BUSINESS PLAN PREPARATION
AND IMPLEMENTATION STRATEGIES.
PART 1
It is not possible to go into a jungle without carrying out a rigorous preparation. One needs to know about the terrain and how to navigate it, the temperature, the rainfall and food supply. You may also need to be keen about the hostile creatures there and how to defend yourself against them. In the same vein, starting a business, particularly a first business, requires the same level of preparation as one needs in crossing the Sahara desert or exploring the jungles of Central Africa. Definitely, one is entering a hostile territory. The required preparation can be phased into these tripartite stages. The Business Ideas (or opportunities).§ The Business Plan.§ The Business Implementation Strategy.§ 1.1 Identification of Business Opportunities - Come up with a business idea. As a major prerequisite of going into any business, you have to come up with a business idea. A new invention of thought, often styled as idea, is usually the starting point of a successful business. But the journey from an idea or prototype to a product on a store shelf can be long and difficult. The actionist looks at the steps involved in this journey, from the protection of the idea to the financing and marketing of the final product. You have decided that you want to go into business, but you don’t know what that business is going to be. You have to look for a great idea. The best advice is to begin by breaking down the bigger picture into manageable pieces. First, look at your own skills and knowledge.
Consider your present occupation, and whether you could do your present job working for yourself rather than being employed by someone else. Successful businesses are frequently started by people with practical experience in the type of work that the new venture is entering. They go into business because they decided that they want more independence in their working lives. Secondly, you may want to modify your present skills and experience while working for somebody else and proceed to start your own business. Thirdly, take a careful look at yourself. It could be that your personality or physique suggests a business idea. If you have persistence, charm and communication skills, for example, you might be a good sales person. This might be an opening for self employed sales agent to sell other peoples product. Fourthly, you might discover a potential hole in the market – a widespread consumers’ dissatisfaction. Once you have an idea of the size of the potential market, you can develop a business idea to fill the gap.
To arrive at a good business idea, one can find answers to some of these frequently asked questions:
(i) How do I identify new ideas? Brainstorming with friends or relations to stumble into business opportunities for entirely new products or services.
(ii) Can I look at existing ideas in a new way? Most successful businesses come from modifying, refining or rethinking an existing business idea.
(iii) What goods or services could I provide locally? Think about things or services that you and your neighbours and friends need or complain about locally.
(iv) What goods or services could I provide to local companies? Do some research among local companies about their requirement. For instance local staff canteen to serve many local companies.
(v) How do I find out about opportunities for tourism or leisure businesses in my area?
(vi) How do I find out about selling goods made by other people?
(vii) What do large companies, local councils and other public bodies buy in from outside the areas?
(viii) Is there potential for import substitution in the area? Look at things currently being brought from abroad. You can act as an export agent or make local substitutes. You can also make things happen by turning your hobby into a business. For instance, if you like gardening as a hobby; you could start a garden design business. Buy an existing business. But look carefully at the business accounts and investigate why the owner wants to sell the business.
1.2 The Business Plan The most important step in launching a new business or expanding an existing one is the construction of a business plan. Such plan must include the goals for the enterprise, both short and long term; a description of the products or services, market opportunities anticipated, and finally, an explanation of the resources and means to achieve the goals of the enterprise in the face of likely competition. The core thinking behind business plans and their eventual implementation is strategic analysis.
The strategic analysis refines or confirms the view of what is really unique about the proposition of the business. The business plan, once completed, will serve as a blueprint to follow which, like any map, improves the user’s chances of reaching their destination.
(a) The Objectives of the Plan The major reasons for writing up a business plan are as follows:
• Building Confidence. It gives the confidence that the plan put together will make things happen. It may even compensate for lack of capacity and experience.
• A Veritable Test of Ideas on Paper. A systematic approach to planning helps to make mistakes on paper, rather than on market place which is likely to be too costly.
• It Shows How much Money is needed for the Business. The business plan details how much money is needed, what is needed for and when and for how long it is needed. By so doing, it can reduce the risk of business failure.
• Providing Planning Experience. Preparing, business plan gives an insight into the planning process which is very important to the long-term health of a business.
