This book is a gold mine of wisdom and a must read for the young graduates and entrepreneurs entering their practical life in the "real world" after their basic or advanced education. It provides guidelines in business matters, loans and banking, providing banker's perspective to the entrepreneurs on borrowing matters. The deep recession of 2007, has been stubbornly overshadowing the developed world. Many Western countries are struggling with much larger debts and very high unemployment rates. Much larger percentage of graduates and school leavers are without proper jobs in their formative years. Many of them would need to look at their own liking of becoming entrepreneurs and self employed. This book is an easy to understand guide, a ready reference about banking, financing and entrepreneurship. It will help remove myths and fears of entrepreneurs about banking relationships and borrowing. The book also explains the intricacies and precautions to be observed in any businesses in simple language. The book provides deep insight and sound advice on day-to-day topics like credit score, limited liability entities, insurances, buying real estate, income tax, raising capital and estate planning. This book is a product of the author's over ten decades of collective experience in international trade and finance. It provides almost all that young graduates and MBAs students need to know while undertaking any new venture.
Wisdom for Business Success
Practical Guide for Entrepreneurs and Fresh GraduatesBy Barkat Charania Nuruddin AbjaniAuthorHouse
Copyright © 2012 Dr Barkat Charania & Nuruddin Abjani
All right reserved.ISBN: 978-1-4634-4744-1Contents
Dedication...................................................................................iDisclaimers..................................................................................iiiAbout Authors................................................................................ivPreface......................................................................................viiAcknowledgements.............................................................................xChapter 1 Be a Successful Entrepreneur.......................................................1Chapter 2 Informal Sources of Capital for Entrepreneurs......................................6Chapter 3 Conventional Sources of Capital....................................................9Chapter 4 Banks Have Important Role In Society...............................................18Chapter 5 Banking Is Important Business Relationship.........................................22Chapter 6 Applying for Bank Facility.........................................................31Chapter 7 Types of Banking Facilities........................................................35Chapter 8 Finding the Right Lender for Your Needs............................................45Chapter 9 Know Your Bank.....................................................................49Chapter 10 Formal Meeting with Your Banker...................................................54Chapter 11 Small Business Administration (SBA)...............................................57Chapter 12 Various SBA Loan Programs.........................................................61Chapter 13 Writing a Loan Proposal...........................................................68Chapter 14 Successfully Qualifying for a Loan................................................74Chapter 15 Valuation of Your Collateral......................................................80Chapter 16 Evaluation of Your Loan by Underwriters...........................................83Chapter 17 How to Proceed After Getting Loan Commitment......................................92Chapter 18 Your Creditworthiness as Seen by Your Lender......................................103Chapter 19 Long Term Relationship with Lender................................................108Chapter 20 Lender is Your Friend; Just Fulfill Obligations...................................117Chapter 21 Banking and Lending in the USA....................................................124Chapter 22 Understanding Cash Flow and Managing it...........................................129Chapter 23 Break-even Analysis...............................................................135Chapter 24 Your Credit Score: Raise it using Prudence........................................141Chapter 25 Limited-Liability Entities: Advance Planning Pays in Long Run.....................152Chapter 26 Franchising Wisdom: Buying Experience at a Price..................................158Chapter 27 Wisdom: Advantages of Legal Entities..............................................163Chapter 28 Bankruptcy Protection: Wisdom of Last resort......................................165Chapter 29 Property Transaction Wisdom: The Ultimate Goal....................................169Chapter 30 Will and Estate Planning Wisdom: a Must for All...................................174Chapter 31 Adequate Insurance Wisdom: You Can't Over-insure..................................179Chapter 32 Savings And Retirement Wisdom.....................................................184Chapter 33 "Wisdoms" Learned From Global Recession...........................................191Glossary and Definitions of Financial Terms..................................................203Index........................................................................................207
Chapter One
Be a Successful Entrepreneur
There are many ingredients required to become a successful entrepreneur. In business and entrepreneurship, there are many qualities, traits, attributes and virtues needed from the person aspiring to become an entrepreneur. Almost all of us have most of such qualifications. Some may need to be developed by working with some experienced colleague or a mentor. With investment of time these can all be developed. We shall define and elaborate them here.
