Small Business Loans: Five ways to get your start-up ready for financing

Most start-up businesses are created by entrepreneurs who use their funds and family members’ funds to start the business and run it at the initial stage. However when it’s time to grow the business and move up to the next level, finding that required level of funding is usually difficult. The options are to continue lending from family members or access business loans from financial or non-institutions (take a bank loan; take a microfinance loan/alternative investment funding or find some venture capital or private equity funding).

To get ready for none family funding, there are a number of steps that a start-up must take. In this article, we outline a simple guide to getting your small business ready for funding. While this is not an exhaustive guide to getting funds for your small business, it provides some perspective to the discourse.


1)   Develop a Business Plan

Your business plan is the first thing you need to prepare when you are positioning your business for financing or even when about to start your business. It is the primary tool that potential investors or lenders would use to rate your business. The business plan should provide a holistic view of your business, especially the market you intend to play in and the risks and plans you have for overcoming them. Your business plan should contain a clear budget that has no ambiguities and clearly shows how you will manage funds to achieve your business objectives.

2)   Determine what type of business loan your start-up business require

Start-ups need to understand what type of funding they need–debt or equity.

Equity requires selling off a part of your business in exchange for funds from a Venture Capital fund or even family member so that you can use the funds for the business. The partner takes equity in your company. Nigerians typically do not like to give up control of their business so the equity mode is underrepresented in Nigeria. Also venture capitalists who are the only type of funders for start-ups usually tend to lend large amounts which the typical Nigerian firm doesn’t need at the beginning.

What we usually find is that most start-ups want business loans which can come from either microfinance firms, banks, finance houses or unstructured lenders. Debt is good for operating your company but equity is better for growth, acquiring machinery and business premises. Equity funding can come from many sources, the first and easiest source being yourself; if you do not believe in the idea enough to put in your own funds, no one will get behind you. To get equity, you may also consider friends and family and where those prove insufficient, you should look for some more structured equity funding through angel investors and venture capital firms.

3)   Open a Business Account

It’s imperative for any formal and serious business to have a corporate account, which is used to manage the operations of that start-up. This allows the start-up to quickly develop a credit history that can subsequently be used by banks to assess its cash flow. This is a critical determining factor for banks considering structured business relationships with any institution.

4)   Separate your personal income from your company income

One of the main destroyers of business value is the inability of the SME’s owner/promoter to distinguish between his own personal funds and the business funds. This is why a lot of business management books clearly state that business owners should pay themselves salaries rather than utilize business funds at their whim for personal expenses. When reviewing a company’s cash flow for possible consideration for business loans, banks quickly pick up on this sort of behaviour to identify business owners who will be credit risks.

5)   Acquire an encyclopedic knowledge of your industry

There is nothing worse for a loan officer in a financial institution that has a business loan seeking entrepreneur sitting in front of him/her than when that person shows a lack of a strong grasp of the basic intricacies of that industry. The entrepreneur should understand both the operational aspects of the business as well as the demand and supply aspects of the industry. He/She must also have a clear grasp of what the loan is for and how he/she will be able to repay it. Never approach a bank for a loan without the ability to convince the bank official that you understand your business (especially the financial aspect) and your industry.