A B O U T -L O A N S -&- F I N A N C E

 

Your Own Funds | A Bank Loan | Private & Other Sources


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Your Own Funds. 

  • 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.
  • Sources of your own funds are many.  There is obviously your own cash savings.  But remember to put only that part of your private funds that you will not need to support yourself and your family while your business is not showing a profit.
  • 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.

  • 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.
  • Have you a reputation for paying your commitments when due? The manager will look at his records of the bank's dealings with you to see whether you always stayed within your overdraft limits, and decreased your overdraft on the dates you promised to do so.
  • 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.
  • Do you have any funds of your own? The bank does not want to be the only backer of your business; neither does it want to carry you, your family and your business if your plans do not work out.
  • 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.
  • Whether your business keeps other bank accounts? If so, where, and whether there are debts outstanding on such accounts.
  • 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?)
  • Whether you have orders to deliver goods, which will require additional working capital to manufacture or deliver.
  • How you arrived at the amount of the loan requested, and whether it is the minimum necessary for the purpose.

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.

  • 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.

  • 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

  • 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.
  • 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.
  • 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.
  • 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.

  • 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.

  • Compare Loan Offers - The Loan Exchange offers personal loans, small business loans, mortgage loans and more! By partnering with the top financial networks, we can help match you with the perfect loan. Our friendly loan agents will guide you through the loan options available so you can proceed with total clarity and confidence. Find and Compare Loans from multiple sources to get the best fit for your needs.


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