Ambition: This is by far the most important ingredient in becoming a successful entrepreneur. Without ambition to grow and be successful, many important and much-needed jobs will remain undone or less attended, leading to very slow progress or even failure. Hence, every beginner has to try and understand his own ambition and follow his or her sixth sense in starting or pursuing any career. Today's world is very competitive, and although ambition is an inborn thing, it would be safe to say that the competitive spirit, which is promoted in today's schools and colleges, sharpens the inborn ambition to a major extent.
Personal interest: You need to be interested from the bottom of your heart and spirit to be able to succeed in any line of work. One sure way to lose and fail is to start a job and lose interest in the middle. Hence, all entrepreneurs are well advised to have a long enough exposure in the line that they are wanting to pursue as career. Such exposure will make you understand how much interest you actually have in the career, which, on first look, seems to be enticing. You may have to work in that business or career for some time to understand its requirements. You then need to analyze from the experience obtained to understand the limitations and difficulties in that career and then conclude whether that business or career is suitable for you or not.
Commitment: To find success in any work, only getting involved is not enough. One has to be committed to the work. As an entrepreneur, you need to learn this early in life, so that you are trained to be absolutely devoted to the kind of work that you chose to pursue for your entire life. A new business venture is like raising a child. It is a challenge to learn many new things and be dedicated to do all that it takes. Again, if the commitment and interest is any less than the best, it may lead to mediocrity and/or failure. Many businesses do not do well only because the entrepreneur is not fully committed right from the beginning.
Experience: This is also one of the most important ingredients to bring success to any work. Experience is an invaluable asset that anyone can invest in one's work. We strongly advise every entrepreneur to work and gain experience in the line of work that you think will be interesting and gather a lot of experience before starting your own business. The time spent in obtaining such experience will reveal to you the limitations and rewards attached to it. It will expose you to many possible problematical situations and teach you how to resolve or rectify them. The firsthand experience will allow you to measure your own interest in that line of business and will also be a test if the interest is sustained after a while. Firsthand experience and an understanding of the business will also reveal whether or not this is the kind of work that you like. It will also be clear to you whether it will satisfy your future expectations and obligations to yourselves, your family, and community.
Planning: This attribute can never be over emphasized. Well-experienced gurus say that "if you fail to plan, you have planned to fail." Generally speaking, planning is best learned hands-on, while on the job and continuously thinking about it. Good planning is based on the experience that you obtain from working in a business and learning about its challenges, and limitations. It may also be learnt from someone who already possesses such experience. Sound planning is a key to the success of any business. Any friends, financiers, or bankers who agree to support your enterprise will want to see that the planning of the venture is well-thought-of.
Inquisitiveness: While doing anything, if one is fully committed, there will be many questions that will arise on different aspects of that work. How to make it simpler and easier? How to make it cheaper? How to spend less time, yet produce a better result? How to make it more attractive? If you are committed to the work, you need to eat, breathe, drink, and sleep that work. If your questions get answered by some experienced colleague, your work will be made much easier and success will be nearer.
Close supervision and management: This skill is a byproduct of the experience that you obtain and acquire while mustering experience in the field of work that you wish to pursue. Close supervision by the owner with appropriate experience is essential for any business to succeed. Statistically, one of the most important reasons for failure of any business is cited to be poor management. Therefore, the overall management of the business has to be vigilant. There are many aspects of the work in any business, and all those aspects need to be looked into regularly by the management to ensure the best performance. These include buying and selling the inventory, insuring the business adequately, hiring and firing of employees as needed, training, and interpersonal relationships, to name a few.
