THE NEED FOR FINANCE
Businesses need money for one or more of the following reasons:-
- To put the basic infrastructure in place.
- To get the trading activities of the business moving.
- To acquire capital equipment.
- To purchase inputs.
- To carry out marketing activities.
- To pay staff.
SOURCES OF FINANCE
There are several sources of financing that are available to entrepreneurs. These include:-
- Personal: Savings, Assets which can be used as leverage in securing other funds.
- Friends and relatives: This is often called love money.
- Banks: Commercial and Development
- Credit Unions
- Silent Partners: Own a percentage of the business but does not play an active role in the day-today operations. You are able to maintain control over your business
Active Partners: Play a role in the business.
- Potential Customers
- Government Special Programmes
SOME THINGS TO NOTE WHEN DECIDING ON A SOURCE OF FINANCE
i. Loans from banks and Credit Unions must be paid back with interest over a predetermined time. You must not only have collateral but you must be able to repay the loan as well.
ii. Having a partner
- Adds needed resources and skills to your business.
- Gives you someone with whom you share failures and successes.
- Prevents you from having full control of your business.
iii. Term Loans: taken for a specified period of time.
iv. Trade Credit: a supplier sells you products on credit.
v. Line of Credit: operates similarly to a credit card but has a lower rate of interest.
LENDING CRITERIA - THE FOUR C’S
- Character: The financial institution assesses you and the business’s past financial history and credit rating.
- Capacity: The lending agency determines if the business is capable of making projected profits and marketing its products; Has a healthy cash flow and realistic projections.
- Conditions: General economic conditions.
- Collateral: Security against the amount of money that is borrowed. It can take the form of the business or owner’s assets.