What You Should Know About Financing Your Business

By A.V. Narinesingh, CPC, APC, CC. CPCM

The process of raising capital for a business venture, whether in the start-up or growth stage, is not easy. Identifying and attracting financial partners or sources of financing, meeting funding criteria laid down by lenders, and understanding new and creative financing methods, will allow you to better estimate your project’s capital requirements in the short term and plan for sustainable growth in the long term.

Moreover, a comprehensive evaluation and due diligence phase must be carried out in order to address all the facets of the business including, legal structure, management, industry background, trends, market research, marketing strategy, financial planning and operational policies. In addition, the process would generally include and assessment of logistics, viability, potential, risks and any contingencies. The level of preparation in developing the final business plan would also be an important element.

There is no guarantee that that the most professional, well designed business plan will be funded by a Lending Institution, Venture Capitalist or Investor. On the other hand, a poorly prepared business plan has absolutely no chance of being reviewed by a Lender, let alone being considered for funding. A poor, or weak, or unprofessional presentation can result in the rejection of a fundamentally sound business proposition. The RISK vis-vis REWARD equation must always be clearly established.

Understanding the array of existing financing options is a first step in deciding whom to approach for capital as well as improving your chances of getting your venture financed under acceptable terms and conditions. It is also important in preparing your cash flow projections and other financial and operating forecasts, as financing costs, debt or equity structuring and repayment obligations will have a measurable effect on your operating ratios, liquidity and profits.

In general, and except for commercial banks and other traditional financial institutions, bona-fide Investors and alternative Lending Sources now appear to be more difficult to find in today's ever-changing financial markets. This is because many have changed their focus or investment criteria, have shied away from the lending business for a variety of reasons including the movement to the sometimes more lucrative arena of currency trading, while others have been creating a protective environment from borrowers who "dream in technicolor" and expect "a free ride" by refusing to pay what they deem "up-front costs or fees", except to banks and financial institutions who invariably collect such fees because of their perceived "legitimacy" as lenders, when in fact they are nothing more than asset-based lenders who almost always find a way to decline funding applications.

The lending environment has experienced a number of changes over the years. Historically, private investors made equity investments while banks made loans for a fixed period of time. Contrary to what we read in the newspapers and business magazines, Lenders are becoming more selective as capital markets continue to tighten-up on the lending parameters, procedures, terms and conditions which they actively followed in the 1980s and 90s. The "old economy" which was being eclipsed by the "new economy" is again experiencing a rebirth.

In spite of the launching of a myriad of new business ventures during the last few years due mainly to the growth in dot.com, high-technology and computer applications, and the move to creating self-employment opportunities, overall startup project financing and public offerings for internet-related as well as traditional non-technology ventures have generally slowed for those who need it most, and there continue to be a lull in debt financing, joint ventures, limited partnerships, asset based lending and mergers and acquisitions, unless a business already has an impressive track record and adequate security. Merger-mania exists only among the big players who insist that their survival locally can only be assured by expanding globally. In essence, "bigger is better". The "Real Options" approach is not being widely embraced as in the past years, as analysts and investors return to the "Net Present Value" method.

The immediate focus by banks and corporations still appear to be on increasing the value of their shares to lure more small private investors enter the stock and bond markets for a quick return on their investment and the chance of hitting it big. But as stocks skyrocket in value, inequities in the business environment are becoming more visible as many businesses try to keep the "ship of state on an even keel". The biggest problem facing society as a whole seem to be greed and self entitlement of those who strike it rich, in that, it is difficult for them to decide how much is enough - $20 million, $50 million, $100 million? Moreover, those that give the impression of giving to charity or supporting social, health or educational programs, set up Foundations or Trusts and only disburse the amount that they would have normally paid in taxes. …. How is that for being good corporate citizens!

In spite of a very well orchestrated public relations program by banks and other financial institutions to convince the public-at-large that they are anxious to make loans, it has become increasingly more difficult to obtain bank financing although their profit margins have never been better. Although service-oriented companies have been able to show more resiliency than manufacturing concerns throughout the reversionary periods, banks and other institutional lenders still insist on using certain set criteria and ratios to determine if a project is "bankable". They have not yet entered into the realm of 21st century financing and from all indications, they do not intend to change as they continue to lose touch with the lowly entrepreneur and pursue only the business of large corporations and consolidate their global position.

Companies seeking new or expansion funds are investigating and participating in more innovative approaches using a variety of techniques not normally promoted by traditional North American and other Western Banking and Financial Communities, except to a privileged group of borrowers with the capability, asset base and net worth to enter into complex financing programs. As a result, a new creative, more complicated and often misunderstood financing environment is starting to, and will continue to, take root. Prospective borrowers who dare to investigate and embrace these new vehicles will stand a much better chance of having their project funded. Those who do not jump on this band wagon will get stuck in the eternal merry-go-round of conventional financing methods.

However, one fact is certain - until our banking and international financial system move away from the conventional thinking of only lending against recoverable security, industrial and commercial growth will remain stagnant and the entire world will continue to suffer from chronic under-capitalization and under-employment resulting in social unrest and other socio-economic problems. Recessions will continue worldwide unabated.

The answer may lie a an hybrid type project financing alliance between business, banking institutions and government to meet the needs of the revolution taking place globally, which is changing the way business is being done. It is important that every "budding" entrepreneur recognize that as they seek to compete in the business world into and during the 21st century, they will "lock horns" with the new breed of business leaders that is determined to change the status quo, rewrite the rules and practices of doing business, pursue daring and untested and sometimes unethical tactics with disturbing alacrity, and introduce neoteric technologies at a spectacular pace.

In addition this new breed, if unchecked, will openly continue their confrontational approach in changing relationships in the workplace while using their new economic power to demand from world political leaders that they "toe the line" or run the risk of being defeated at the polls. Unlike small business which depend on competition between banks to obtain financing, this new breed will give their support to the concept of mega banks, thus putting more financial power in the hands of bankers and financial institutions and causing the economic gap to widen between the rich and poor.

It is therefore important that a prospective borrower understand the factors that govern the flow of capital and become familiar with traditional as well as creative methods of funding ventures when developing an acceptable financial structure to obtain funding for a business venture. A borrower must understand the financial implications when deciding on a specific financing structure, as the costs associated with arranging, borrowing and repaying debt obligations will have a direct impact on your bottom line and survival of the business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.