If you are good at financial planning for a startup business, you can also apply for business financing which is called doza loans. If you want loans to fund your business, check it here as an example.
Borrowing money is one of the facts of life when starting a business. So, it is advisable that you should borrow money for a business you want to leverage or expand. It is somehow instances.
It will never hurt to have some additional cash on deposit in just case that you need loans for more products or expanding a business.
Further Reading:
Top 10 Tips for Starting Your Business Without Leaving Your Full-time Paid Employment
And also it will help to establish a professional relationship with some lending institutions or business loans sites of your choice for future growth and expansion needs.
Some richest industrialists use lending institutions to finance their businesses successfully because they have good teams that work with them so well.
Borrowing money for financing your startup business is the most valuable things in life. There are some lessons we would like to review some sources on business financing and then show you how you can apply for a loan in this article.
What Is Business Financing?
Business financing is a considered activity with the supplying and distribution of loans to any individual who want to raise their new or existing business or seek for financial funds.
Finance companies are where they can provide funds for a business or where you can submit your loan request to for a business. That there are two types of business financing that you need to know is Debt Financing and Equity Financing.
Debt Financing Vs Equity Financing: What It Is And Which Financing?
Equity Financing: It means that when you raise equity financing for a business through an investor or investors, you give up a portion of the ownership of your business to them who becomes your partner in the business.
You build a business while an investor or angel investors invest into a single product or equipments that one day they will take over your business if you go into bankruptcy.
When you raise equity financing to fund your business, you sell a portion of the ownership in the business to the investors. This is an example of equity financing. You do not owe anything to investor(s).
You do not make monthly payments to them since they are a partial owner in the business. They are no longer your creditor if your business goes bankrupt. You are not responsible for this.
But remember you can not take full control of this business as your own monthly profit and assets as long as they are your partial owner of this business.
They are your boss because they invest 50% or more in your business. You can not control over them in this business unless you find money to buy your business back from them.
With this equity financing, You may disagree with your business partner which may lead to the parting of ways with each other.
When your partner departs from you after making minor misunderstanding between you and them, it may cause serious problems in the business which eventually leads to its failure.
Debt Financing: It means you take bank loan from any bank or lending institutions of your choice which you are obligated to pay back to them with interest after they check your personal credit, your business financial statements, financial history or business credit history which satisfy them.
When you raise debt financing through any bank or lending institutions, they can not take full control over your business as a partial owner. They do not know how you run your own company.
Unless you are overwhelmingly qualified, it is difficult for you to receive debt financing from any financial institution.
It is not suitable for any small business like barbershop, car washing business, fashion business, etc. It is only suitable for big business like manufacturing businesses, or exports and imports business, bus transportation business,etc because they want quick repayment back to them on time.
When you raise debt financing, they will ask you to pay them back with interest within 6 months or one year no matter what happens. If you fail to pay them back on time, they may put foreclosure on your business.
Debt Financing is only for big players that lending institutions can lend over millions dollars naira while equity financing may be suitable for small players that individual or investor can lend only smaller amounts that they want to take advantage of if they recognize how hot their business is.
How to Get Financing From Loan Sources For A Business And What Astute Investors Actually Want to Know
1. Loan Planning
With your own personal money you would have to invest in the business, it may not nice because it limits you from what you want to expand or increase your sales.
But It would be nice if a lender financed most of your business because when your business paid off all of its debts, you would get all the profits and own the assets.
But unfortunately, most lenders are hesitant about that because they are really aware of the fact that the lack of capital is a major reason behind small business failures.
That is why they require your financial planning for a business. So be prepared to scale down your business ideas to suit the amount of money you can raise to get started.
2. What Lenders Want To Know
There are some things astute investors want to examine as much as possible. There are some things they want to know before your loan is approved for a business. What do they want to know?
It is financial, marketing and sales experts in your company smart investors want to know more.
It is management team they want to know about their experiences in the business that they are about to enter.
It is projected income statement and balance sheet they want to evaluate.
It is a company they want to know more about your visions you want to run as a CEO. They will ask you some questions about your vision on this company you are running.
Before your loan is approved, investors want to see preciously how much you want to raise your business, when you need it and when you can pay it back.
So you have described to them everything about your purpose of business financing, your well-rounded management team, your enough background information, your competitive salaries, your compensation methods to encourage buy-in from key employees, your chosen best people to work with you, your high quality for competition, the key credentials of your startup team, your previous lending sources to augment your loan request.
And your character and your past business associations will be carefully reviewed before your loan application will be approved.
Lenders would like to view your financial package by analyzing the key financial ratios before they approve your loan application. The financial ratios will be explained here as an instance.
3. Financial Ratios
Potential investors will want to read your financial ratios to see how well the cash cycle blends in with the operational cycle of your business.
The key ratios that they want to review interestingly are: Current Ratio, Current Debt-to-Equity Ratio and Accounts Receivable Turnover Ratio. The three ratios I want to illustrate are here as follow as an instance:
1. Current Ratio:
Let us assume that your current assets are 90,000 dollars naira and your current liabilities are 31,000 dollars naira. The current ratio in the following formula on calculation is:
Current Ratio= Current Assets÷Current Liabilities
90,000÷31,000= 2.90.
