Leke Alder answers your business questions. Send your business questions to rsvp@lekealder.com

Question
I have an ongoing business. How do I raise funds to actualize my business dream?

Answer
You have 4 options

1. Money from friends and your family in exchange for equity or as loan

2. Money from investors in exchange for equity

3. Loan from a financial institution

4. Pre-sale of future services

The cheapest and the less troublesome is of course money raised from friends and family, unless of course you have very cantakerous relations and friends. Integrity demands that you repay on agreed terms if it’s a loan; if it is an investment then you must endeavor to give good returns.

Loan from a financial institution means that you pay interest on the loan and this can sometimes be onerous. It takes discipline to repay a loan. You must be focused and determined.

Qualifying for a loan is however another thing. The problem is that many SMEs don’t have the collateral for loans and banks avoid business risks. They only take financial risks. In taking financial risks there are some things banks watch out for:

1. How good is your cash flow?
Without cash flow it will be hard to repay interests and capital on a regular basis.

2. What is the profit margin on the business?
The margin must be able to support operations and loan repayment.

3. What is the track record of the business?
That is why they scrutinize statements of account and audited accounts.

4. What is the efficiency of the capital deployed? What is the capital yielding? Low or high returns?

5. What is the potential of the business? Is the market shrinking or expanding for the line of business?
If it’s shrinking then there is a huge capital risk.

6. What is the character of the entrepreneur?
What references. An entrepreneur is his enterprise. If he is a crook, then the chances of paying back his loans is doubtful because of character flaws.

7. How organized is the business?
Are the books well kept? Is there structure? Are systems in place or is it a fly-by-night proposition?

All of the above are important to both the investor and loan provider.

The last option is to presell your products and services at a fixed rate to clients in exchange for upfront bulk payment. It’s a risk they may choose to take. If the prices rise in the market, they can gain. However if the price falls, they lose. It’s a sort of edge against market fluctuations.