While many people who are stuck in a nine-to-five job may dream about chucking it all in and starting their own business, the reality is that an entrepreneur’s life is not an easy one.
When a person takes the big step to become his or her own boss, many daunting questions come to mind, such as; “Do I have what it takes to run my own show?” “What if my idea is not viable?” What will happen to me if I fail?” “Where will I get the money I need to carry out the business?”
One of the major challenges that business persons face is the need for financing. With many start-up businesses, the entrepreneurs have little more that a germ of an idea and a big vision to present to a prospective lender.
With the high failure rate among new enterprises, it is no surprise that many businesses find it difficult to raise the financing they need to succeed.
However, the good news is that there are several options available for the smart entrepreneur to get funding. Jamaica Trade and Invest (JAMPRO) is one such agency which is dedicated to helping small business to develop and succeed.
Recently the JTI’s Corporate Finance Broker Unit hosted a seminar which offered advice on different types of business financing and sources of alternative funding, and allowed financial institutions to explain how they planned to help Jamaica’s small business sector to flourish.
Laurence Adamson, Senior Consultant in the Unit, outlined several financing options which business persons could use to raise funding. He encouraged entrepreneurs to not be afraid to approach lending institutions for money. “You should never view borrowing as begging for money,” Adamson pointed out.
“Rather, consider that you are offering a financial institution an opportunity to do business with you and make a sale.” The consultant noted that if business people did all the groundwork required by lenders then their chances of getting financing would be greater. “Success occurs when opportunity meets preparation,” he confirmed.
Some of the traditional sources of business financing described included:
Equity Financing – This funding comes from the personal moneys of partners (e.g. savings & investments, inheritances) or loans from family, friends and business associates. Adamson recommended that owners have at least 25%- 40% equity in their businesses as it demonstrates to lenders that they are committed to their projects and are prepared to share the risks.
Short Term Loans – These are usually less than one year in length and finance the day-to-day operations of the business such as wages, inventory purchases, office supplies and other operating needs. Types of short term financing include bridge financing which are interim loans with a short fixed term, overdraft facilities and lines of credit.
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Long Term Loans – These are normally used to finance the purchase of long term or capital assets such as equipment, land, buildings and machinery. They are arranged when the scheduled repayment and the estimated useful life of the assets being purchased is expected to exceed one year. This form of financing can come through promissory notes, mortgages against property, pledge of assets e.g. shares, and personal guarantees. Adamson noted that lenders would require the business to possess strong management ability, steady growth potential, appropriate insurance to protect the assets, and a sound business plan with realistic cash flow projections.
Adamson also outlined some alternative sources of obtaining capital, which may involve making arrangements with suppliers or customers. These funding sources include:
Supplier Credit – This is funding where the suppliers extend their payment terms, or offer discounts for early payments. Businesses can also get credit when the suppliers provide goods on consignment.
Leasing – Instead of having to purchase equipment up front, a leasing company can allow a business to lease with an option to purchase at the end of the term. This arrangement can free up capital to be used in other areas, and also allows the business certain tax advantages.
Advanced Payment – Some businesses may be able to negotiate full or part payment in advance for goods or services to be supplied in the future. This allows the business to finance the preparation costs related to the job and will help to reduce non-payment risks.
Discounting Receivables – Lending agencies can provide money up front against future sales of the business. This is common in companies that utilize credit card sales, as the past sales figures are used as justification for the financing.
Factoring Account Receivables – This is a process which involves selling outstanding receivables to a third party for cash. The debt factoring company will then assume responsibility for collecting the money which was owed to the business. This option is offered to businesses which trade on credit terms, which are well managed with a high growth in turnover.
The Corporate Finance Broker Unit provides entrepreneurs with more information on accessing alternate funding and technical assistance to develop their businesses. Next week we will look at some of the documentation required to be successful in obtaining financing.
Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.
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Originally published in The Daily Observer, October 04, 2007
Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl