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Effective, Low-Risk Fund Raising Strategies: External Sources

By Okechukwu Onwuka
A creditor is worse than a slave owner; for the master owns only  your person, but a creditor owns your dignity, and can command it-VICTOR HUGO

We started this series last week and continue today with focus on the aspect of identifying what fraction of the total amount we need has to be provided by others. As a recap, the 7 steps for raising funds are briefly itemized below;

1. Develop Accurate Estimate of funds needed.
2.Identify how much of needed funds that would be funded externally.

3.Identify your position of strength to potential fund providers
4.List all your measurable Cash-Convertible currencies for potential lenders
5.Develop strategy to get your potential lenders to see and recognize your strengths
6.Remember: Money is a form of Energy and consequently obeys the Laws of Conservation of Energy i.e. it cannot be created or destroyed but can only be transformed from one form to another.

7.Approach ONLY those who represent lowest-risk funding options.
Some people may wonder why step #2 is important. That is not surprising given that all too often, we tend to see loans as the major obstacle. If only bankers know how passionate you are about this business idea, how hard you are prepared to work and how original the concept is, they’ll chase you with all the money you want. Unfortunately, it just does not happen that way.

The typical mind can be selfish and conceited but of course to varying degrees, oftentimes without our being aware of it. The lenders or lending institutions are selfish too. And this is not wrong per se. They have to be because lenders exist to make profit from secure credits to customers.

Lenders must be distinguished from charity organizations whose goal is to perform charitable deeds for a totally different interest. Usually, Charity organizations focus on the severely disadvantaged people, or those who have been handed a tough fate by death, famine, natural disaster, or oppression.

But even Charity organizations define their own rules of engagement. It is never open-ended; otherwise, they run the risk of exhausting their resources through reckless disbursements. In a similar sense, it is advisable to recognize once again that borrowing should be a last resort rather than first option, because borrowing, particularly on interest, will surely cut down on your profits.

That is, if you make profits, ultimately. In other words, to minimize the amount of cuts on your potential profits that the planned loan will make, you must also reduce the amount you ultimately borrow. Here are a few steps to systematically accomplish this objective

1.Eliminate or Minimize ‘mega-concept’ risk. Mega-Concept is a term I use for the common tendency for individuals or entrepreneurs to plan for heavy loaded projects for the primary purpose of achieving a one-in-town impact. I know someone who was profitably running about 4 retail points of a high demand commodity. (I will not mention the exact business area to protect his identity.)

He caught the mega-concept bug and decided to build the biggest facility in Africa for the product. His justification was that he needed that capacity to qualify to buy the main product in bulk as minimum storage size is required. To make this happen, he had to apply for credit facilities. Because he was already generating a lot of cash revenue in his existing retail outlets, it was very easy to access credit from a Nigerian bank.

While this bank on the one hand was flaunting the credit facility to the company in the media and internet as a positive attestation of the banks support for Nigerian businesses, the business man was filled with pains. He told me that the first thing the bank did was to place a number of people of the project executive team with their remunerations and costs borne by the loan. To make things worse, the funds are not released when required. He also had to use consultants approved by the bank and other conditions.

The project is nowhere being built yet he is deep into interest payments from the revenues accruing from his existing retail outlets. One of his greatest pains was an instance when the bank refused his taking a cheaper international credit facility (in terms of interest rates and repayment plan). He just could not understand the rationale. But it is simple really. The bank must protect her interests. Their decision to fund his mega project was never based on the new project. It was simply based on his existing cash flow trend from the retail outlets. While he chose to derive motivation from the would-be mega project, the bank was motivated by measurable reality.

The best option at the beginning would have been to break the would be project into the smallest possible components or modules. Build gradually from his already profitable cash flow or at best, arrive at a concept where very small loan amounts would be required. What we tend to forget is that bigger or biggest are constantly changing representations. Nelson Mandela once said “after climbing a major mountain, you realize there are many more mountains to climb”.

This is the first test that your cost estimate must pass.
2.How much of the required cash do you have? As a rule of thumb, my advice is that you should have at least 50% of the total funds you require for a project or business. It is even better if you have a steady cash flow that can cover an additional 20-25% of the costs over the half-term period of the loan repayment. Even banks can’t stand any credit applicant who cannot contribute anything to the project capital.

3.Are there credible alternatives to loans in cash? Cash based credit facilities are traditionally the most expensive in terms of interest rates. It is thus advisable to explore as much as possible all possible ways to achieve the objective without cash based loans.

For example, for building projects, it is possible to get material suppliers (cement, sand, aggregates etc) who will deliver materials to you and accept payment after one or two months, at no extra cost. With solid relations developed over time, you can receive materials from your suppliers on credit and pay over 60 or 90 days, as long as you have a good history of always paying up.

The beautiful thing about such transactional/relationship- based credit is that they do not pass you through the sometimes humiliating scrutiny, documentation, collateral verification and other bottlenecks that traditional lenders subject the potential borrower to. Rather than borrow cash to pay for machinery or equipment, you can optimize the external funding scenario by exploring the market to identify equipment manufacturers or distributors who are willing to install for you and allow you to pay over time.

In a market situation where cash is scarce, this represents a very viable opportunity as there are more people willing to simply find buyers for already manufactured equipment or machinery, even if they have to pay later.

This is more so given that storage cost money and that the machines lying idle do not generate revenue either.
The choice will always be ours; perform the necessary due diligence and reap the rewards or allow others who do so to reap the rewards at our expense.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.