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2013, November 21 - Four Tips for Financing a Small Business

November 21, 2013
(Adapted from Yaneek Page’s Businesswise - Advisory Column: Small Business

I am the founder of a small business, which I run from home. I have registered the business name as a garage and offer general repairs, engine overhauls and transmission repairs. I also buy and sell motor vehicles for profit as well as for clients, for commission. I need some advice and direction from you regarding how to secure funding to grow my business.

BUSINESSWISE: Limited access to finance can well be described as the Achilles’ heel of micro and small businesses. It remains a Herculean and pervasive problem that constrains the potential of businesses to expand, create jobs and drive economic growth.

In case you’re still wondering whether I have an easy solution to the question you’ve posed, I don’t.

That’s not to say the situation is hopeless. I do have some suggestions for financing your business, but there is no magic bullet. It will take time and effort, and literally psyching yourself up to persevere.

The business you’re in has very good potential for growth and profitability, so here’s how you can go about funding:

Financing can take the form of equity or debt. Most businesses need one or both in order to grow. Debt typically refers to loans from family, friends, banks, other financial institutions, or bonds. Equity is ownership interest via venture capital funding, initial public offering, private investors, etc, who invest money in exchange for stocks or shares in the business.

Understanding how financiers think and satisfactorily addressing their concerns is key to successfully raising money.

Lenders need to be convinced you can and will repay. They focus on cash flows, business plans, collateral and your character/credit history.

Investors want to know they’ll get good returns on their investment.

They look at industry outlook and growth potential, past and future profitability, liquidity, people/talent, governance, strategic plans and associated risks, etc.
Remember, investors have a say in how the business is run; banks don’t.

Entrepreneurs often shoot themselves in the foot by hunting financing before outlining a credible plan for growing the business.

Your plan should span at least two years and include exactly how much money you need to raise and how every dollar will be spent.

I noted that you did not say how much money you needed to secure what you need. The plan is not just a tool to raise money, but more important, your road map to growth.

An important bit of ‘pre-work’ to the planning process is to maintain proper accounting records and start building a relationship with your banker.

Make it a habit to lodge every dollar you collect to your business account – this provides evidence of earnings and cash flow.

The likely financing options for your business now are using cash flows or securing loans from family or friends, which I know may be quite difficult, but still more desirable to other alternatives. For example, be wary of microfinance, as the high interest rates and short repayment periods may be counter-productive and inimical to growth.

Banks may not be a viable option either, since they typically shy away from start-ups.
I spoke with a manager at a major commercial bank about your case and she conceded it would be unlikely you would get a loan unless you were a good customer who can personally guarantee it and/or offer acceptable collateral, such as house or land.

The Jamaica Business Development Corporation offers loans, but they favour the productive sector such as manufacturing and the creative industries.

Given the stage, informal structure nature of your business, financing through the Junior Stock Exchange would be unlikely at this time. You could, however, explore a non-traditional source such as crowdfunding.

Sites like Indiegogo provide an international crowd funding platform where people who want to raise money can create fundraising campaigns to tell their story and get the word out. They charge four per cent of the money you raise as commission if you meet your goal amount or nine per cent if you don’t.

Timing is essential when seeking funding and the current economic conditions will likely exacerbate the challenges.

Financiers and investors would be understandably cautious and risk-averse. I am therefore encouraging you to be realistic in your expectations and prepare to be rejected, but not give up.

Gary Matalon, CEO of KLE Group, shared on the Innovators TV show that it took many months to convince a bank to finance his casual eatery, Usain Bolt’s Tracks & Records. He stayed the course even after two banks told him no, despite his frustration at wasting valuable time and resources in the due diligence process leading up to the denials.

Even if you’re not able to secure the financing you want now, press on and ready yourself to qualify in the future. One love!

Yaneek Page is a trainer in entrepreneurship and workforce innovation.
Email: / Twitter: @yaneekpage
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