Small and Medium Enterprises Development Agency of Nigeria
BANKING AND FINANCE FOR SMALL BUSINESSES
SMEDAN
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
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 no other enemy.
SMEDAN 4
The Three Core Issues
1. The need for finance 2. Sourcing the finance (where is the money?) 3. Starting a banking relationship
SMEDAN
The need for finance
- To handle pre-start operations
- To start: (e.g. pay for workspace, acquire essential inputs, etc) - To expand operations (e.g. acquire new machines, increase storage facilities, etc) - To modernize operations (e.g. replace obsolete equipments, invest in IT for CAM and/or CAD, invest in staff training and quality assurance, etc) - To meet some urgent liquidity needs while project is in gestation
SMEDAN 6
The need for fin.: understanding the stages
Business Idea Business Plan Founding of enterprise Expansion phase Development phase
Pre- start-up Seed capital Capital
Start-up capital
Venture capital
Bank Finance/Sale of shares or IPO
Early stage
SMEDAN 7
The need for finance
Relating the need for finance to the stages: 1. Early stage owners equity predominantly, especially for pre-start-up and seed capital; friends/relatives may contribute to start-up capital 2. Development phase/stage venture capital predominantly 3. Expansion stage money and capital markets
SMEDAN 8
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
Sourcing the Finance
Non-governmental Sources
Commercial banks, with some specialized schemes MFBs Venture capital (little known in Nigeria) Donor/International Funds Ford Foundation, EZE, Microstart (UNDP). Donor funds operate through NGOs such as FADU, COWAN, LAPO, CDTF Other informal private Sources families, friends, ROSCAs originating about 40% of total rural credits
SMEDAN 10
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 Franchises
SMEDAN 11
Starting a Banking Relationship
Banks are in the business of lending money, so they are constantly on the look out for good business opportunities 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 access them. You need to establish a relationship before you can get money Understand the risk of taking someone elses money.
SMEDAN 12
Getting Money from Banks
1. 2. When you are about to approach a bank for loan, these are some guidelines for making the request. Ensure your business plan is up-to-date and accurate; avoid under or over estimating the figures Make an appointment with the banks manager or business adviser. Present a crisp copy of your business plan several days before the meeting Think of questions you are likely to be asked by the bank, and plan out what your answers will be.
SMEDAN 13
3.
4.
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 the bank says, review your plan, recheck the facts, then approach another bank. Dont give up easily.
SMEDAN 14
Cannons of Credit
The 5 Cs of credit are: 1. Character
Willingness to pay back Fulfillment of terms Capacity to pay back Identification of the sources of repayments Review of future cash-flow Ability to meet financial obligations outside the loan
SMEDAN 15
2. Capacity
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
Cannons of Credit - 3
4. Collateral - security for the loan
Security is supposed to be a secondary issue in a good 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
A Little More About Loans
1. Loans - normally made to finance the purchase of the 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-agreed term, usually two to five years. 2. Overdrafts- these are short term working capital to cover inevitable cash-flow fluctuations. Overdraft is usually the cheapest money you can borrow commercially for your business.
SMEDAN
18
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
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
Critical Dos and Donts
Do start to restrict your own personal expenditure- immediately Do make plans to minimize long term domestic spending. Do manage any existing personal debts very carefully. Dont borrow money unless you absolutely have to Dont plan on taking any long holidays from your business, especially with large outstandings Dont close your eyes when reading loan agreements, and dont fail to seek counsel from those who have borrowed before you.
SMEDAN 21
Final Words
Many business ideas have remained mere ideas for lack of money Many good business ideas have been choked out of existence by money If you must borrow, you must ensure that the interest rate compares very well About the right time to borrow, this is the commandment: thou shalt not cross bridges before thou comes to them.
SMEDAN
22