• Satisfying Financiers’ Concern. If finance is required, it is important to examine what financiers expect to be able to raise funds from them. The business plan is a passport to sources of finance. It shows to outsiders what they require to help to raise money. These outside-parties could be bankers, potential investors, partners or advisory agencies.
(b) How many Plans? A business plan will be more effective if it is written with the reader in mind. It will require research into the particulars interest of the audience in mind. Bankers are more interested in hearing about certainties and steady growth, while venture capitalists, who put up risk capitals on behalf of institutions such as pension funds, are also interested in dreams of great things to come. Business angels, who put their own money at risk, like to know how their particular skills and talents can be deployed in the business.
(c) What should be in the Plan? Layout and contents There is no universal business plan format. But experience has taught us that certain styles have been more successful than others. The following list contains the elements of an effective business plan, one that covers most requirements.
(i) The Cover: The cover should show the name of your business, its address, phone and fax numbers, e-mail address, Web site, contact name, and the date on which this particular plan was prepared. It should confirm that this is the current view on the business’s position and financing needs.
(ii) The Title Page: The title page, immediately behind the front cover, should repeat the above information and also give the founder’s name, address, and phone number. A home phone number can be helpful, particularly for investors, who often work irregular hours too.
(iii) The Executive Summary:
The executive summary is ideally one page, but certainly no longer than two, and contains the highlights of the plan. Writing this summary is a difficult task but it is the single most important part of the business plan. Done well it can favourably dispose the reader from the outset. Done badly, or not at all, then the plan may not get beyond the mail-room. This one page (or the two pages) must explain:
• The current position of the company, including a summary of past trading results, if any. • A description of the products or services, together with details on rights or patents and details on competitive advantage.
• The reasons why customers need this product or service, together with some indications of market size and growth.
• A summary of forecasts of sales and profits, together with short and long-term aims and the strategies to be employed.
• How much money is needed to fund the growth and how and when the provider will benefit? The executive summary is to be written after the completion of the business plan itself.
(iv) The Tables of Contents: The table of contents, with page numbers, is the map that guides readers through the business plan. If that map is obscure, muddled, or even missing, then you are likely to end up with lost or irritated readers who are in no mind to back your proposal. Each main section should be listed, numbered, and given a page identity. Elements within each sections should also be numbered: 1, 1,1, 1,2, and so on.
(v) The Business and its Management: Details of the business and its management should include a brief history of the business and its performance to date and details on key staff, current mission, legal entity, capital structure, and professional advisers.
(vi) The Products and Services: A description of products and services, their applications, competitive advantage, and proprietary position. Include details on state of readiness of new products and services and development cost estimates.
(vii) The Marketing: The marketing section should provide a brief overview of the market by major segment showing size and growth. Explain the current and proposed marketing strategy for each major segment, covering price, promotion, distribution channels, selling methods, location requirements, and the need for acquisitions, mergers, or joint ventures, if any.
(viii) The Management and Staffing: Information on management and staffing should give details on current key staff and on any recruitment needs, include information on staff retention strategies, reward systems, and training plans.
(ix) The Operations: The operations section describes how the products and services are made, how quality standards are assured, and how output can be met.
(x) The Financial Data: A summary of the key financial data, including ratios together with a description of the key controls used to monitor and review performance.
(x) Financing Requirements: Financing requirements needed to achieve the planned goals, together with how long you will need the money for. You should also demonstrate how the business would proceed using only internal funding. The difference between these two positions is what the extra money will help to deliver.
(xi) E-commerce: E-commerce isn’t just about selling goods and services online, though that is important. It covers a range of activities that can be carried out online to make your business more efficient. These solutions extend across the supply chain from ordering your raw materials right through to after-sales service. It can incorporate market intelligence gathering, customer relationship management, and a whole range of back office procedures. Your business plan should show how you plan to tackle this area.
(xii) Major Milestones: Include major milestones with dates. For example: get prototype for testing by 20 December, file patents by 10 January, or locate suitable premises by such and such a date.
