Wanting to finance your business

Wanting to finance your business

FINANCING a business can be a daunting task. You might be thinking of how you can finance a start-up, the expansion of your business, buy new machinery, settle outstanding debt, pay VAT, pay a deposit for a new business, pay income tax, buy a vehicle or buy out a business partner.

A lot of thoughts will come into your mind: Should I borrow from the bank or from the loan sharks? Should I issue shares, bonds or can I use retained profit?

Should I consider factoring my receivables or should I try crowd funding? Or should I attract some angel investors or pledge my future earnings? Each of these modes of financing has its advantages and short comings.
There are a number of issues that you need to consider before you decide the mode of financing that you will use.
As I have highlighted abo

ve there are a number of ways that you can finance your business. However you need to consider the following important factors, namely, the repayment terms, the total cost of capital and the requirements of the lender or investor.
When you are looking at the repayment terms you have to decide on the tenure or length of the loan.
Firstly you need to consider the purpose why you need finance. If you are financing working capital you will need short term loan but if you are financing a long term asset you would need to get a long term loan.

The important thing is to match your loan with the life of the asset or match the revenue generation to the loan.
This will make it easier when you repay the loan.
You cannot finance a long term asset with short term loan when you know the repayments will be funded from the revenues generated from the asset.

Sometimes your business is cyclical so you should also take note of the impact of this on your cash flows and hence on your loan repayments.

The other factor that you need to consider is the cost of financing. This will be made up of the interest and other costs associated with getting the loan.

You should add up all of the costs associated with each financing method before making a decision.
The common costs for loans include the interest, administration fees and brokerage fees. Financing through a loan will carry much different costs than other mode of financing.

For instance financing from venture capitalists might not require repayment for a number of years but will require that the investor be repaid at a steep premium all at once after a certain period.
One important issue to consider when using venture capitalists is that they often require an ownership stake in the company, which they expect you to buy back at a premium after a period of rapid growth.

However before you buy the ownership stake back, the venture capitalist investor may assert a great deal of influence on managerial and strategic decisions during the period that he has a stake in the company.
Also when the venture capitalist sells his stake there is the possibility of you losing managerial control in the future and or falling victim to a takeover from a larger company.
If however you use ordinary share issues to fund your business this might lead to a change in management and a drastic shift in the strategic focus of the business. The third factor to consider are particular requirements that each lender or investor places on applicants.
Some of the requirements are too onerous. So it’s advisable that you pursue financing from sources whose requirements you are able to meet in full.

Most financiers would want your business to score certain credit scores or for your business to have certain specific financial ratio tests, such as the debt-to-equity or interest coverage ratios or profitability ratios.  You therefore need to assess these requirements and their impact on your business.

Whatever mode of financing you decide to pursue, your ability to sell your business concept for starting or growing successfully will increase the potential of obtaining the right financing when approaching financiers.
You would need to come up with a solid business plan to support your request for funds.
You should be able to demonstrate that your business will be able to generate the funds to repay the loan plus interest or reasonable profits to provide a good rate of return to the investors.

Stewart Jakarasi is a business & financial strategist and a lecturer in business strategy and performance management.
He provides advisory and guidance on leadership, strategy and execution, preparation of business plans and on how to build and sustain high-performing organisations.

l For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com or +266 58881062 or on WhatsApp +266 62110062

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