The entrepreneurial spirit is alive and well in Jamaica, as statistics show that more and more people are opting to start their own small businesses. However, idealistic business owners are often hit with the harsh reality that most enterprises need financing in excess of what their pockets can provide.
Last week we looked at some funding options as outlined in the Small Business Financing seminar organized by the Jamaica Trade and Invest (JAMPRO) recently. These included the traditional forms of equity financing and short and long term loans, as well as alternative sources that involve making arrangements with suppliers or customers to improve the cash flow of the business.
Although there are varied options available for financing, small business owners sometimes find it difficult to access these funds.
Deanna McFarlane, consulting officer in JTI’s Corporate Finance Broker Unit revealed that to be successful in obtaining financing, the borrower should supply documentation on the project to be financed, as well as relevant personal financial information. This is necessary, she explained, to validate the project’s financial viability and to assess the credibility of the borrower.
McFarlane recommended that business owners keep their records safe and filed in an orderly manner for efficient retrieval. She encouraged entrepreneurs to record all relevant data so that they can be quickly analysed to assist in future planning, and to ensure that the financials were accurate so that lenders can properly validate the feasibility of their enterprises.
Most financing agencies will require a business to submit:
1. A business plan;
2. Cash flow projections -usually for the life of the loan;
3. Projected financial statements – profit and loss accounts and balance sheet;
4. Financial accounts for 2-3 years- some may require these accounts to be audited to ensure their accuracy.
Let’s look a little more in detail at some of these necessary documents:
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Business Plan
This document is simply a blueprint of what the business was created to do and how the owners intend to go about achieving it. Some of the aspects covered should include:
• History and background of information on the business
• Strategic direction that is planned for the business
• The history and future of the industry that the business is involved in
• An analysis of the market
• The marketing strategy
• An analysis of the operations
• An analysis of the financial projections
• An outline of the organizational structure
• An executive summary which summarizes the general content of the plan
Many lending agencies will focus directly on the executive summary and the financial projections, so it is crucial to ensure that these sections are well done. Remember, what the lenders want to see is exactly what you intend to do with their money and if your plan to pay them back is feasible. With this in mind, you should spend most of your time working on the budget and cash flow projections so that your financier can assess how you plan to make money and how you expect to spend it.
It’s important to note that the business plan is more than a document to impress a potential lender. This outline will also help you to put all the ideas you have for your business on paper, so that you can see how practical they are and exactly what it’s going to take to turn them into reality. Many business owners could have prevented financial losses and personal stress if they had done a simple plan to guide their operations.
To get help in preparing your business plan you can contact the JTI Corporate Finance Broker Unit, the Small Business Development Agency, the Jamaica Business Development Centre, or you can download a business plan template online at www.financiallyfreenetwork.com.
Financial Statements
Lending agencies usually need to judge the business operations and will normally require current balance sheet and profit and loss statement. For larger loans, the financier may request audited statements for up to three years. The balance sheet shows the lender the status of your business- what are your assets (what you own) and the extent of your liabilities (what you owe). It also indicates how much personal equity you may have invested in your project. The profit and loss statement shows how well the business is operating – is it making profit or are there losses, are there any taxes outstanding?
Along with the business statements, some lenders may request personal financial details for the owners, as the status of the principals’ finances will also affect the outcome of the projects. Oftentimes businesses are crippled because the owners try to meet all their personal expenses from the profits. The lender will want to ensure that the returns can satisfy the owners’ needs, or to see proof of how they intend to meet their financial obligations.
Next week we continue our small business feature with a look at the missing link that most small business owners need to find to access financing: Collateral.
Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.
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Originally published in The Daily Observer, October 11, 2007
Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl