Yesterday we held the third Money Talk at The Office Hive. Our guest speaker Brian Amanyire did an excellent job explaining the basics around financing small businesses.
These are some of the things I learnt from the session:
4 challenges of financing small business
1. Inadequate collateral
2. Information opaqueness
3. Low technical and management skills
4. Competition from large enterprises
5Cs of credit. This is the criteria banks use to decide to lend to a business.
1. Character of business owner. Banks easily lend to people who are credible and trustworthy.
2. Capacity (cashflows, profitability, liquidity, etc)
3. Capital. Banks prefer people who have already invested some of their own money.
4. Conditions. Bank are willing to finance projects which make business sense.
5. Collateral. Usually banks will require collateral to manage their risk.
3Ds. This is what usually happens when people default on their loans.
3 key reasons for rejection of loan applications.
1. Lack of veriable cashflows. Most applications are rejected because of this.
2. Poor credit history
3. Inadequate documentation
3 top reasons for default
1. Diversion. 80% of loan defaults are because people spent the money on different things.
2. Lack of management structures
3. Over borrowings
Dos and Donts
1. Put in place proper management structures
2. Have good financial controls
Overall it was a great session and I picked a few pointers to implement in my small business. I also got to network with different business owners and professionals.