How To Get Capital For Business

Capital is the primary reason why many startup businesses fail to take off; and existing businesses cannot expand quickly.

Accessing funds for business is increasingly becoming a herculean task owing to the
effects of the global economic meltdown. As banks and other financial institutions in the country are battling with liquidity crisis, they find it difficult to extend loan facilities to those in need for business. Their immediate concern is to meet customers’ obligations and stay in business.

A business represents commercial or trade activities. The type and nature of a business determines the amount of fund that is required. Essentially, business is categorised into sole proprietorship, partnership and limited liability. Funds could be raised via loans, banks, family and friends, cooperatives, among others. It could also be short or long term. Fund may be needed for start up or for expansion purpose.

However, this write up is essentially for those that would want to access funds from banks. Industrialists, business owners including members of the organised private sector, had, at various times, accused banks of not doing enough to assist the real sector. Their overall argument is hinged on the fact that banks offer suffocating interest rates.

In raising fund, the first thing to consider is to determine, in exact details, the reasons you need the money. This will help you to know where to go and will determine the kind of financing you get.

Another issue is how you intend to repay the money. The answer you give to this question will also determine what type of funding you need, short term or long term.

Banks, in most cases, only give short term loans, while long term credits can be accessed from the stock market of bond market.

Before you apply for loan, be sure you have estimated, in great deal, the amount of money that will be adequate for the project you have in mind.
Also, consider the interest rate otherwise known as the cost of funds. Currently, the interest rates in banks hovers between 25 and 28 per cent. Bankers often complain that the high interest rate is a product of the inflationary trend.

It is worth knowing that commercial banks will not grant loans that put them in a situation of investing in a company. They want to stay liquid and minimise risks.
According to the Director General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, banks have remained the bane of the development of the manufacturing sector as they don’t extend credit facilities to the sector. They often complain of the high interest rates. Every effort and attempts made by the immediate past Governor of Central Bank of Nigeria (CBN), Professor Chukwuma Soludo, to get them understand the economics behind interest rates fell on deaf ears.

The first step to take into consideration is the purpose of borrowing. That is the need for the fund. In a nutshell, the type of business one is to engage in determines the amount one desires. For instance, a start up capital for a small and medium enterprises (SME) operator will be different from the one going for manufacturing concern. The financial sector is now structured in a way that small lenders could readily access funds from the microfinance banks. This micro lending does not require the exhaustive documentations obtainable in the commercial banks. It is meant to be simple and easily accessible.

Raising funds from commercial banks
In most cases, most people regard all banks’ lending as loans. There are various ways by which commercial banks extend credit facilities to their customers.

Direct Loan: Banks grant short or medium term loans to their customers to meet various exigencies. Loans are usually granted for a specific period and to serve a specific purpose. It is a known fact that commercial banks usually shy away from long-term loans. Loans are granted to both individual and corporate bodies, and repayments are usually on agreed basis.

Overdraft: Overdraft facilities are usually granted to business customers. The facility allows a bank customer to overdraw his account up to an agreed limit until a specified time, and may be renewable periodically. Overdrafts require constant servicing, paying into the account often and withdrawing from it. There are no specific installment payments. Most overdraft facilities are meant to serve as working capital for businesses.

There are other facilities such as bank guarantees and letters of credit.

Requirements For Loans:
Feasibility Study: The first major step in accessing funds from the bank is to have a business plan. This is the blueprint of what your business intends to achieve. Feasibility study is an overall plan of the business, comprising plans for generating and spending money. It is usually composed of capital expenditure budget; profit and loss projections and cash flow projections. The lender looks at these projections to ensure that you can repay the loan from the profits or income of the business. He is going to check the cash flow projections to see that you have enough money to allow for your subsistence. The bank also watches out for the company balance sheet and breakeven analysis.

Why Business Plan?
There are many reasons you should prepare a detailed business plan. It acts as a guide to both the organisation and bank. It has to be detailed and requires discipline. Lenders and investors would like to see how well thought-out your business plan is. Bankers and equity investors want to see if your projections are reasonable and also want to have a chance to verify your statements and what impact the credit facilities is going to have in your business.

A good business should be composed of: definition of project; objectives of the venture and the promoters; definition of product mix; forecast of demand or market size; distribution channels and logistics; marketing communication; estimation of revenue; capital and operating costs; ownership or capital structure; cash flow and financial projections; selection of technical options; implementation schedule; risk analysis; enumeration of assumptions, organisation and people.

Tips For Dealing With Banks
Having made up your mind to approach bank for loan, open account with a bank that can meet your objective; get acquainted with bank’s employees; open up on your need; don’t play smart; be ahead of the game; ask question and make useful enquiries so as to be cleared with the conditions; try to know the benefits of product and services the bank offers.

What Banks Look For
Before a bank issues out loan to any person or organisation, it must be sufficiently sure that there is the ability to pay back the loan from your revenue or income; the organisation is stable; regular stream of income; track record and of course, good character.

What The Banks Need
According to a manager with Oceanic Bank, Mr. Cosmos Igwe, most prospective borrowers are scared of approaching banks because of collaterals. As a matter of fact, collateral or security has become an albatross for prospective loan seekers. However, Olatunji argued that the possession of securities is not a precondition for granting loans. Banks ask for securities as a secondary issue so that they can have something to fall back on in case a business or project does not go as planned or in the event that the customer is unable or unwilling to pay back his loan as agreed. In that case, the bank will simply dispose of the securities to recover its money.

The types of collaterals the banks are interested in include: land and landed properties; life insurance policies; shares and stocks of publicly-quoted companies, cash, guarantees and other assets.

If the above principles are strictly adhered to, the problem of accessing funds in the banks will be a thing of the past.

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