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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. 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 -
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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