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Your
Own Funds |
A Bank Loan |
Private
& Other Sources
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Your
Own Funds.
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The
first step in raising money is to find out how much
you can put into your business venture yourself. There are two reasons for this. First, the more money you put
in yourself, the higher your direct personal stake in the business
will be. This is
especially important if you form a company and incorporate as
your shareholding will often be directly related to the amount
that you contribute yourself. Second, the more of your own money you risk, the easier
it is to persuade others to risk theirs.
Some investors, in fact, make it a rule never to invest
in a new venture unless the major partner finances at least half
of it himself.
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If
you own a house or property free of mortgage, you
can mortgage it to a bank, building society or private lender.
If it is already mortgaged, you can often get a second
mortgage, especially from a private lender.
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You
can also borrow on the strength of a life assurance policy,
your paid-up pension fund contributions, i.e. 401K, or
even a future inheritance.
A Bank Loan
Your second step to raise finance for your business project
is to approach your bank manager. Banks are conservative
in their approach to requests for loans. In general, they like their
loans to be secured against collateral, or to be made only for a short
period. If you do not have assets to cede to the bank as collateral,
be careful about how you lay out your proposal to your bank manager.
The
bank manager will keep certain points in mind whenever he is
approached for a loan. These will probably include, your personal
character, your proven business ability, success in past business
ventures, your knowledge of business methods (to give a promise
of future success), need for the loan, and the probability of
repayment on time and in full.
To
ensure success, prepare yourself carefully for the interview.
Attend to the following questions that your bank manager is likely
to ask.
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How
will you use the money? He will be most sympathetic if you
intend to spend the money on goods that can easily be sold again
without loss of value [such as stock]. He will be less impressed
if the money is to go into fixed equipment, such as machinery
[which you do not intend selling, and which will rapidly depreciate
in value]. Least of all he will not like it if you want to spend
it on luxuries, or have not made up your mind on how the finance
will be allocated.
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Do
you have experience of your proposed new business? Have you
studied your project in detail? Testimonials, examinations results,
letters of recommendation, anything that shows promise of you
being competent will count in your favor.
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Have
you any reasonable expectation of producing sufficient income
to repay the loan? If you have unfilled orders, favorable
results from market tests, or provisional sales contracts, they
will count in your favor. When can you repay? The bank wants to
know as precisely as possible when you expect to repay or reduce
the loan. Show the facts and statistics on which you base your
expectation of being able to liquidate the loan by a certain date.
Instead
of seeking a personal loan, you may also approach the bank for
a loan on your business account. All the points above also apply
in a general way to this type of application. But in more specific
detail, the bank would also want to know the following details, especially
if your business is a new one with a new account.
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How
your business is organized? (sole proprietorship, partnership,
or private company) When it was organized, and whether there have
been recent changes or problems relating to your name or activities.
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Facts
about the owners: the age and marital status of yourself and
your partners, where you have your personal bank accounts, what
business and civic organizations you belong to, whether you carry
life insurance, and to what value.
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How you intend repaying the loan, and what its purpose is?
The purpose of the loan is a very important part of the loan application.
Your bank will want to be sure that the loan will be used for
a necessary business purpose. For example, will it finance the
purchase of merchandise which can be sold before the loan has
to be repaid (i.e.; is it of a self-liquidating character?)
In
addition, you should also offer your bank a balance sheet.
In it you list your business assets and liabilities as of some recent
date. It would be useful if you could include the comparative figures
for the previous year. Further, show proper reserves for depreciation;
as to how your inventories have been valued. You will also need to
give the amount of past doubtful accounts or show a special reserve
for bad debts. Apart from the balance sheet, add a statement of last
year’s sales, costs of doing business, and net profits income statement,
or profit and loss account, as it is also known. A basic knowledge
and use of a good bookkeeping or accounting software program is very
useful for this part of the application, as it makes a good impression.
Visit our page on financial
services available to the small business, especially the use of
QuickBooks
How
to prepare your Investment or Loan Pitch - This downloadable
set of documents and slides cover the essential elements of how
to make a successful pitch with your bank or prospective investor.
This pitch is meant to be a building block for your own pitch. It
is NOT the bible for all pitches. Slide order and content should be
adjusted to suit the needs of the presenter and the presenting company.
Buy
Investment Pitch with Tips
How
to keep your bank happy
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Maintain
good relations with your bank. Invite your bank manager to
visit you at your place of business. (This is just a pleasant
gesture; he/she will probably not have time to come). Offer to
show him/her around. Explain your plans to him/her, especially
if they involve special expenses. Don’t try to conceal difficulties
from him/her; it is part of his/her code not to betray confidences.
Mutual frankness is the first basis of good banking relations.
When you have been granted a loan, do not abuse it. If it is granted
for seasonal purposes, do not use it for equipment.
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Never
have your bank manager call you up to warn you that you are
above your overdraft limits. This destroys his confidence in you.
At the end or the year, as soon as you have them available, send
a copy of your audited financial statements to your bank. In a
footnote, explain any unfavorable features, e.g. high bad debt
percentage, poor turnover, and poor trend in earnings that may
arise from your statements.
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The
importance of applying for a commercial loan to your bank is
listed as one of the major problems now faced by small businesses,
and we have researched the best ways to handle this problem. click
here
Private
and Other Sources
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After
banks you may look at private sources of capital.
Keep in mind that any lender wants his money (a) to be safe, and
(b) to produce a regular and worthwhile income. If a person does
not lend you money, but supplies investment capital, he is usually
prepared to put up with less safety. In return, he wants his capital
to grow, i.e. he requires the capital value of his share in your
business, as well as his income in the form of dividends, to increase.
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Your
friends and relatives are a first source. Here at
least you will not need character references. But do not expect
anyone to lend you money simply on the basis of blood or friendship.
You will have to show promise of safety, good return and growth
of capital. Further for the sake of good personal relations, do
not approach a friend or relative unless you have a reasonable
chance of succeeding. Some friends will refuse because, rightly
or wrongly, they believe in the saying: Lend money to a friend,
and you earn an enemy. Others may be embarrassed by your request,
either because they do not have faith in your business acumen,
or because they have no funds to lend you.
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You
may also approach your attorney. Lawyers administer
estates and trusts for families or small companies. Your plans
may look profitable to him, an ideal way to get a high return
on a relatively safe investment. So ask your attorney and your
accountant, you will only impress them if your plans are concrete.
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You
may also get funds by advertising for it. There
are many individuals who, because of tastes, interests, and their
tax position like to invest in ventures offered in the classified
columns of your daily newspaper and may bring you the cash you
need. An advertisement should include: amount needed, form of
financing (unsecured loan, mortgage, or share-projected dividend
on shares), time period, type of business in which it will be
used, and purpose. Avoid extravagant claims: a sober statement
is more likely to impress.
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How
to set up Successful Financial Agreements
between friends and family -
When a loan or financial arrangement
is made between individuals for personal
or small business use, the risk
must be covered with extra care to reduce
any strain between family members, friends
or other private parties. Our financial
partner has a great way to reduce this
risk and we suggest that you look at
the various suggestion made on this
web
site.
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