Over the last three weeks, we have discussed the typical uses of funds in a business as well as the major types and sources of funds. In this concluding part of ‘Funding Your Business’, we will discuss formal loan requirements, processes and borrowing etiquettes.
But first, let’s just say a word or two about formal investor requirements. Equity investors will normally look out for the quality of your business proposition. The quality of your proposition refers to its reality, strength and potential of building a sustainable and profitable customer base: Are the business objectives already being achieved? If not, can they be achieved? Is the business scalable? What are the cash and profit positions of the business? Etc.
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‘Risk-averse’ investors look to a business that is already stable and with a lot of room for growth. Such investors might, for instance, invest in a foods and beverages business or real estate. Other investors with greater appetite for risk, like Venture Capitalists, look to innovative and disruptive businesses. These investors might be excited to invest in a firm introducing a new drug for the cure of Alzheimer’s or some breakthrough in cloud technology.
After the ‘soundness’ of a proposition, other factors that risk-averse investors would consider will be a historical record of solid profitability and cash flow. Our more ‘risk-inclined’ investors, on the other hand, will look out for the prospects of strong cash flow and profitability that can be achieved by a competent management on a proposition that has not been tested.
Loan requirements: Formal loan sources such as banks would always have a lending policy. A lending policy is the framework around which all the lending activities of the institution are built. Lending policies will cover issues like which industries to lend to; What minimum and maximum loan amounts can be granted; What types of collateral can be accepted from borrowers; What loan tenors can be accommodated; Will start-ups be funded or not, etc.
Consequently, the first thing entrepreneurs should do when they make contact with a lender is to find out if their loan request will fit into the lending sphere of the institution. If it wouldn’t, don’t waste your time unless you are sure there is sufficient basis that might interest the institution to consider you as an exception. However, if you establish that the lending policy will accommodate your request, you can begin to discuss what the requirements of the institution will be as regards your request. The officers will inform you what application documents and information will be expected from you; What collateral will be required; What the interest rate and other charges will be, etc.
Loan processes: Loan processing will involve active engagement of the two parties. These engagements will be about the lending institution understanding your business and request and for you to understand what the loan requirements and process will be. Once sufficient mutual understanding is achieved, you can then submit your application with relevant documents such as feasibility report, business plan, audited/management accounts, cash flow statements, or others as may be required by the lender.
With all documents submitted, the lender will review your request. An officer or team will remain in touch with you, often asking for clarifications or additional documents. It is imperative that you are steadfast, diligent and forthright in providing any information. The institution will assess your request from general and specific perspectives. Some of the assessment criteria will be your character, business capacity, what collateral might be accepted, economic conditions, etc.
Different lending institutions have different response time frames. Depending on the loan, processing of an application might end at a branch, regional or head office level. Once an approval is granted to your request, an ‘offer letter’ stating the terms and conditions of the facility will be made out to you. It is necessitous that you review the offer letter with your legal advisor and financial consultants to understand every bit of it. If there are any difficult issues, you can raise them at this time. Do not accept an offer whose terms or conditions, legal or financial, you cannot meet.
Borrowing etiquettes: As with all other aspects of your business, the moment you make the decision to borrow, you have to maintain an impeccable level of integrity in everything you say and do. All information and documents you provide to the lender must stand any integrity tests they may be subjected to. Similarly, do not commit to what you know you do not intend or will be impossible for you to deliver. Lenders would rather have terms reviewed on mutual agreement than for you to begin to falter and fail on the commitments you have pre-agreed to.
The best approach to relating with a lending institution is to take them on as ‘partners’ rather than ‘adversaries’ that many entrepreneurs wrongly do. With the right mind-set, your approach to dealing with them will be that of good faith and well-meaning. You must have an unflinching commitment and resolve to service and pay your loans. Remain in regular contact with your lender and provide timely and relevant information.
When things go wrong, as they often do, you should immediately communicate with your lender. If you need some loan restructuring, discuss it. If you are already handling the situation in your ways, let them know. If you need time to sort things out, let the lender know as well.
Next week in this column, we shall take up business planning in ‘Entrepreneurship Development: Planning Your Business’.