(xiii) Risk assessment: Risk assessment feature high on the reader’s list of concerns, so it’s best to anticipate as many as you can, together with possible solution. For example: Our strategy is highly dependent on finding a warehouse with a cold store for stock. But if we can’t find one by start date we will use space in the public cold store 10 miles away. Not as convenient but it will do.
(xiv) Exit Route: Detail an exit route for venture capitalists and business angels. Typically, they are looking to liquidate their investments within three to seven years, so the business plan should show how much money they can make and how quickly. For long-term investment, there is need to say something about who might buy the business and when it might be launched in the stock market.
(xv) Appendixes: Appendixes include CVs of the key team members, technical data, patents, copyrights and designs, details on professional advisers, audited accounts, consultants’ reports, abstracts of market surveys, details of orders on hand, and so on.
1.3. Business Implementation Strategy
With a written business plan, the entrepreneur is ready to commence a business. Starting a business can be a confusing operation: to make decision to take so many actions to carry out. It is important to keep to the right path. This stage helps the entrepreneur to keep to the critical path. Certain steps are set out below as useful guide. They have been distilled from research and successful experience. Not all steps will apply to every business, but one will decide which ones are relevant and critical to a particular business concern.
The strategic steps can be categorized into four sections.
• Initial preparation. • Getting into greater details. • Setting up. • Ready to trade.
(a) Initial Preparation
(i) While you are still in your job, or about to retire from paid employment, one can undertake the initial preparation and research while still doing this.
(ii) Analyse your character and abilities. Are you the right person to start on your own?
(iii) Discuss with your family and friends the possibility of starting a business. Are they aware of what it means to family life? Will they be committed? (iv) Come up with a shortlist of ideas for a business. Do you have the necessary skills? Does the market look promising? (v) Briefly define business ideas. (vi) Brush up inadequate skills. Apart from reading the relevant literature on the particular business idea, consider training courses and counseling. (vii) Consider whether you should start the business with someone who has complementary skills, that is, who is strong in those skills in which you are weak. Negotiate who gets what share. (viii) Decide how big a business you want. Will it be large or small-scale? How much growth potential do your business idea have? Do you have the essential management skills to opt for a fast-growth route? (ix) Did your self-analysis suggest that you needed ongoing help? Or have you been unable to come up with a sound business idea? (x) Investigate the possibilities of buying a business if you have the necessary funds or can raise them. (xi) Carry out detailed market research into a shortlist of ideas. Do this whether you are starting from scratch, buying a franchise or buying a business. (xii) Identify a market section. Establish what will be different about your product. Estimate all of these, market size, market share, market structure, market trends. Investigate competition and their products. (xiii) In steps xi and xii, narrow down possible ideas to a leading prospect. (xiv) Work out you principal selling method - e-commerce, direct mail, intermediaries, for example. (xv) Forecast amount and timing of sales. (xvi) Review yourself, your skills, your family, your idea. Take the decision to proceed, do further work or abandon. It is better to drop the idea now than carry on with doubts. (b) Getting into Greater Detail (i) Draw up an initial business plan. Forecast sales, costs, cash flows. At this stage, figures will be very approximate. (ii) Make a preliminary decision about your need to raise money. Roughly, how much will you need? Who is the likeliest lender. (iii) Discuss with your family and friends what you will be able to invest. Consider what security you can offer. (iv) Seek out and employ the advisors you need. These could include solicitor, accountant, bank, design consultant, IT specialist, database experts, Web designers. (v) Decide how much you will spend setting up, but keep a margin of safety. Tailor the amount to how much you are wiling to risk yourself, as the funds you can raise will be multiple of what you can invest. (vi) If you are currently employed, are you able to give the necessary effort to get the business going? Or do you need the extra income? Consider giving up work. (vii) Test your product to confirm its performance. Test-market your product or service, if possible. (viii) Apply for a patent to protect the product or register the design or trade mark, if applicable. (ix) What form will your business take: for example, sole trader, partnership or limited company? (x) Decide your IT strategy - consider your needs for hardware and software: accounts package, spreadsheet, e-mail, database and so on. (xi) Name your product and business. Keep in mind your sector of the market and the product’s benefits. The name is part of