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Start-ups: Raising capital for new business

Some months back, I promised to do a three-part series on start-ups. That pledge is redeemed today with the commencement of the articles on raising capital for a new business. Let me say right away that there’s never a last word on this subject, or any subject for that matter. We’d keep talking about business financing as new ideas crop up.

Many people blame their inability to start their own business on lack of capital, or the difficulty of sourcing it. While there are no hard and fast rules of the pattern of capital formation, aspiring businessmen and women must take the lead in raising their own capital. That’s the first thing to realise.

You start raising your own capital by saving, at least, 10 per cent of your income in a bank. That’s how you build your deposits; by all means, do more if you can, but you should save enough money to fund the most basic things you need to start your business to convince everyone that you really mean business.

That way, you would win the confidence of those you may approach for direct cash loans, credit facilities through supply of stocks, or fixed assets, depending on what you need. You have to invest in your business before you can justifiably ask others to do so. Doesn’t that make sense?

If you can save enough to start a small business, it means you are disciplined. It presupposes that you could exercise restraint in the way you handle money in the face of competing needs and pressures. Saving and building cash deposits in a bank shows you have a banking culture.

After raising the basic capital through saving your money in a bank, the next step is to incorporate the business, if you intend to go into the formal sector right away. A modest share capital is sufficient, to start with. Your lawyer may suggest you register a business name or what we call “enterprise,” which is suitable for micro-businesses like a salon, sole trading, small shops, etc. It all depends on your vision and how bold and ambitious you are.

Whatever the case, if you have registered a new company, the first thing you’re to do is to open a corporate bank account. The essence of this is to begin banking transactions by operating your account as you start running your company from day one. An active ledger gives you goodwill with your bank over time, which may translate into liberal credit line facilities.

As the owner of your business, you must have accumulated substantial goodwill through interaction with people in society, over the years. These people would form the pool of your initial patronage; your immediate target market. Goodwill is accumulated over time. If you sustain your reputation as a jolly good fellow who is reliable, trustworthy and decent, your goodwill grows like a bank deposit that you build consistently. If you mismanage your goodwill through character flaws, you hurt your reputation and deplete this social capital, like overdrawn bank deposit.

Social capital is as important for business success as cash capital and other major inputs, like quality product, excellent service delivery, manpower, facilities, etc. Combine goodwill, including good banking relationship, with cash capital and you have a solid foundation for building a strong capital base for your nascent enterprise.

You can also raise capital by disposing of assets like jewellery, cars, land, shares, etc. This is why it is wise to tie down excess cash on investments like these, which could be converted into liquid cash in a jiffy. If your business is well capitalised, all other things being equal, with the grace of God on your side, you’d make so much money that, replacing all the valuables you sold to fund your business won’t be difficult.

It is natural to think of banks when looking for money to start a new business. You may, however, be disappointed if you first go to the money market in search of loans for a start-up. It is unlikely you’d get a positive response because no bank would fund any venture that has no financial record with it.

It may be a lot easier to shore up your capital by getting loans with little or no interest from friends or relatives. You stand a far better chance of getting money from the money market (banks) if you have been in business for between two and five years. It can be reasonably assumed that, if you stayed that long and survived, run your cash flow effectively, amortize the private loans, you are likely to succeed with a much bigger loan facility. Isn’t that logical?

Indeed, start-ups, and small and medium enterprises have other financial windows created for them by the Bank of Industry and other institutions. These cheap loans are more easily accessed by companies that have been able to run on their own for some length of time. For you to qualify, you must be on ground. You must have audited accounts, pay all your company taxes and levies, as well as your own taxes, and meet every single legitimate corporate obligation.

We cannot put the lid on raising capital for start-ups, but space constraints limit our options today. For now, you chew and digest this, till next week when we continue the conversation.

WEEKEND SPICE: “If you do not conquer self, you will be conquered by self.”– Napoleon Hill.

Have a nice weekend, folks. Stay motivated.

Ladi Ayodeji is an author, rights activist, pastor, business consultant and life coach. He can be reached at [email protected] and 09059243004 (SMS only).

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