Ravi Chandran
When you are exploring SME finance solutions, it involves choosing from a vast array of alternatives. Debt or equity? Secured or unsecured? Are you at start-up, already launched, profitable, looking for exit / succession funding? How much resources have you committed to financing business?
By: Hitesh Khan/
What does a lender or investor want from owners seeking SME finance solutions? What are some of the myths?
Table of Contents
Probably the most common mistake we find among those seeking financing for their business is the idea that someone else will stake them to their dreams without them taking a large share of the risk.
Think about it – how much confidence will a lender or investor have in your proposal if you don’t have enough confidence in it yourself to put your own resources at risk?
SME finance solutions: It is about committing yourself and your savings or resources to the business.
For a start-up business, which might not be able to obtain funds on credit, the owner will have to come up with capital, such as from personal savings. No matter where else you look for funding, the money you put in is a strong sign of good faith and commitment to other lenders. Consider borrowing from friends and relatives and /or selling off surplus assets to provide the funds you need.
For an established family business, financing is often needed for expansion or to assist with transition of ownership from one generation to the next. As part of our succession management program, you should always consider the economics to “build or buy” as part of their growth strategy. Given the current economy, there are many businesses to buy – but certainly not without expert advice”.
Your business plan should tell you. Things like:
-
- initial operating expenses such as utilities, rent, payroll
- inventory and supplies to get started
- computer system, software
- fixing up your premises, office furniture, production equipment, delivery vehicle
- perhaps funds to buy an existing business rather than starting from “scratch”, etc.
In searching for SME finance solutions, be mindful that not all of these items require cash. Alternatives include renting or leasing and even barter or exchange.
And don’t forget the important questions when searching for SME finance solutions that go with “how much?”
-
- When do you need it? Utilities are paid after the end of the month, except for a small deposit at the beginning. Payroll is incurred weekly or monthly. Rent is usually paid along with a deposit at the beginning of the month. Inventory can be built up gradually in some cases, and suppliers often grant extended payment terms.
- When are you going to pay it back? You will want to earn enough to start paying operating expenses from regular cash inflow. Inventory should turn over [be sold and replaced] several times a year so that you can typically sell it and collect for the sale in around 90 days. Assets like production equipment, delivery vehicles, computer system last longer and might take around 5 years to be paid off completely.
- What security do you have to offer?Also known as collateral, security is what a lender has to rely on if you don’t repay. It might be business assets and / or personal assets.
There are several ways to finance business. You may have sufficient savings to cover the startup costs, you can borrow funds from the bank or family or you can look for an investor. Keeping startup costs to a minimum is nearly always the best option and the lean startup is the most popular way to start a business in the current environment.
Every business needs to raise startup capital to get started, and there is a range of options out there for you to take advantage of. What’s available will depend on how much you need, the type of business you’re planning to run, and the level of control you want to keep, but essentially funding comes as four types:
- Your own investment
- Investment from others
- Bank Finance
Many companies mix and match their funding sources when they want to raise startup capital – an overdraft to cover day-to-day borrowing, a loan to buy equipment, and investment to provide a substantial amount to get the company up and running. Business financing always works easier if you lay the groundwork in advance.
If possible, get to know an independent loan consultant, before you need business financing. This will give your independent loan consultant an opportunity to get to know you and your business, how you think, what your goals are, what the financial situation of your business is. Building a relationship with a consultant you are currently working with can help them get to know the intricacies of how you operate your business.
Finding SME finance solutions, especially in these difficult economic times, is tough but need not be impossible. The process of finding finance for starting a business, or financing a business, will serve to make sure that your business idea is a good one. If you can get financing that means that somebody has confidence that you will succeed and is betting money that you will.
Generally, the higher cost your business startup, the faster you should see a return on your investment. Take into account interest expense when calculating your return.
There are also low cost businesses with a great deal of potential. The person who can start his own business with very little money and perhaps no outside financing will usually invest “sweat equity” into the business instead of financial equity. This means that a low cost business may take longer to produce results. In the long run, however, if it has enough potential, it may be the right business for those that have few financial assets.