Investment: Apart from the investment of experience, which is abstract, the entrepreneur needs to have certain amount of tangible investment capital available to start any business. Surely the banks and financing institutions are there to assist the entrepreneurs, but no bank will extend all the funds needed for almost any business. All lenders would like to see a healthy debt-to-equity ratio before agreeing to loan that business. Not only is the investment the lifeline of any business, but also it has to be adequate and available when needed. Non-availability of finances and not arranging for it in good time is statistically the second most important cause of failure of a business. That's why, sufficient financing must be arranged well in time. Proper planning ensures that entrepreneurs avoid common mistakes, like securing a type of financing that may not fulfill the needs of that business, miscalculating the amount required as working capital, or underestimating the cost of borrowing money. We shall define these terms and explain them in detail, as they relate to what the lender might expect to see as an investment from the entrepreneur.
Luck: This may sound unscientific, but at the end of the day, luck plays at least some role in any and every work and situation. Business, be it any, is always a slight risk. By and large to a major extent, all the other ingredients are under the control of the entrepreneur. Nevertheless this luck factor is the sequel of unforeseen circumstances and situations beyond your own control. Nevertheless, this should not deter you, the entrepreneur to start a new business. Good wishes, along with support and prayers from the relatives, friends, and well-wishers, will surely boost the morals of the entrepreneur. The fact is that you must put in the utmost, optimum effort in the work that you have chosen as a career, or business, and leave it to destiny to have success in the venture.
Chapter Two
Informal Sources of Capital for Entrepreneurs
Entrepreneurs: If you are a person with an idea to start a new business or implement a new way of servicing a particular industry, you may be termed an entrepreneur. You may have thought of a new formula or a new invention and may have the right idea or vision to accomplish a particular goal. Now, to put your idea into practice, you need tangible capital, which you may not have. Hence, you would need to "raise funds" to try and make your dream come true.
You may have a long list of possible informal sources of raising funds to fulfill your dream and goal. However, when it is a question of parting with money, even the best of your friends and nearest of family will have many questions. The fear of losing the money makes the fund-raising a difficult task for the entrepreneur. You need to start thinking as to what is the easiest source from where you can get the capital. Let us look at the list of all the possible sources of financing one by one to realize your dream idea.
Own money: Try and identify some valuable assets that you possess and liquidate it to raise the capital that you need for your dream project. It may be your car, home, jewelry, or other precious family treasures. However, this is not an easy decision. As mentioned earlier, any business carries certain risks, and one has to be convinced of one's likely success to be able to then risk all that one possesses into materializing one's dreams.
Borrow against your home or insurance policy: This is another easy way to obtain some capital. If this is enough, you may not need to look elsewhere. However, when this is not enough, or after employing such capital, you may have reached a stage where you need some more. That is the situation when you need some more funds to be raised through a loan, which we shall discuss in this book in detail.
Borrow on your own strength: In today's age, credit cards may come in handy, if your need is such that it can be satisfied by your limits on those cards. Although this may be an easy and quick fix to your need, you must understand that it may be very expensive, since the interest rates on credit-card debts are usually the highest. Consequently, you will need to replace this capital with a cheaper and more traditional source sometime soon.
Borrow from friends and family: This may also be one of the easier ways to finance one's goal of having a business, though it may not be the quickest. The entrepreneur will have to go great lengths to make the would-be financier understand that the money that he or she is about to part with will be used very carefully without much risk. The financier would also like to see that the money would be most likely returned in whole and with some reward. However, many times such personal arrangements may be interest-free or at a low interest rate, which can be beneficial while getting started.
Chapter Three
Conventional Sources of Capital
Financing your dream business: Generally speaking, no matter how much financial resources you may have, your business is bound to need financing from some usual avenues at some point. Hence raising necessary capital is one of the most basic activities in any business. This requires at least some preliminary understanding of certain concepts, without the experience of which, the process of borrowing may look and sound very complex to an entrepreneur. In a large deal, the borrowing process may even wear out the acumen of any experienced businessman. Asking for money is a difficult and daunting task in itself. On the other hand, if you do enough homework to prepare for this process, it will become relatively smooth and easy.
