Smeda e Learning

8/6/2019 Smeda e Learning

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BANKING AND FINANCE FOR

SMALL BUSINESSES

SMEDAN 1

Small and MediumEnterprisesDevelopmentAgency of

Nigeria


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Outline

Entering behaviour The three core issues

The need for finance

Sourcing the finance Starting a banking relationship

Getting money from banks

Cannons of credit

A Little More About Loans

Critical Dos and Donts

Final word

SMEDAN 3


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Entering Behaviour Reviews

What can you do without money?

A borrower is a servant to a lender. True or

False? If you have all the money you wanted, write

the first five important things you will do

With a friend like the bank, you need noother enemy.

SMEDAN 4


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The Three Core Issues

1. The need for finance

2. Sourcing the finance (where is the money?)

3. Starting a banking relationship

SMEDAN 5


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- To handle pre-start operations

- To start: (e.g. pay for workspace, acquire essentialinputs, etc)

- To expand operations (e.g. acquire new machines,increase storage facilities, etc)

- To modernize operations (e.g. replace obsoleteequipments, invest in IT for CAM and/or CAD,

invest in staff training and quality assurance, etc)

- To meet some urgent liquidity needs while projectis in gestation

SMEDAN 6


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SMEDAN 7

The need for fin.: understanding the stages

Expansion

phase

Business

Idea

Pre- start-up

capital

Business

Plan

Founding ofenterprise

Venture capitalBankFinance/Sale

of shares orIPO

Early stage

Development

phase

Start-up

capital

Seed

Capital


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Relating the need for finance to thestages:

1. Early stageowners equity

predominantly, especially for pre-start-upand seed capital; friends/relatives maycontribute to start-up capital

2. Development phase/stage venture

capital predominantly3. Expansion stage money and capital

markets

SMEDAN 8


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The Need for Finance

Four major financing options:

Debt financing or loans (including

overdrafts).

Equity financing

Supplier Credit esp. where there are

vertical linkages between LEs and SMEs.

Leasing/Hire Purchase

SMEDAN 9


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Sourcing the Finance

Non-governmental Sources

Commercial banks, with some specializedschemes

MFBs

Venture capital (little known in Nigeria) Donor/International Funds Ford Foundation,

EZE, Microstart (UNDP). Donor funds operatethrough NGOs such as FADU, COWAN, LAPO,

CDTF Other informal private Sources families,

friends, ROSCAs originating about 40% of totalrural credits

SMEDAN 10


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Sourcing the Finance

Governmental Sources BOI (esp. for purchase of equipments)

NACRDB

NERFUND State Microcredit Scheme

Specialised programmes, e.g. NAPEP, NDE for

micro-enterprises) Some New Initiatives

Leasing companies

FranchisesSMEDAN 11


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Starting a Banking Relationship

Banks are in the business of lending money, so they areconstantly on the look out for good businessopportunities in which to invest.

However, since new businesses present a considerable

risk, banks are naturally cautious. The banks will want to know full details of the proposed

business and the people who are behind the project.

You must fulfill certain conditions before you can accessthem.

You need to establish a relationship before you can getmoney

Understand the risk of taking someone elses money.

SMEDAN 12


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Getting Money from Banks

When you are about to approach a bank forloan, these are some guidelines for making therequest.

1. Ensure your business plan is up-to-date and

accurate; avoid under or over estimating thefigures

2. Make an appointment with the banks manageror business adviser.

3. Present a crisp copy of your business planseveral days before the meeting

4. Think of questions you are likely to be asked bythe bank, and plan out what your answers willbe.

SMEDAN 13


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Getting Money from Banks -2

5. If you are nervous, try a rehearsal with a

friend acting as the banker

6. For the meeting itself, dress smartly and

conservatively.7. Dont be overawed by banks- they need your

business as much as you need them.

8. If you are unsuccessful, think about what thebank says, review your plan, recheck the facts,

then approach another bank. Dont give up

easily.

SMEDAN 14


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Cannons of Credit(2)

3. Capital

Equity contribution

Shareholders fund

Creditors Cushion for the lender in case of default

Assets of the company

Adequacy of equity/ asset and value of assets

SMEDAN 16


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Cannons of Credit - 3

4. Collateral - security for the loan

Security is supposed to be a secondary issue in agood credit

It must be adequate

Must be marketable

Must be adequately insured

Must be free from encumbrances

Must be realizable

Define who keeps the security Define whether it is moveable or not

What percentage of loan is the security?

SMEDAN 17


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A Little More About Loans

1. Loans - normally made to finance the purchase ofthe fixed assets of the business (plant, equipment,buildings etc.)

Can be at fixed or variable rates of interest and are

repaid monthly or quarterly over an pre-agreedterm, usually two to five years.

2. Overdrafts- these are short term working capital tocover inevitable cash-flow fluctuations. Overdraft is

usually the cheapest money you can borrowcommercially for your business.

SMEDAN 18


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Cannons of Credit - 4

5. Cash-flow

Certainty of stream of cash from the business

Evidence of ability to meet maturing financial

obligations such as interest and capital

payments.

Cash-flow signifies the health of the business.

SMEDAN 19


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A Little More About Loans -2

Some common requirements for loans:

Account opening

Application

3-6 months operation of account

Financial accounts if business is in progress.

Guarantor

Guarantors statement of net-worth/ identification

Others

SMEDAN 20


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Critical Dos and Donts

Do start to restrict your own personalexpenditure- immediately

Do make plans to minimize long termdomestic spending.

Do manage any existing personal debts very

carefully.

Dont borrow money unless you absolutelyhave to

Dont plan on taking any long holidays from

your business, especially with largeoutstandings Dont close your eyes when reading loan

agreements, and dont fail to seek counselfrom those who have borrowed before you.

SMEDAN 21


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Final Words

Many business ideas have remained mere ideas forlack of money

Many good business ideas have been choked out ofexistence by money

If you must borrow, you must ensure that theinterest rate compares very well

About the right time to borrow, this is the

commandment: thou shalt not cross bridges beforethou comes to them.

SMEDAN 22

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