FINANCING YOUR BUSINESS

A lofty business idea or projects without the necessary resources to put the plan into action is more or less “day dreaming”. It is as good as wonderful business plan on paper without execution destined to collect dust and buried. One of the key resources that are required is FINANCE. Finance as the name implies means providing necessary liquidity for the smooth take-off and running of any business idea. It is often referred to as Capital or Funding.

Finance serves as the oil used in lubricating the machineries that will bring the vision and dream into reality. It is an essential element that has caused several business/project failures due to abuse or lack of proper management.

Finance could be directly from the business/project owners in terms of own funds or indirectly as a loan from financial intermediaries or other financiers. Whichever the option used, it serves as the blood that carries oxygen to the heart of the business. In deciding the option to choose, in-depth understanding the workings of the business/project, the transaction flow/dynamics, and funding needs are however crucial. Wrong funding mix would eventually need to the collapse of the business or project.

Understanding your funding needs

Most business owners failed to appreciate this and used the wrong mix to finance their operations or mismanaged their cashflow flow/finance with serious consequences. The type, cost, nature, structure, combination, repayment, etc. are some of the issues to be considered in determining the funding structure to adopt. Also, the nature of business, activity, operating cycle, alternatives available, environment, economics, etc. should be considered. Using short term funds to finance long term assets /activity puts the business owner under pressure of repayment.

The business/project conversion cycle gives an idea of how long it would take for it to complete the cycle of turning cash invested back to cash. It provides the essential information as mentioned above and the funding needs of the business/project. It helps the operators to plan and project expected inflows and outflows. Making decisions as to equity against loan, own funds against external equity, single ownership against partnership, etc. becomes easier.

Funding types

The funding types to be discussed have been streamlined to reflect the peculiarity of our system and environment:

·        Personal Savings

This is the best option. This option refers to money set aside by the business owner from income earned over time to start a new business/project or profit ploughed back to the business to expand/support the business. Interest free and the owner reap full benefit of the success/failure of the business/project.

·        Friends and Families

Support from families and friends who buy into the vision of the business owner and are willing to support financially and otherwise. This could be in form of cash, assets or intellectual connections. 2 heads are usually better than 1.

·        Loans and Advances

Support from financial institutions or other lenders to finance a particular asset or operations of the business that attracts interest on the amount loaned. Repayment can be for a short or long term while repayment is usually over a specified period which is usually tied to the cashflow generated by the company or from another agreed source. It is only advisable if the repayment source is defined and the tenor/form is properly aligned to the transaction/operational cycle and nature of business.

·        Equity and Shares

Shares of the company are offered to willing investors through private arrangements as a Private Placement or publicly as a public offer. Based on the agreed rate per share, shares are allotted to the buyers giving the buyers control/rights to the company and share of the profit/loss thereafter. The control/rights is however directly related to the number of shares purchased.

·        Venture Capital

Money provided by investors to start-ups and small businesses seeking expansion with potential for long term growth but without access to capital markets. The investor invests money, managerial or technical expertise in exchange for the company shares and earns returns (dividend or profit sharing) when the business succeeds. It typically entails high risk for the investor should the business fail.

·        Grants

These are usually non-repayable funds given  by one party like government agencies, corporation, foundation or trust, to another party to fund specific projects and may require some level of compliance and reporting as dictated by the giver. High level of financial discipline is however required. 

·        Trade by barter

Not common but workable. It involves an agreement between 2 or more parties where one party does an activity in exchange for something. For example, a property manager agreeing to manage a complex for free in exchange for the payment of rent for the use of an office space either within the complex been managed or another. Out flow of cash for rent is swapped for the offer of service.

Know your business (KYB) and let the good grasp of its dynamics guide your decision in determining your funding mix.

For assistance in reviewing and proffering possible mix for your business, send your details to Michael@bizadvisory.tk or info@bizadvisory.tk or visit www.emoyolgroup.com/contact-us and our team will get in touch with you immediately.