Once you have exhausted personal sources of financing or your need of capital is larger, you need to start doing some homework to apply for conventional or formal sources of capital. In this chapter we shall look at different factors that needs to be kept in mind, since they effect the whole process that you may need to undertake for borrowing from formal sources.
Age, size, and type of your business: The process of financing differs for different situations, where borrowing is needed. The approach to financing and also its preparation will differ depending upon the size of capital that you need. You will also look at different sources depending upon the requirement and size of loan. If the requirement is for a small start-up business, usually the source to approach is different than if it is for a large or well-established business needing a large loan. A business that is a few years old and is already on its own feet may need additional capital to expand. While expanding, the business may require a larger cash flow, it may require new equipment, or the business may need to start an entirely new location to take over the competition. The sources of capital for such a need will be different from that of a start-up business.
How established is your business?: An ongoing business, which is on its feet, growing and profitable, may also need capital to grow larger and acquire some upstream or downstream business lines connected with the original business. On the other hand, your business operations may have become larger, and its present shape and functioning does not allow you to capture all the potential profitability and opportunity. Therefore, you may need to expand its base with increased space, staff, and facilities. All these activities need additional capital. This is yet a different situation, where the capital providers may have specific strengths; for this reason, your choice of lending organization may be narrower and different.
Why borrow at all? At times you may wonder why borrowing is preferable over accepting an equity financing. There is a very simple mathematical explanation for this. Supposing you have two sources; one is ready to inject equity and another to raise a loan of same amount. Also suppose you wish to provide equal return to both sources, that is equity to be paid equal to the interest on loan. Now remember that the payment of dividend on equity is after the payment of tax. Hence, your business has to have made that much additional profit (equivalent to the tax paid on profits) to be able to provide an equity return (dividend) equal to the interest on loan. This may be large drag on the profits of the business.
Interest on borrowed money is an expense to the business and, hence, a tax write-off, which results in the business paying that much less tax. In other words, you can survive with lesser profit if you have borrowed from a lender than if you have accepted equity participation. This is why it is better to borrow, if your debt-to-equity ratio is healthy enough and is acceptable for the lender to provide a loan.
Aside from the above reason, when you accept equity in business, you are accepting a partner in the business, which may not always be beneficial because of many reasons. However, if you borrow instead, your only obligation is to repay the amount and not share your business secrets or be accountable to any partner.
DEBT FINANCING
When looking for money, you must consider your company's debt-to-equity ratio. It is the relation between dollars you've borrowed and dollars you've invested in your business. The more capital the owners have invested in their business, the easier it is to attract financing. If your firm has a high ratio of equity to debt, you should probably seek debt financing (e.g., borrowing by way of a loan). This may take one of many forms depending upon what needs to be accomplished and what will suit both the borrower and the lending institution, like a bank.
Traditional sources: One of the most traditional and conventional ways to fulfill your financial need is through a lending institution, of which banks are at the forefront. Traditionally, banks have always been the primary source because not only do you get financing from them, but also you may use them on a daily basis for many of your transactional business needs. This book discusses mostly about such borrowing from traditional sources like banks or other similar lending institution. They will be discussed in detail in the following chapters.
Banks as traditional lenders: There are many formal sources of capital. Your decision to approach a particular lender will depend upon the business itself, its age, and its stage of progression. However, the most traditional of these sources, which comes to mind first, is the street bank. Banks may provide a conventional loan or an SBA-guaranteed loan, which will be explained in detail separately.
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Excerpted from Wisdom for Business Successby Barkat Charania Nuruddin Abjani Copyright © 2012 by Dr Barkat Charania & Nuruddin Abjani. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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