RAISING FINANCE FOR YOUR START UP BUSINESS (11B) CONT'D

By Ayo Emakhiomhe

This is continued from last post on bank loans as a mode of raising finance for small businesses.

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Let’s look at some of these credits especially the ones that affect the small businesses in Nigeria.

INVOICE DISCOUNTING

This is available to customers with invoices or certificates that can be discounted for payments made to or to be received from acceptable third parties. In simple terms, if you have concluded a job for a client of yours who does not make payments immediately (maybe over 45-60 days) but you require cash to urgently conclude another job or simply for cash flow management, then you can present the invoice to the bank who will give you as much as seventy (70%) percent of the invoice sum (less charges) based on various terms and conditions.

CHEQUE DISCOUNTING

This is similar to invoice discounting except that in this case it’s a cheque that is issued and not an invoice. The bearer of the cheque who should be a customer of the bank offering this service will get an immediate value of all or part of the sum of the cheque (less charges) if the issuer of the cheque is an acceptable party to the bank.

The bearer can then have immediate cash for other purposes while the cheque goes through the normal clearing processes.

CONTRACT FINANCE

A bank might decide to finance a contract awarded to their customer either fully or partially based on the customer’s request. For the bank to be a party to such a contract, it must have considered the profitability and risks of such a contract and the integrity and capacity of the parties to the contract. There is no restriction to the type of contract (as long as it is within the gamut of the law, meaning that it is legal) a bank can finance once the customer meets with the terms and conditions of the bank. Note also that no terms and conditions are cast in stone; waivers can be gotten depending on the workings of the contract to be financed.

emakhiomheayo@yahoo.com

TO BE CONTINUED BY NEXT POST.

 

read a book today.

RAISING FINANCE FOR YOUR START UP BUSINESS (11)

By Ayo Emakhiomhe

BANK LOANS

We started a little while back with many posts so far on various ways of raising finance and how to go about this and their upsides and downsides.

The following methods are the ones we have posted on this blog.

a. Personal savings

b. Family and friends

c. Partnerships

d. Esusu/Ajo (contributory scheme)

e. Co-operative societies

f. Lease/rent

g. Contract/exchange

h. Credit lines

i. Credit card

j. Business angels

k. Venture capital funds

l. Clients/customers

m. Personal guarantees

n. Insurance

o. Private placements

You can access all these past posts from the archive to the right of the screen.

You can also click on the “join this site” button and get all subsequent posts directly to your email addresses so you never miss any again.

Today we shall be discussing the financing method of BANK LOANS. This was supposed to be the last method as we had listed at the beginning, but please allow us add 1 last one again which is OUTSOURCING; this we shall discuss by the next post when we conclude on bank loans. 

A bank is simply defined as an institution that engages in what we call financial intermediation. Financial intermediation is simply taking money from the sector/persons/businesses in the economy that has excess funds and lending to the sector/persons/businesses in the economy that lacks these funds or requires these funds at a price which forms the banks income.

In Nigeria we have various categories of banks; from the micro-finance banks to the international banks (large commercial banks). The main definer of these bank categories are their capital base and spread.

A loan in its simplest form is cash advanced to a customer as credit to be repaid over a defined period for a defined purpose at a defined price based on specific terms and conditions.

Banks raise funds in various ways from savings, deposits to bonds and guarantees, even borrowing from other institutions in forms of loans and grants.

It is all the funds raised above that the banks now offer to the sectors or businesses that lack these funds in various forms. These funds are usually available to both small and large institutions/businesses/governments both local and international depending on the focus/strength of the bank involved and the central bank policy direction as at the time of transaction.

It is noteworthy to know that the Nigerian system does not encourage banks to support the small businesses, but some are trying at this.

Loans given by banks are basically referred to as credits. These may be classified as short term, medium term or long term credits. These credits are usually for working capital financing, export/import finance, mortgages, leases (for example asset lease or equipment lease), contract financing and guarantees.

Let’s look at some of these credits especially the ones that affect the small businesses in Nigeria by next post.

emakhiomheayo@yahoo.com

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please read a book today.

RAISING FINANCE FOR YOUR START UP BUSINESS (10)

 

By Ayo Emakhiomhe.

 

PRIVATE PLACEMENTS.

 

Private placement or private investment capital is money invested in your company usually from private investors in the form of stocks and sometimes bonds.

 

This is usually a mode of investment sought by firms that either cannot or are not yet willing to approach the stock market. Some companies use this method as a preliminary to entering the market by introduction. An introduction is an application for shares already in issue where no marketing arrangements are required. This is because the existing shares for which listing is sought are already of such amount and so widely held that there would be an open market for the trading in these shares. Since only existing shares are listed by introduction, it follows that no new shares will be issued and no additional funds will be raised.

 

The main benefits of this type of investment are

 

• High degree of flexibility in amount of financing with combinations of debt/equity

 

• Investors are more patient than venture capitalist, often seeking 10 to 20% return on investments over a longer term of 5 – 10 years

 

• Much lower costs than approaching venture capitalists or selling the stocks to the public as an IPO (initial public offering)

 

• Quicker form of raising money than usual venture capital markets.

 

WHAT IS REQUIRED FOR PRIVATE PLACEMENTS?

 

• A very sound business development consultancy company  like Coinbox Limited to prepare the various documents and strategy plans.
• A very sound business plan- Coinbox Ltd can help you with this.
• A private placement memorandum (PPM) disclosing the full facts of the investment and business. A sample copy can be found at www.vlaonline.com/ppm.Coinbox limited can also assist with drawing this up for you. 
• A law firm or lawyer experienced in private placements

 

With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable source of business financing without the stress of taking a company public and conceding control.

 

TARGET MARKET

 

• Your customers whom you are already doing business with and are familiar with

 

• Close friends and family

 

• Institutional investors like banks, finance houses, insurance companies, etc.

 

• Suppliers to your company

 

• Creditors to your company

 

• Distributors

 

• Company contractors

 

• Staff, etc.

 

What prospective investors usually look for before investing in a private company is return on investment as well as security of their capital.

 

Also, the investor will want to know how easy it is to pull out his investment whenever he has to. A solution to this is to make the offer redeemable which means that the company can buy back its shares whenever they are put up for sale.

 

 

 

To employ any of the methods outlined above, you must have already done your research/feasibility study and prepared a business plan. If you have not, please prepare that first before deciding which method or combination of methods will best suit your business plan and needs.

 

If you do not have a business plan, you are like an army general that went to war without any combat strategy, he and all his men were killed in battle.

 

Also, always Endeavour to start small; Even if you have all the capital to hit the high market with your product or service. Always start with just a small test first. Do a Test run of your venture before slowly releasing funds to grow it to size. By doing this you will see any small problems that otherwise would have been hidden by large outlays and your mistakes and losses will be small. Also, backing out if necessary will be at minimal loss/damage.

 

 

emakhiomheayo@yahoo.com

 

 

Don’t forget to read a book today.

 

Thanks to all those that sent emails and texts. Please keep them coming.

 

Please note that previous posts on this and other topics are available by just a click on the archive to your right on this blog page.

 

 

 

Please don’t forget to visit our blog on leadership- www.zerofactorleadership.blogspot.com

 

 

The COINBOX team.
 
 
REFERENCES:
 
http://www.investopedia.com/

 

http://sbinformation.about.com/cs/creditloans/a/prplacemt.htm

 

Raising capital for small businesses; non-bank ways of financing SME’s by Adekola Owolabi. Published by David Richard Associates (2006) Nigeria. davidrichardass@hotmail.com.

 

http://www.askventure.com/