your selling effort. (xii) Register the company name, or change the name if buying a ready-made company. Check there is no other company with that name. Sole traders and partnerships need take no action. Assistance of a Lawyer is required to guide you. (xiii) Draw up a partnership agreement, if applicable. (xiv) Come up with some initial ideas about letterheads or consider those put forward by a designer. (xv) Develop ideas about how to sell you product or service. Identify the product benefits and advantages. What means will you use to get your message across: leaflets, brochures, etc. (xvi) Identify possible suppliers. Begin your negotiations. (xvii) Develop a pricing strategy. (xviii) Refine the business plan. Be pessimistic about sales and costs. (xix) Ask an adviser or colleague to go through the plan with you, challenge all assumptions and figures. Have you identified the principal risks? (xx) Review the plan yet again. Does the business look viable? Will you go ahead, research further or abandon? All the momentum is to push forward because of all the work and commitment put in so far. But if the idea does not hold water, the right decision is not to proceed but to research something else. (c) Setting Up (i) Consider what equipment your business will need. Investigate how to pay for it: cash, hire purchase or leasing. Are you sourcing them locally or through import? From where? (ii) Establish guidelines on what credit to offer, what credit to take from suppliers, how you will control cash. (iii) Find out what insurance you will need for your business. (iv) Estimate the amount of initial stock and production run. (v) Make first approaches about raising money. (vi) Decide if you will start trading before you raise the money or if you will wait until you have finalized Remember with complicated finance, it can take several months. (vii) Register for tax and VAT. (viii) Set up a simple accounting record system. (ix) Work out what your accounting period should be. There is some advantage in a year-end early in the tax year if profits are rising. (x) Consider the virtues of trading from home, even if several of you are joining together to start the business. E-mail can help you to communicate from several locations. Otherwise, start the search for premises. (xi) Finalize decisions about letterheads and order stationery, once you have found premises and know your business address. (xii) If you will need staff when you start trading, start the search now. (xiii) Carry on developing your ideas about image, how to sell and how to get your message across. (xiv) Draw up terms and conditions of sale, if applicable. Set up your database for actual and potential customers. (xv) If you will be selling direct yourself, develop a sales dialogue. Train up carrying out role-play with your spouse or a colleague. (xvi) Set up a financial control system, that is, how you will compare actual performance with budgeted performance as drawn from your business plan. (xvii) Finalize your decisions about brochures, literature mailers, phone scripts. (xviii) Draw up contracts of employment for any staff. (d) Ready to trade (i) Finalize premises, fitting out, employing staff, sales methods. (ii) If you are still employed, hand in your retirement notice. If you are employed, contract your local Business Link or Jobcentre Plus to find out whether you can get any financial assistance from the start of trading. (iii) Inform the relevant Internal Revenue Service, FIRS and NCS if you are to be a sole trader or partnership or limited liability company, depending on your choice. (iv) If you are forming a company or taking on staff, ask FIRS and SIRS for information on how to operate the PAYE tax system. (v) Set up a reporting system for your staff. (vi) Plan the opening. Conclusion The use of this step-by-step guide is the appropriate strategy in the implementation of a business plan. The guide is in appropriate order depending on when the business is to commence trading. SECTION 2 ACCESS TO FUNDS AND GRANTS Money is required for a successful business set up. There is rent to pay, materials and equipment to purchase, even before any income is received. To start a business which will lead to success requires sufficient money to survive until a point where income continually exceeds expenditure. To raise this initial money and exert effective financial management of the business is fundamental to the success of a business. Many businesses fail due to lack of sufficient day-to-day cash and financial management than any other reasons. This module deals with and common pitfalls to avoid how to raise the right type of money in the running of a successful business. 2.1 Achieving and Managing Financial Growth Achieving and managing financial growth of a growing business requires patience, persistence and balance. It involves all the activities that enable a company to obtain capital for growth, allocate resources efficiently, maximize the income potential of the business activity and monitor results through accounting documents. The benefits of this are numerous and cannot be over-emphasized. It benefits the owners through profit potential, employees’ benefits through increased earnings and promotions and customers too benefit from expanded products and services. In a given business, to obtain financial growth often poses problems.
