Whether you have been in business one week, two years or seven years an infusion of funds is always welcome. How many business women out there have tried to raise capital for their business? How many women reading this are thinking of venturing into business but need capital and do not know where to begin? Perhaps this article will shed some light on the things to keep in mind when trying to raise capital.
The first place people think of raising funds is usually the banks. I spent some time speaking with credit managers for a couple of financial institutions while doing the research for this article and got some very insightful information on the bank business credit application process. One point that came across that particularly struck a chord with me is that people need to keep in mind that there is a human being at the end of that paper trail. This means it is the perception of a human being that will play a significant role in whether your loan application will proceed or not. In my research with these institutions I found that the status of current loan documentation has been guaranteeing rejection. If you have ever applied for a visa, you know how your paperwork needs to be meticulously presented. At the embassy what you are trying to do is make it very easy for them to evaluate you. Same thing with the credit officer in a bank. Think about it, it may be Friday 4:45 pm on a rainy afternoon, kids need to be picked up, friends are calling to have drinks and from his window the credit officer of a certain bank can already see traffic piling up. He has to review just one more application and then he can start his weekend. What will make it extremely easy for him to review this application? Firstly, correctly filled out loan application forms with the required supporting documentation that has been asked for. If for any reason you do not have some of the required documents attach a note saying why you do not have them. Point it out in black and white in your covering letter and do not simply ignore them and hope that it will not be noticed. For example if you do not have audited accounts because you have been in business only six months, say that and attach your six month in house management accounts.
Secondly and very importantly a business plan that clearly defines your vision, definition of product or service, how your business will grow and how you will make money. Michael Gerber in the E-Myth Mastery states “A business without a vision is directionless. It lacks purpose and the essential idea from which it will flourish. But a vision without a plan is only hope. A vision needs a plan to make it reality”. No one invests in hope. In our previous article we alluded to that fact that once we are in business we spend to earn and not so much earn to spend. Since we are trying to borrow we have to directly link the additional funds we are borrowing to increased revenues to the business.
This business plan must be something you can stand up and defend. If you are new in business this is the main tool you are using and you should even include client references to make your case stronger. A lot of people write business plans just because they have been asked. Whether you are looking for credit or not you should have taken time to go through your strategy and document this critical thought process. You cannot be expected to grow without a plan. Failure to plan is simply planning to fail. The credit managers are also smart enough to pick out a business plan that was written last night. A very useful insight, which I have personally used successfully is as much as possible try and present the business plans to the bank through a face to face meeting. A lot more weight is carried when the story is told from the horse’s mouth. This challenges us as well to make sure we really believe in what we are doing. In larger institutions this may be difficult but I found that the smaller banks and financial institutions really do have an open door policy. All you need to do is ask. Something to keep in mind when selecting your preferred banker. My own experience has taught me to go talk to the credit managers when I first open the account. Keep the end in mind so that in six months or a year when you want to borrow, you have been operating your bank account in the correct way.
Banks are in the business of lending to you and making money of it. They are going to look at two elements risk and return, the exact same things you would look at before buying a share on the stock market. When evaluating risk they are going to try and determine whether you can service the loan. You have to be able to prove that your business has or will have sustainable cash flows. The reason banks are flogging personal loans round every corner is that a pay slip proves that an individual has a sustainable income and can service the ongoing repayments. This proof could be in the form of your financial accounts. A lot of people tell banks that they do not have financial accounts. Whether you have been in business two months or ten years you need to keep management accounts. How else will you keep track of money coming in and money going out?. Even though the inflows or outflows are small this shows financial discipline. If you are not keeping track of this, the bank will never believe that you can manage a loan. After 18 months in business your accounts should also be audited. A lot of institutions particularly banks will also ask for security of some sort. Traditionally it has been property, which a lot of women find themselves without access to. The good news is that there is starting to be some flexibility on what form this security takes. It could be shares, unit trusts, cash and some will even take your car as security. If you have a strong business case some banks may even give part of the loan unsecured.
So what do you do if you do not have security? On the banking front be prepared to start small. They may not lend you the Kes 2 million you want but may give you an unsecured overdraft of Kes 400,000 to begin with today. Take it. What the bank wants to see is whether you can manage and service it. They want to get more comfortable with you and consequently view you as less of a risk. As you build your relationship your credit limit can be increased. There are micro finance institutions who do lend without security but they usually do so in small quantities and they are expensive with charges of three to five percent per month. If you are looking for very short term finance usually known as bridge finance, this is an option. It is used to bridge the gap between supply of a good or service and receipt of the payment. An alternative to this is getting your suppliers to give you payment terms e.g. supplying your goods and allowing you to pay in two months. This is very common especially if you have an existing relationship with them. SACCOs are also an alternate way of accessing funds. They will typically lend you thrice the amount you have in deposit. If you are not saving in one, it may be a good time to start in anticipation of funds you may require later.
In your search for capital do not limit yourself to banks and financial institutions. You may choose to approach individual private investors who will take up some form of ownership in your company (equity) in exchange for their capital. They are commonly referred to as Angel Investors and they are interested in projects that will give them a higher return on their money as compared to traditional investments. This angel investor could be your brother, mother, your dentist, your accountant or somebody else these people know. It could be the banker, who may have rejected your loan from the banking point of view, but who may be personally interested as a private investor or has the ability to point you in the right direction. If you are interested in pursuing this avenue, whenever you meet people talk to them. Don’t mistake this for shoving your business idea down everybody’s throats but you could casually ask if they know of any investors who would be interested in your type of business or if they would look over your business plan and give you suggestions for improving it. A good friend of mine always says “Kuuliza si Ujinga”. Over time in business I have learnt that there is a purpose towards most people you meet. Research shows that one out of every three Kenyans is in an investment group and the more aggressive groups are starting to appreciate the benefits of investing in private business. Again this necessitates a very solid business proposal, so I would reiterate the emphasis in spending time developing this. There are also professional investors who are in charge of larger pools of capital commonly referred to as Venture Capitalists who are able to fund bigger projects. They will generally give you funds in exchange for ownership and will exit after a certain specified period say three to seven years. They however tend to be very specific about the companies, industries they will invest in as well as the amounts.
In summary if you are in business or thinking of starting a business and need capital these are a few of our Centsible tips to guide you:
1) Form a relationship with your bankers.
[learn_more caption=”learn more”] From onset choose your bank carefully and operate your accounts with the end in mind. You may want to work with a smaller bank where you have more access to the decision makers and who also are flexible on the type of security they are willing to take. Be prepared to start by borrowing smaller amounts and build up your credit history.[/learn_more]
2) Have a solid business plan.
[learn_more caption=”learn more”] You will be able to use this with the banks or other types of investors. It is worth getting professional assistance to do this.[/learn_more]
3) Maintain proper financial records from day one.
[learn_more caption=”learn more”]Track every shilling that goes in and everything that goes out. If you have been in business and have not been doing this, get a good accountant to help you with the backlog. Not only will it prevent you getting into tax problems, it cultivates financial discipline which is important to any investor or bank, .[/learn_more]
4) Be prepared to move away from traditional methods of financing.
[learn_more caption=”learn more”] You are better of owning 30% of a Kes 100 mn company than 100% of a Kes 1 mn company.[/learn_more]
The first line of credit is always the hardest. It becomes easier as you build up credibility. I also personally believe the biggest hurdle is truly getting to the point where we really believe in what we are doing. Once we have that, the Universe does have its way of making things happen. If you truly believe in what you are doing there is someone out there you can sell the idea to. They may be behind a desk at the bank, they may be your brother, they may be someone looking for diversification in their investments, they may be somebody else!
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