at several factors when
assessing a business loan application:
- How much money you are
seeking and why is the loan required ? (Be careful not
to under-estimate the amount you want to borrow)
- Have
you considered any other options (such as reducing costs, tougher
debtor
terms, capital injections from partner/s) ?
- Do you
have a clear business strategy (a business plan) ?
- Is
there a clear plan to service and repay the debt from cash flow ? (The
bank
will want to see financial records and/or estimates)
- Does
your business have good cash flow management ?
- Is
there a good track record of success ?
- How
much can you contribute and what security can you offer ?
- Have
you sought professional advice from your accountant ?
Reasons
why a bank will reject a finance
application:
Rejection
of a loan application
predominantly revolves around the bank not having full confidence in
your
ability to repay it.
Other
reasons why an application might be
rejected include lack of collateral (especially if cashflow is not
adequate),
inadequate information and unacceptable operating risks.
Some
tips:
Talk
to the bank as early as possible when
you are considering borrowing money.
Remember
that it is not a pre-requisite to
have borrowed money before. Many people think that a bank will only
lend money
if you can show a prior repayment history. However, banks are in the
business
of lending money, so the real issue is giving your bank confidence in
your
ability to repay the debt.
We strive to provide only quality articles, so if
there is a specific topic related to business finance that you would
like us to cover, please contact us at any time.
And
again, thank you to those contributing daily to
our business
finance
website.
TheTeam@awareness-guide.com
Thanks
For Stopping by...
If you can't find the
Business Finance information you are looking for?
Try Google Search
|
|
|
