Strongpreneur#Starting A Business
January 17, 2019 35
Strongpreneur#Starting A Business
January 17, 2019 35
There are basically two sources of funds open to small-scale industries, they are internal and external sources.
Internal Sources of Fund
The fund said to be derived from an internal source when the supplier of such funds is members of the company or enterprises that are receiving or benefiting from such fund. Funds obtained internally consist of equity fund.
Funds of this nature are supplied by owners of the business and they are usually made available to the company by ways of:
1. Retained Earning
This is the profit of the company which is plowed back in the business. It is commonly used by small-scale enterprises. When a business retains part of its profit, it can always resort to it when the need for finance arises. Retain earning is a costless source of finance and its use does not dilute ownership. It allows for financial flexibility.
However, companies using this source should be careful since it could affect the prospects of the company, which is measured by the rate of dividend declared. Some shareholders at times react against this source. Though it is still a source of the fund for many companies.
2. Personal Savings
It is the funds accumulated from individual savings. It serves as the primary source of fund of most enterprises setting up small-scale business. But when business commences operations the expansion will depend on the increase in the personal saving of the owner and the profit of the business. This source of fund is primarily used by small-scale firms and as they heavily rely on it, for it is a cheap source of fund. But when it is solely depended upon, it leads to a limited rate of expansion of the business.
3. Call Money
This is a money surplus invested on an overnight basis and withdrawable on demand.
4. Commercial Paper
This consists of promissory notes issued by large firms when they need to borrow money from insurance companies, pension, funds, and banks.
5. Deposits From Customers
This represents fund received by a firm to supply goods and services at an agreed future date. This receipt increases the firm’s liquidity in form of advance payment made by customers due to high demand and short supply of the product. This source is common amongst the small-scale enterprises and it is a costless source which provides short-term finance.
6. Leasing Financing
A lease can be defined as a contract by which the owner of a tangible asset allows another person or firm to benefit from the economic use of the asset for a specified period of time and for a fixed rent. The owner of the asset is called lessor while the person who holds the lease is called leaseholder or lessee.
There are different forms of leasing assets and they include:
7. Debt Factoring
Debt factoring applies to an important current debtor. A company may sell its bad debts (at a discount to allow a profit to the buyer) in order to avoid tying down capital in the credit it allows to customers. In another form of this, the factoring company advances a proportion say 80% of the number of credit sales as they are made without it actually acquiring the debts. This is then sorted out of the cash paid by customers as it is received.
The moment sales are made the invoice is stamped to notify the buyer to make payment directly to the factor provided the credit unit has not been exceeded by the sale. Factoring is usually undertaken without recourse, the factor becomes liable for the bad debt that arises subsequently.
The main advantage of factoring to a firm using the services of a factor may be summarized as follows:
(a) There are clerical and administrative savings particularly for forms selling repetitively on credit as follows.
(b) There are also the following financial matters.
Despite all these advantages enumerated above factoring leads to loss of customers goodwill and it can be expensive especially of the changes is above bank rate. Like leasing, it is not normally used among small scale industries.
8. Invoice Discounting
This is similar to factoring except that in his case only the financing service is used. It is a financial agreement which enhances the liquidity position of the user; it is designed to overcome the problem of tying up working capital in trade debts (debtors). The procedure is that a firm can convert invoices (sent to customers) into cash by discounting the invoices through specialized finance companies. This may involve either separate invoices to be discounted or a proportion of a firm’s bad debt truly the full face value of the invoice is not usually advanced.
It has some advantages such as:
However, there is no protection given against bad debt since the finance house is not in charge of debt collection, therefore, he must reserve a right to claim back advances from the firm if debts turn bad. It is therefore not commonly used as sources of short-term finance by small-scale enterprises probably due to lack of awareness or the existence of those who provide such services.
9. Hire Purchase
Hire purchase is a financial arrangement between a hire purchase company and its customers whereby the latter is allowed to take possession of equipment or any goods without immediate cash payment.
The legal framework of the hire purchase agreement is that the hire purchase company hires the equipment to the intended purchaser who is given an option to purchase the equipment for a nominal sum when the hire charges have been paid. The legal title of the equipment remains with the owner until the aide exercises his right of option to purchase then the ownership passes to him.
Initially, a deposit of between fifteen percent (15%) to thirty percent (30%) of the agreed amount will be required followed by series of installment payment which includes interest charges spread over an agreed period of time rather than making one large cash outlay at the time of first using the equipment.
It is mainly used by the small-scale firm for rapid growing at an early stage of their development. It is particularly useful because it is one of the ways in which new business may become established and service the difficult initial stage of setting up and growth. As the firm grows and its financial strength improves the need for such method is less and bigger companies rarely use it.
