How small businesses can attract external financing

MOST start-up businesses are created by entrepreneurs who use their funds and family members’ funds to start the business and run it at the initial stage. However when it’s time to grow the business and move up to the next level, finding that required level of funding is usually difficult. The options are to continue lending from family members or access business loans from financial. Here is a guide to getting small business ready for funding.

Develop a business plan

Your business plan is the first thing you need to prepare when you are positioning your business for financing or even when about to start your business. It is the primary tool that potential investors or lenders would use to rate your business. The business plan should provide a holistic view of your business, especially the market you intend to play in and the risks and plans you have for overcoming them.

Business objectives

Your business plan should contain a clear budget that has no ambiguities and clearly shows how you will manage funds to achieve your business objectives.

Determine type of loan required

Start-ups need to understand what type of funding they need – debt or equity. Equity requires selling off a part of your business in exchange for funds from a Venture Capital fund or even family member so that you can use the funds for the business. The partner takes equity in your company. Nigerians typically do not like to give up control of their business so the equity mode is underrepresented in Nigeria. Also venture capitalists who are the only type of funders for start-ups usually tend to lend large amounts which the typical Nigerian firm doesn’t need at the beginning.

Open a Business Account

It’s imperative for any formal and serious business to have a corporate account, which is used to manage the operations of that start-up. This allows the start-up to quickly develop a credit history that can subsequently be used by banks to assess its cash flow. This is a critical determining factor for banks considering structured business relationships with any institution.

Separate personal, company income

One of the main destroyers of business value is the inability of SME owner/promoter to distinguish between personal funds and the business funds. This is why a lot of business management books clearly state that business owners should pay themselves salaries rather than utilize business funds at their whim for personal expenses.

Have deep knowledge of the industry

There is nothing worse for a loan officer in a financial institution that has an entrepreneur seeking business loan sitting in front of him/her than when that person shows a lack of a strong grasp of the basic intricacies of that industry. The entrepreneur should understand both the operational aspects of the business as well as the demand and supply aspects of the industry.

 

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