1. Financing your business
PK Mwangi Global Consulting
Financing your business
The key to acquiring funding will depend on the structuring and presentation of the business plan to lenders. Depending on the size of the firm and amount of finance required, financiers will require to see the following at the initial (negotiations) stage:
company/ owner profile
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company activity, market share, market potential
company registration documents, statutes, shareholding, latest accounts
trading history and sales forecasts
current turnover & profitability
borrowing facilities- existing bank loans and interest rates, equity capital (if any) and exit agreements (where applicable)
development and growth plans as well as future plans.
Funds can be sought to finance the purchase or rent of capital equipment and other business assets or to finance working capital requirements i.e paying creditors, purchasing inventory and managing debtor receipts.
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I. For Asset Financing
Asset Financing is the finance required to purchase or rent business assets without using up valuable working capital. It is important to consider:
the alternative financing methods when evaluating its suitability to the business.
the availability of government support (grants) and government tax incentives which can lessen the financing requirement
There are a number of ways to finance an asset:
Outright purchase with a bank loan
Commercial banks will provide asset financing loans with the period of the loan and the interest rates decided according to different factors. The commercial loan may be structured in a variety of ways according to borrower circumstances and there
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is considerable flexibility with repayment schedules. Most high street banks provide these loans and details are available on their respective websites. 
Leasing
This is a form of financing in which the lessor retains ownership of the asset with the lessee paying rent which includes a fee to cover for depreciation over the hire period. It includes a number of services offered by the lessor which include maintenance, replacement during repair, management, etc.
Contract (hire) purchase Contract purchase is the commercial equivalent of a hire purchase. The asset is owned by the “hiring” company until the final payment is made at the end of the term. Once the final payment is made then legal title to ownership is transferred to the purchaser.
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Sale and leaseback
Many businesses have cash tied up in assets that could be released to be used immediately as funds for expansion, finance to buy a new business or equipment, reduction of debt etc. New or used equipment, plant, vehicles, property (land and buildings) that are owned may be sold to a lender (for cash) who in turn leases the asset back to the seller under a leasing agreement. The difference between the sale price and the repayment amount represents the interest on the cash received.
Private Equity & Venture Capital Funds
These funds invest in companies by taking equity. They expect to take a profit with an agreed clear exit clause - selling to an end client or identified purchaser within 3-7 years, repurchase of stock by proprietor/management or sale via the capital markets.
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A good management team and a rapid future growth plan are the pre-requisites of obtaining private equity/ venture capital. Small companies not able to list on the local exchange may opt for a loan from angel investors provided they have a strong management team and meet the requirements specified by them.
Investment Funds (Equity Funding)
Relevant to companies aiming to or already listed on the stock exchange
Joint Venture with a suitable partner
With a joint venture two or more parties agree to form, for a finite time, a new entity by pooling together their resources, assets and expertise and/or by contributing capital. All parties exercise control over the enterprise and consequently share the risks and rewards i.e. revenues, expenses and assets.
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Thus the partners each own equity within the company and agree how it should be managed.
Government grants
see relevant Ministry website (in Kenya this is the Ministry of Trade & Industry)
II. For Working Capital Financing
Working capital is the amount of money that a company has tied up in funding its day to day operations. A company has to tie up money to fund its inventory, debtors and other current assets, but this is offset by its ability to fund this from current liabilities such as purchases on credit.
Working capital financing is critical to funding everyday business expenses related to property rent, employee salaries, marketing expenses, inventory, etc.
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When opting for working capital financing the business will need to consider;
the management of inventory, debtors, short-term funds, cash, overdrafts and creditors
the business’ credit worthiness
the historical trading record
terms of credit and cash discounts
debtor collection period(s)
cash forecasting and budgets
cash management
Types of working capital financing include:
A. Factoring
Factoring is a financial transaction whereby a business sells its debtors (i.e., outstanding invoices) to a third party (called a
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a factor) at a discount in exchange for immediate money with which to finance continued business. The finance company will charge a monthly fee for the service, and interest on the amount borrowed against sales invoices.
B. Invoice Discounting
This is similar to factoring in that it enables the release of funds that are tied up in unpaid invoices. However in this case, the responsibility for invoice collection does not change but remains with the borrower.
Thus responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the debtors’ ledger and the credit control process.
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C. Supplier/ trade credit
Supplier or trade credit is an arrangement between businesses to buy good or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay.
D. Bank overdraft
A bank overdraft is a loan arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current account customer can write cheques or make withdrawals. Interest is charged on the daily overdraft (debit) balance.
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E. Short or medium- term loan
Applying for a loan at the bank is also a good option. Short and medium-term loans (usually less than a year) from banks are available to finance the daily operating costs of a small business. Banks rely heavily on the business’ credit-worthiness before lending the amount.
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