What Kind Of Money?

When you set out to borrow money for your firm, it is important to know the kind of money you need from a bank or other lending institution. There are three kinds of money: short term, term money, and equity capital.

Keep in mind that the purpose for which the funds are to be used is an important factor in deciding the kind of money needed. But even so, deciding what kind of money to use is not always easy. It is sometimes complicated by the fact that you may be using some of the various kinds of money at the same time and for identical purposes.

Keep in mind that a very important distinction between the types of money is the source of repayment. Generally short-term loans are repaid from the liquidation of current assets which they have financed. Long-term loans are usually repaid from earnings.

Short-Term Bank Loans

You can use short-term bank loans for purposes such as financing accounts receivable for, say 30 to 60 days. Or you can use them for purposes that take longer to pay off - such as for building a seasonal inventory over a period of 5 to 6 months. Usually, lenders expect short-term loans to be repaid after their purposes have been served: for example, accounts receivable loans, when the outstanding accounts have been paid by the borrower's customers, and inventory loans, when the inventory has been converted into salable merchandise.

Banks grant such money either on your general credit reputation with an unsecured loan or on a secured loan.

The unsecured loan is the most frequently used form of bank credit for short term purposes. You do not have to put up collateral because the bank relies on your credit reputation.

The secured loan involves a pledge of some or all of your assets. The bank requires security as a protection for its depositors against the risks that are involved even in business situations where the chances of success are good.

Term Borrowing

Term borrowing provides money you plan to pay back over a fairly long time. Some people break it down into two forms: (1) intermediate - loans longer than 1 year but less than 5 years, and (2) long-term - loan for more than 5 years.

However, for your purpose of matching the kind of money to the needs of your company, think of term borrowing as a kind of money which you probably will pay back in periodic installments from earnings.

Equity Capital

Some people confuse term borrowing and equity (or investment) capital. Yet there is a big difference. You don't have to repay equity money. It is money you get by selling a part interest in your business.

You take people into your company who are willing to risk their money in it. They are interested in potential income rather than in an immediate return on their investment.

How Much Money?

The amount of money you need to borrow depends on the purpose for which you need funds. Figuring the amount of money required for business construction, conversion, or expansion - term loans or equity capital - is relatively easy. Equipment manufacturers, architects, and builders will readily supply you with cost estimates. On the other hand, the amount of working capital you need depends upon the type of business you're in. While rule-of-thumb ratios may be helpful as a starting point, a detailed projection of sources and uses of funds over some future period of time - usually for 12 months - is a better approach. In this way, the characteristics of the particular situation can be taken into account. Such a projection is developed through the combination of a predicted budget and a cash forecast.

The budget is based on recent operating experience plus your best judgment of performance during the coming period. The cash forecast is your estimates of cash receipts and disbursements during the budget period. Thus, the budget and the cash forecast together represent your plan for meeting your working capital requirements.

To plan your working capital requirements, it is important to know the "cash flow" which your business will generate. This involves simply a consideration of all elements of cash receipts and disbursements at the time they occur. These elements are listed in the profit-and-loss statement which has been adapted to show cash flow. They should be projected for each month.

What Kind of Collateral?

Sometimes, your signature is the only security the bank needs when making a loan. At other times, the bank requires additional assurance that the money will be repaid. The kind and amount of security depends on the bank and on the borrower's situation.

If the loan required cannot be justified by the borrower's financial statements alone, a pledge of security may bridge the gap. The types of security are: endorsers; co-makers and guarantors; assignment of leases; trust receipts and floor planning; chattel mortgages; real estate; accounts receivables; saving accounts; life insurance policies; and stocks and bonds. In a substantial number of States where the Uniform Commercial Code has been enacted, paperwork for recording loan transactions will be greatly simplified.

Endorsers, Co-makers, and Guarantors

Borrowers often get other people to sign a note in order to bolster their own credit. These endorsers are contingently liable for the note they sign. If the borrower fails to pay up, the bank expects the endorser to make the note good. Sometimes, the endorser may be asked to pledge assets or securities too.

A co-maker is one who creates an obligation jointly with the borrower. In such cases, bank can collect directly from either the maker or the co-maker.

A guarantor is one who guarantees the payment of a note by signing a guaranty commitment. Both private and government lenders often require guarantees from offices of corporations in order to assure continuity of effective management. Sometimes, a manufacturer will act as guarantor for customers.