This ratio indicates the number of times your current assets will help pay off current liabilities.
I read ago that 2:1 or higher ratio is considered (a good buy on stocks or) a good financial indicator.
This ratio indicates how well your business is because it can meet its current liabilities easily. To improve your current ratios are to maintain low inventories and tight credit policies.
The more you keep inventories low and tighten credit policies, the higher your current ratios that will attract venture capitalists or angel investors.
2. Current Debt-to-Equity Ratio:
Let me assume that if a owner's equity is 450,000 dollars naira and his current liabilities are 210,000 dollars naira, then the debt ratio is calculated in the following formula:
Current Debt-to-Equity Ratio= Current Liabilities÷Owner's Equity
210,000÷450,000= 0.47
This ratio indicates that it compares what is owed against what is owned. The financial leverage of your business is measured by this ratio.
The lower the ratio is, the greater are the profits you make from sales.
But your ratio determines whether you have high or low profits you make from sales, depending on a number of factors such as accounts receivable and inventory turnover.
The accounts receivable turnover ratio will be explained in calculation in the next third number.
3. Accounts Receivable Turnover Ratio:
The receivable turnover, which is also known as the sales-to-receivable ratio, is the ratio of total credit sales to receivables.
Assuming that total net sales on account are 2,500,000 dollars naira and the receivable balance is 10,000,000 dollars naira, then the calculation in the following formula is here:
Receivable Turnover Ratio= (Net Sales on Account)÷( Receivable Balance)
2,500,000÷10,000,000= 0.25 or 25%
This ratio is an indication of how efficient your company is as you collect credit account money.
25 percentage of the total accounts receivable balance was collected over some designated time period.
The typical time period is monthly as you collect your receivable balances. For an example, your company is averaging four months to be completely collect receivable balances( i.e. 10,000,000 divided by 2,500,000).
A receivable turnover ratio of two months or lower is considered a preferred ratio.
Smart investors or venture capitalists use this ratio to determine the relationship between the volume of credit business and average outstanding receivables.
A higher turnover ratio is an indication of how shorter your collection period is.
Financial Projections
It is so hard because most potential investors want to see your financial projections for three to five years out first, including balance sheet, cash flow and income statements.
At a minimum, they also want to see your monthly projections for the first year of operation.
So, pay particular attention to your cash flow projections which indicate how your financing is timed and tracks the repayment terms of your loans.
It is important if you want to successfully borrow money for financing your business.
Financial Projections Checklists
1. Three-year balance sheet projection.
2. Three to five year income statement projection.
3. Three years of previous tax returns.
4. Cash flow analysis.
And your projections should include three scenarios for the company's performance: Strong, Netural, and Weak.
Then identify what your assumptions are for each scenario given and clearly identify the break-even point for each scenario.
4 Way to Avoid Small Business Cash Flow Problems
Cash flow can be a big problem for a big business if you don't pay attention to the cash coming in and going out of your business.
And it can be a disastrous situation to your small business if you don't manage cash flow in and out of your business daily.
Cash is king because it is the life of your business. Cash is what keeps your business alive. When you run out of cash, you run out of business. The state of cash flow reflects the state of business.
There is not a small business owner any where that has not had sunk or felt in the pit of their stomach on payday/or bill-pay day.
May be you can not completely avoid all of the cash flow problems that seems evil to your small business.
But you can help yourself to avoid most of them if you understand more about cash flow management. Here is what I offer you to learn how to manage cash flow problems or solve it.
Cash flow management is much more important than sales management. Let me start with these tips:
1. Overhead
Keep your overhead as low as possible for as long as you can. You don't need to impress your competitors.
Your business should serve to your customers as well and as efficiently as you can while spending money as little as possible to do it.
And later you may enjoy big paydays and then you can hire others to do the dirty work for you someday. But when you start a new business, you can say as your motto or mantra: "I can do that myself".
2. Income And Expenses
Make sure that you keep your finger on the pulse of your business because if expenses grow faster than income, you will be in a big trouble, but if income grow faster than expenses, you will avoid future cash flow problems.
Know how how fast your income is growing in relation to how fast your expenses are growing. It is important if you want to keep your business alive in the coming days daily.
3. Time and Money On Customers
Rather than seeking new customers, concentrate your time( and money) on creating repeated customers. It is far less expensive to sell a second or third time to the same customers than it is to get a new customers.
4. Making Payments On Time
Try to schedule or book the payments that are due to you in the early days of the month and the payments that you owe to others toward the end of the month. You can't always do that, but it can help avoid cash flow problems.
Final Thoughts
You can access private or bank loan for a business as long as you understand about business financing, equity financing and debt financing as well as cash flow problems.
But if you feel uncomfortable with business financing in this explanation or you do not want to risk this, you can look for family or friends to help you with funds or your own personal money that you feel comfortable.
Don't go look to get your business financed unless you have well-patronized business that can pay off for you within short time.
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