There are basically two ways of managing financial growth. • Grow gradually, accumulate profits and use the profits accumulated to finance other additional growth. • Source for outside fund probably through outright borrowing or equity financing. However, the two methods could pose problem. You will definitely experience some rejections and frustrations and this is where persistence is necessary. It is your determination and your willingness to adjust your plans that would carry you through the process. Advising financial growth would likely take more time than you expected, you need not worry over these, many successful business men have experienced some problems. It is also important to mention here that you need to balance your financial growth quest with your business operational aspect of growth, for instance the marketing function of your business might extend beyond your financial capacity at a point in time. You need to simply deduce ways of balancing up between the two. You may for example look for a mere cost reduction marketing expansion technique. Guidelines to Financial Growth (i) Growth should be attempted in a profitable business. A profitable business would be known from two main angles. • Checking at the Assets and Liabilities items that are on the balance sheet. • Checking at the operational items on the income and expenses reports. (ii) Management skills and abilities must exist to take care of the increasing demands of a growing business. (iii) Other considerations: • Expect that your personal involvement and commitment to the business will increase during a growth cycle. • Consider personal sacrifices and the sacrifices of people you work with, including your family. • Expect additional pressure on the time and resources needed to run the business. 2.2 Planning Your Business Liquidity Liquidity is the extent of a company ability to meet its day-to-day financial needs. A company therefore requires adequate cash for this purpose. Cash is the king. It is like the oil in the engine of a car, no matter how powerful an engine is; if the oil in it runs dry, the engine stops. Availability of cash in a business is exactly the same. If the cash runs dry, the business seizes up, no matter how profitable it may be. A way of planning business liquidity is the preparation of cash flow forecast which shows cash coming in and cash going out for a specified period of time and broken down into months. The monthly cash flow forecast provides the financial information of the revenue and expenses as well as the monthly flow of cash in respect of these items. Planning your business liquidity provides you with the means of keeping your business decision making on track, for example, it will serve as an early warning signs when your expenditures are running out of line or your sales targets are not being met. As the manager of you cash, you will have enough time to devise remedies for anticipated temporary cash shortfalls and ample opportunity to arrange short-term investments for the business temporary cash flow surpluses. 2.2.1 Assessing How Much Money You Need It is important that from the onset, you work out how much money is needed to get your business off the ground. The starting point is to make accurate sales forecast, which is an integral part of the feasibility testing. This will be done along with seeking objective advice on estimating costs for initial expenditures such as retail or production space, equipment, staff and so on. To estimate the amount of money a business needs on a day-to-day basis, forecasting cash flow is the most reliable way for this. Preparation of a Cash Flow Forecast There are certain Do’s and don’ts you must observe religiously in making a cash flow forecast. • Ensuring your projections are believable. This means, you need to show how your sales will be achieved. • Base projections on facts not conjecture. • Describe the main assumptions that underpin your projections. • Explain what effect these assumptions would have if the events do not occur. • Don’t use data to support projections without saying where it comes from. • Don’t forget to show seasonal factors, e.g. sales of ice-cream are lower in wet or cold season than dry or hot season. Sales of toys reach the peak at Christmas season. • Don’t ignore economic factors such as an expanding (or shrinking) economy, rising (or falling) interest rates and an unemployment rate that is so low that it may influence your ability to recruit at the wage rate you would like to pay. • Don’t make projection without showing the specific actions that will get those results. • Don’t forget to get somebody else to check your figures out – you may be blind to your own mistakes. 2.2.2 Forecast Receipts You should be able to project correctly the receipt from sales depending on the range of products and services you offer. There may also be receipts from other sources but try to isolate exceptional receipts from regular ones in the projection. In fact, these other outside finances are best left out of the regular forecast at this stage. In forecasting receipts from sales, take note of the following. • Finding enough product or people. Apply the test of feasibility of weather you can get enough goods to sell or enough people to provide the services you are offering. • Sizing up the markets. Ensure there are enough customers with sufficient money to spend to create a viable market place for your product or services. You must carry out market research. • Find your segment of the market. Market segmentation is the process whereby customers and potential customers are organized into clusters of similar types, such as age, sex, educational level or location. • Use the internet to access valuable market information. The 123 World.com Web site (www.123world.com/libraries) is very useful. • To make sound initial sales forecast, also make sure you achieve: Credible projection.