How to raise business finance when the bank NEEDS to say no
It is the 2nd (ikeji) of the Enterprising Communities series to be published by ALARAN DEVELOPMENT ENTERRISES. This series aims to assist African enterpreneurs in building business enterprises based on innovations in science, technology, engineering and medicine.
HOW TO RAISE BUSINESS FINANCE WHEN THE BANK "NEEDS" TO SAY NO.
Introduction:
A person who works in a bank is a worker, not a banker. It is the people who own (equity shares in) the bank that are bankers. The Enterprising Communities series shows you how to raise funds for an enterprise in your community, when the bank and its workers only want to buy and sell foreign exchange . . .
Article:
These days, it is likely that the bank located in your community NEEDS to do business mainly with multinational enterprises. An examination of the structure of enterprise economy in many African countries reveals three distinct layers: the multinational trading companies; a small middle tier of brokers, and vendors of non-tradable services; and a vast community of family-controlled enterprises. Only the multinationals can readily do business with our banks, precisely because the multinationals have access to vast capital resources of their own. They use the banks only to pay local employees, suppliers and brokers.
The banks for their part think they are too big for the community enterprises. Rather than investing in and supporting community enterprises with appropriate lending, savings and leasing schemes, our banks are attuned to become "globally competitive". As a whole, Africa generates some 5pc of global trade. There are regional development authorities or states elsewhere with far greater impact on global trade flows. For example, the land mass of all of Western Europe will fit within the borders of Sudan alone. But financially, all of Sudan is smaller than Birmingham UK or Birmingham USA. In the same vein, Texas USA generates some 30pc of USA's USD 3 trillion GDP. That is more than productivity of all Africa other than Nigeria and South Africa. Yet the main operations of our banks rarely extend beyond fishing for deposits, round-tripping of foreign currency, and daisy-chaining of import-export financing letters. These banks make it difficult for community enterprises to operate bank accounts. They don't want you dirtying their marble floor-to-ceiling lobbies. As a result, many enterprises do their business in cash. They buy, sell, lend and collect cash payments. Businesspeople travel with large sums of cash. Politicians settle issues with bags of cash. Major capital expenditures are financed in cash. Only a small portion of this cash enters the formal banking system.
Here then is a guide to raisng funds for community enteprises.
Many middle-tier enterprises conduct the bulk of their business with one or two trade suppliers. It is not uncommon that 70pc to 80pc of supplies for your beer brokerage comes from one supplier. Community enterprises tend to have a more varied distribution of suppliers and customers. Your metal-working workshop may source wrought iron from any number of metal vendors and sell ornamental gates to any number of home-improvers. These trading patterns signify three vibrant sources of business funding for your enterprise, without you needing to exhange dirty looks with a bank worker: vendor finance, supplier finance, and customer prepay finance.
Vendor finance is when the manufacturer of a product gives you some time to sell the product before you pay the manufacturer. The longer you have traded with a manufacturer, the better terms of this "credit" you will likely get. Vendor finance is not likely from your local bukateria (restaurant) where the product is consumed immediately, is not fungible, and is not recoverable. In fact you may see a prominent display that signals "Do not ask for credit as refusal often offends". You should request vendor finance from manufacturers of products that are durable, relatively expensive, and are physically discrete. Such products include stoves, water tanks, car parts, and houses. Although the product is in your possession, its ownership remains with the manufacturer until it is sold. If you are unable to sell the product as agreed, the manufacturer is able to recover the product from your possession and try a more successful trader.
Supplier finance is when a wholesaler, importer or other big trading company supplies you with products or services and gives you some time before you have to pay. This type of financing is the most common in many business-to-business transactions in African markets. Usually ownership and control responsibility for the products become yours. You usually have to pay your supplier when your credit period is due, whether or not you have succeeded in selling the products. Supplier financing tends to cover products with same properties as vendor finance.
Customer prepay finance is when your customer pays before you release your goods and services. This is the type of financing most commonly available to the owner-manager of a bukateria, butchers, small hotel and other open market community enterprises. Interestingly, it is the becoming the most preferred payment mechanism deployed by multinational trading enterprises in African markets. Many Africans do not have credit records or bank accounts. They do not own bank cards or credit cards. They do not own passports or identity cards. They may not even have discernable addresses, as there are no centralised street maps or postal codes. Yet, multinationals know there is plenty-plenty money to be made in your community. Solution: they sell you prepayment cards which you then use, instead of credit or debit cards, to pay for their products.
So how applicable are these funding sources in helping your business enterprise?
You may get vendor finance if your business is resale of capital goods. You should find supplier financing is readily accessible if you deal in fast moving consumer goods. You are already getting customer prepay finance if your business trades on "money for hand" basis. Of course, combinations of all three business financing sources is possible.
When you have ambitions to grow your product-based business, you should consider offering vendor or supplier finance to your business customers. You may be pleased to find significant increases in business volume compensate for delays in getting your cash up-front. You will need to communicate more with your buyers and help develop their business e.g by identifying emerging markets for your products. Do not offer vendor or supplier finance to home consumers.
If your business provides services to a wide range of end-user customers, you should consider introducing a prepayment accounts system tiered to price discounts. For example, you run a restaurant, hotel or mechanic workshop and want to expand your business but don't have the money. Your customers always tell you they really appreciate your food, room service, or car tuning. They only wish you were closer to where they live or work. Bless them. Tell them you want to open a shop near them and are offering discounts on any of your shops to those who pay in advance. Offer 5pc to 10pc discounts for 13weeks or 6months prepayments, respectively. Always issue a computer-printed prepayment voucher that proclaims this offer, and issue a receipt. Use the money to build and furnish your shop. This is the way multinationals fund their GSM "foreign" investments: it is the community paying. Hardly any new money is brought into the community. You can do it too, and you don't need a bank. You only need your regular customers.
Finally, you are advised to invest in information systems to keep track of your growing business, your suppliers, your products and services, and your customers more efficiently. Giving your suppliers and customers computer-generated records improves the profile of your business. Using information systems also helps you to monitor your income and expenditure, profits and losses, and cash flows, so that you know in advance when your enterprise will need money. You really need to plan your business better.
Remi-Niyi Alaran writes on enterprise and social capital.
ALARAN DEVELOPMENT ENTERPRISES. Enterprising Communities.
Copyright (c) ALARAN DEVELOPMENT ENTERPRISES, 2004
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