Advantages of Hire Purchase
The disadvantage of Hire Purchase
Obtaining Bank Loans
Banks also provide long-term finance by giving long-term loans to a firm which may not necessarily be quoted on the stock exchange.
When approaching banks for loans a borrower must assess his tending relationship with the bank from the bank manager’s point of view and from his/her own point of view.
The key considerations in lending decisions from a bank manager’s point of view include the followings:
Considerations from the borrower’s point of view include:
Factors Determining the Use of Funds
Firms require funds for various purposes such as the purchase of fixed assets, payment of salaries and wages, and the financing of business expansion. The sources of these funds and the conditions under which they are obtained differ, so firms need to consider a number of factors in order to decide on the most appropriate source to be used to meet given financial requirements.
These factors include:
Prerequisites for Raising Capital
It is generally agreed that the best aid for raising money is to prepare a first-class business plan. The business plan can even be used to raise money in the absence of the promoter of the business. It is one of the most important tasks the entrepreneur undertakes in his career. Your plan cannot afford to have defects, it must be a masterpiece, showing your personality, your capabilities and your enthusiasm backed up with meaningful statistics.
As a young entrepreneur, there are several odds up against you concerning your level of experience. It would be best to spend quality time in the preparation of the business plan that you intend to use in raising money. This is the main and only yardstick used to measure whether your company is worth investing in.
Adequate care should be taken to ensure that there is a realistic, unassuming, well as an accurate projection. Just because there is a big market for your product or services do not necessarily mean that you will get your fair share of it. Your evidence as to how you will go about obtaining your market share regardless of the size of the market is very important.
Investors want two major things from you in order to keep their money safely with you and make more money in addition. They are not always interested or impressed with sales. Sales cost money. What the investors care about are profits. Show them how you will make profits, profits and more profits.
To convince potential investors that they will meet their goal of high returns if they put their money on you and your business venture provide them with a detailed explanation of how your business will make profits. Your potential investors do not want to know a lot about your product or service. What they want to know is how you are going to run the business to their interest. They want to know what your business is all about and why they should invest in it. Break down your spending strategy. Break it down again until you can explain exactly how you are going to spend the funds judiciously. Make it explicit to prospective investors.
Finally, note that no investor is going to make a decision without meeting you face-to-face. So do not write an operations manual. Always write a marketing tool that will get you an appointment. Other important considerations to be taken note of by the entrepreneur or the business organization in need of venture capital are:
To achieve realistic answers to some or all of these questions, the organization or the enterprise needs to conduct a business feasibility study. There on, a comprehensive and realistic business plan or proposal would be developed.
Raising Funds with Collaterals
Raising funds for investment becomes easier if there is enough collateral to up the required funds. At times, small-scale businesses find it difficult to produce the required collateral. The collateral is an asset whether tangible or intangible that can be legally transferred to the lenders by the borrower. It can easily be converted to cash by the lender in case of default in repayment by the borrower at a stated period of time. It protects the lender in the event of non-repayment of the principal borrowed funds and the interest accrued thereon.
Collaterals that are generally acceptable by lending organizations are highlighted below:
The various types of collateral cannot be exhausted in this write-up. The most important thing is that small-scale enterprises are not big and buoyant enough to procure some of the collateral. Therefore their ability to obtain funds in conventional financial institutions is severely curtailed. Where they succeed in getting funds the interest rates are always very high. For the benefit of small-scale entrepreneurs who may already possess some of the acceptable collateral the discussion below will treat how to raise funds in these organized financial institutions.
There are some notable financial institutions specifically meant to finance small and medium scale enterprises.
These financial institutions include:
The Nigerian Bank for Commerce and Industry (NBCI) had been the major medium for providing funds for small and medium scale enterprises. However, in recent times the bank has not lived up to expectations due to the paucity of funds for onward disbursement to these small and medium scale enterprises, This followed the stoppage of fund transfer by international organizations that usually make some allocations to national governments for the development of their local business enterprises.
In the case of Nigeria, it resulted from the face-off between the government of the late General Abacha and the international community. Unfortunately, also the federal government on its own part could not make contingency provisions to the NBCI. Consequently, the organization virtually collapsed with its activities nearly crippled. However, with the coming of the democratic government of President Obasanjo, it is expected that the problems affecting this sector would be sorted out and that the bank would be able to discharge its duties henceforth creditably.
Generally, when the collateral is available and acceptable to the bank or financial institution in question, the raising of funds is done through the following process:
Strategies for Tackling the Problem of Collateral
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