§ § Reasonable and comfortable market share. Enough customers (real and§ potential) to carry the business beyond the break-even level of operation. • Calculate the break-even level. In a simple form the more you charge above your costs, provided the customers will keep on buying, the more profit you make. But the problem can be more complex as you see the true nature of some costs. 2.2.3 Forecast Payments (or Expenses.) Some expenses, such as rent, rates, vehicle and equipment bills leases are paid monthly. Others like telephone, utilities and bank charges come quarterly. You must not forget to guesstimate costs like marketing, promotion, travel, subsistence, stationery and printing. They may not be that all accurate, but use them as projections. After you have been trading for a while, you can get a better picture of the true costs. Add up all payments for each month and for the whole year. 2.2.4 Working out the closing Cash Balances With the projection of receipts and estimating the expenses, the closing cash balances provide useful information for you to manage your finance. Working the cash flow projection allows you to see exactly how much cash you have in hand, or in the bank, at the end of each month or how much cash you need to raise. Outline of Cash Flow Forecast (N) Months 1 2 3 4 5 6 etc Opening bal. b/f. X Add. Projected Receipts X Less Estimated Expenses X Closing bal. c/f. X 2.3 Types and Sources of Start up Capital There are various financing options to start up and run a business. At the extreme ends of the financing spectrum are the equity capital and the debt capital. At one end of the financing spectrum lie share holders: either individual business angles who put their own money into a business, or corporate organizations such as venture capital providers, who provide equity capital which is used to but a stake in a business. These investors share all the risks and vagaries of the business and expect a proportionate share in the rewards if things go well. They are less concerned with a stream of dividend, instead they hope for a radical increase in the value of their investment. At the other end of the financing spectrum are debt financiers – banks that try hard to take no risk and expect some returns on their money irrespective of your business performance. They want interest payment on money lent, usually from day one. They expect competence in the management of the business. Understanding the difference between lenders, who provide debt capital and investors, who provide equity, or share, capital is cardinal to a sound grasp of financial management. In between the extremes of shareholders and the banks lie a myriad of other financing vehicles which a mixture of lending or investing criteria. Therefore you need to keep your business finances under constant review, choosing the most appropriate mix of funds for the risk you plan to take and the economic climate ahead. The more risky and relative the road ahead, the more likely it is than taking a higher proportion of equity capital will be appropriate. In times of stability and low interest, higher borrowing may be more acceptable. As a rule of thumb, debt and equity should be used in equal amount to finance business. 2.3.1 Reviewing Your Financing Options The important first step is to know how much money you need to get your business successfully started. There are many sources of funds available to small firms, but not all are appropriate to all firms and at all times. These different sources carry very different obligations, responsibilities and opportunities. You have to understand the differences to allow an informed choice. 2.3.2 Examining Your own Finances The first place to start looking for money to finance your business is in your pockets. You may not have enough cash, but you may have assets that can be turned into cash or used to support borrowing. • Examine your Assets and Liabilities, arrive at your net worth (asset-less Liabilities and make decision on how much money you want to release to finance your business start-up. Note that the more outside money you have raise, the more power and perhaps value you have to share with others. • Look at your ongoing expenses. You have to live whilst getting your business up and running. So, food, light, water, roof over your head are essential expenses. But perhaps a two week long holidays abroad, second wife, second car and membership of a prestigious club are not essentials. These may be great things to cherish while you were a hired hand and your employer had to pay fat cheque each month on some luxury for you, now you are working for yourself. 2.3.3. Determine the Best Source of Finance for Your Business Choosing which external source of finance to use is to some extent a matter of personal preference. But keep a good line of communication open with as many sources as possible. In making your choice, consider the following areas. • Consider the costs of raising the money, the lawyers and accountant costs, as well as cost of conducting the due diligent examination (business appraisal.) • Consider sharing ownership and control.