Whether you manage a factory, wholesale outlet, retail store, Service store, or are a builder, you will need to sell. No matter
how good your product is, no matter what consumers think of this, you must sell to survive.

Direct selling approaches are through personal sales efforts, Advertising and, for most businesses, exhibit - including the
packaging and styling of the product - in kitchens, at the establishment, or both. Establishing a fantastic reputation with the
general public through anyhow and distinctive services is an indirect method of selling. While the latter shouldn't be neglected,
this short discussion will be restricted to direct selling methods.

To establish your business on a firm footing requires a Whole Lot Of aggressive personal selling. You might have established
competition to conquer. Or, if your thought is fresh with little if any competition, you have the additional problem of convincing
people of the value of the new idea. Private selling work is nearly always necessary to achieve this. If you are not a good
salesperson, seek an employee or asociate who is.

Another way to build sales is by marketing. This may be done Through papers, shopping papers, the yellow pages section of the
phone directory, along with other printed periodicals; radio and tv; handbills, and direct mail. The media you select, as well as
the message and kind of presentation, will depend upon the specific customers you would like to attain. Plan and prepare
advertising with care or it will be unsuccessful. Most media will have the ability to describe the characteristics of their
audience (readers, listeners, etc.). Since your initial planning described the characteristics of your potential customers, you
want to match these features with the media audience. If you are selling expensive jewelry, do not advertise in high school
papers. If you repair bicycles, you probably should.

Advertising can be quite expensive. It is wise to place a limit upon An amount to invest, then stay within that limit. To help you
in determining how much to spend, study the working ratios of similar companies. Media advertising salespeople will allow you to
plan and even prepare advertisements for you. Be sure to tell them your budget limits.

A third method of stimulating sales is effective displays both in Your place of business and out it. If you've had no prior
expertise in screen work, you are going to want to examine the subject or turn the job over to someone else. Observe screens of
other companies and read books, trade magazines, and the literature supplied by equipment makers. It could be wise to hire a
screen expert for your opening screen and special occasions, or you could get the services of one on a part time foundation. Much
is dependent on your type of business and what it requires.

The proper amount and types of selling effort to utilize vary from business to business and from owner to owner. Some companies
prosper with low-key sales efforts. Others, such as the used-car lots, thrive on aggressive, hoop-la promotions. In any event, the
significance of successful selling cannot be over-emphasized.

On the other hand, don't Eliminate sight of your major objective - to Make a profit. Anyone can produce a large sales volume
selling dollar bills for ninety cents. But that will not last long. So keep control of your costs, and price your merchandise
carefully.

Record Keeping. 1 essential element of business management is the keeping of adequate records. Study after study indicates that
many manager failures can result from inadequate records or the owner's failure to make use of what information was available to
him. Without records, the businessperson can't see in advance which way the business is going. Up-to-date records may forecast
impending disaster, forewarning you to take action to prevent it. While extra work is required to maintain an adequate set of
documents, you'll be more than paid for the effort and expense.

If You Aren't prepared to maintain adequate records - or have someone Keep them for you - you shouldn't attempt to operate a small
business. At a minimum, records are Required to substantiate:

1. Your returns under tax laws, such as income tax and social Safety legislation;

2. Your request for credit from equipment makers or a loan From a bank;

3. Your claims about the company, should you would like to sell it.

However, most important, you want them to run your business successfully And to raise your profits. With a decent. Yet easy,
accounting system you may answer such questions as:

How much business I doing? What are my costs? Which appear to be too large? What's my gross Profit margin? My net gain? How much
am I piling on my charge enterprise? What is the condition of my working capital? How much money do I have available? How much in
your bank? Just how much do I owe my Providers? What is my net worth? That is, what is the value of my ownership of The business?
What are the tendencies in my Receipts, expenses, gains, and net worth? Is my financial situation improving Or growing worse? How
can my assets compare with what I owe? What's the Percent of return on my investment? How many cents out of each dollar of
Earnings are net profit? Answer these and other questions by planning and studying balance sheets and profit-and-loss statements.
To do this, it is Important that you record information regarding trades as they occur. Keep This information in a comprehensive
and organized manner and you will be able to answer the above questions. You'll Also possess the answers to these other vital
questions About your company as: What products or services do my clients like best? Next best? Not at all? Can I take the
merchandise most frequently requested? Am I Qualified to render the professional services that they demand most? How a Lot of my
charge Clients are slow payers? Shall I change to cash only, or use a charge card Charge program?

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