Obtaining credit and financing for your business

How do I get the money

Irrespective of the type of financing you need and are able to obtain for your business, the process of obtaining it is somewhat similar. There are several questions that must be answered during the course of raising money for your business. The ability to answer these questions is critical to your success in obtaining finance as well as the overall success of the business.

How much do I need?

Some serious cash flow planning is needed and estimates of future sales, related costs and how quickly you have to pay suppliers. An assumption must be made on how and when you are likely to pay the money back. However if you raise cash through equity then it is unlikely that you will have to pay it back, but your investors will want to know the value of the business and how they will benefit through dividends or selling their shares.

How will you use the money?

One of the most important questions an investor will want to know is how the money will be spent. Will you use if for equipment or to hire additional employees?

What experience do you have in running your business?

One of the main reasons for failure is the lack of managerial experience. You will need to convince your investors that you have knowledge and experience in managing the business and their money which you expect to operate.

What is the climate for your type of business and your geographical location?

Few investors will want to put money into your business if you haven't done sufficient 'homework' to determine that you have a reasonable chance of success. If your business is based on existing economic or legal conditions which are subject to change in the near future your risk is substantially increased.

Business Plan

The business plan is a document which enables investors to obtain an understanding of your proposal in a consolidated format in order to successfully raise the funding; the business plan should be commercial and realistic. Essential parts of the business plan are financial projections and cash forecasting which are discussed in detail in chapter eight.

Financing Alternatives

There are a number of different types of financing available depending upon the nature of your business.

Banks

This is usually the first source. Banks typically lend to small businesses on a secured basis, using equipment, stock or debtors. The more liquid and readily saleable the assets you have to offer as security, the more acceptable it is likely to be for the banker. Loans from banks take on several forms such as:

  • Overdraft limit - this is usually reviewed annually and allows you to borrow up to a pre-set limit as you need it and is paid back when funds from sales are received.
  • Short term loan - A loan which is repayable on specific dates.
  • Term loan - for the purchase of specific assets, such as machinery or computers.

Lease financing

It is very popular to acquire equipment through Lease Agreements. Leasing companies typically accept a higher degree of credit risk because they are looking to the value of the equipment as collateral if your business does not keep up with repayments. For this reason, leasing companies prefer to finance new equipment which can be resold if necessary.

Trade credit

An important source of financing may be from the creditor and suppliers with whom you do business. Many suppliers ask for cash on delivery, however depending on the nature of your business some suppliers will quickly establish trade credit with you once you have gained their confidence by continuing to do business with them and paying their invoices upon request. Establishing good relationships with trade creditors is essential as it allows you to use the goods to sell to your customers in some instances before you pay them.

Equity Financing Sources

Equity financing usually means selling a proportion of your business, usually by way of shares or ordinary preference shares.

Venture Capital Companies

This is usually a company or fund that is in the business of taking risks. A venture capital fund is often backed by a group of investors which may be individuals or companies. The investors are often represented by a management group which evaluates potential investments and manages the existing portfolio.

Private Individuals

Individuals very often have been successful and have accumulated substantial wealth who often look for further investments and business ventures. These individuals often want to participate in the management activities of the firm and help guide progress through representation on the Board of Directors. The business acumen and contracts of these individuals can prove to be a valuable asset of your business.

Mitchells has helped many of our clients to obtain the finance suitable to their needs.

For more information, call us on 0113 274 3496.

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