2.4. Knowing and Meeting Lenders Requirements
Borrowing can be made from many possible sources, but it has been found that most people start and stop at a bank. The other sources may be from family and friends. Borrowing from banks: Banks are the principal and frequently the only source of finance for nine out of every ten new and small businesses. Banks are usually a good starting point for almost any type of debt financing. Bankers like to speak of the five Cs of credit analysis, factors they look at when they evaluate a loan request. When applying to a bank for a loan, be prepared to address the following points. (i) Character. Bankers lend money to borrower who appear honest and who have good credit history. Before you apply for a loan, it makes sense to see that you pass this test. (ii) Capacity. This is a prediction of the borrower’s ability to repay the loan. Bankers look at the business plan for a new business and for existing business, bankers consider financial statements and industry trend. (iii) Collateral. Bankers generally want a borrower to pledge an asset that can be sold to pay off the loan if the borrower lacks fund. (iv) Capital. Bankers scrutinize borrower’s net worth, the amount by which asset exceed debts. (v) Conditions. Banks loan can be influenced by the current economic climate as well as by the amount requested. Banks also use CAMPARI, which stands for: Character, Ability, Means, Amount, repayment and Insurance. (See www.bankexport. co.uk/ comp ari.htm for more knowledge of this concept).
2.5 Funding through Group/Cooperative Association
In Nigeria, Cooperative Societies and Group Credit Union have provided a convenient platform for raising the necessary fund to start and run many businesses. Instead of battling with the stringent terms of the high profile banks, you may take solace in the generous terms of the Cooperative Societies, Association and Credit Union. Credit Unions formed by groups of small business people, both in business and aspiring to start up have been around in major cities and communities in Nigeria, as elsewhere in US and UK. They have been an attractive option for people on low incomes, providing a cheap and convenient alternative to banks. Some self-employed people such as taxi drivers, spare parts sellers or other traders have also formed Credit Union called different names across the nation (Esusu, Adase, Nka uwat etc) The established Credit Union will usually require you to be in a particular trade, have paid money in for a number of months or perhaps years and have a maximum loan amount that can be taken for specified purpose. Members have to save regularly to qualify for a loan, though there is no minimum deposit, members with good track record can borrow up to say, five times their savings, though they may be required to continue to save while repaying the loan. There is no set interest rate, but usually, dividends are distributed to members from any surplus, sometimes the dividend ranges from 3-5% a year. One of the advantages of this source of finance to members and also business ventures is the opportunity to borrow multiples of your total amount contributed to the Society or Union or Association with very little or no interest payment. A lot of small and medium businesses in Nigeria have been financed through this source. 2.6 Funding from Venture Capitalist This is relatively new in the Nigerian business scene. But it has developed extensively in Europe and America. Venture capital as a means of financing the start-up, development, expansion or the purchase of a company. The venture capitalist acquires a share of the company in return for providing the requisite funding. Venture capital firms often work in conjunction with other provider of finance in putting together a total funding package for a business. Venture capital providers (VCs) invest other people’s money often from pension funds. They are likely to be interested in a large sum of money for a large stake in the business. Generally, VCs expect high return in their investment, as well as recouping their investment within about seven to ten years. More information this source of funding can be obtained from www.evca.com or www.evca.co.uk ). 2.7 Equipment Leasing This is another method of financing a business set up whereby equipment or other fixed assets are loaned out by the owner (leasor) to a user (leasee) under an agreement which requires the leasee to be paying an agreed sum of money (known as rental) for a determined period of time. The leasing agreement is such that the business (leasee) chooses the equipment it wants and then the leasor buys. An agreement is thereafter drawn up between the leasor and the leasee. Such agreement will establish the terms of the contract and the amount of rental to be paid at a given period, it could be yearly. Under a lease agreement, the legal title of the assets has complete use of the asset without having to finance its purchase from its capital.
