Module 8 • The fi nancial plan
2 Trade credit This is a widely used method of financing and is fairly easy to obtain. Suppliers normally require a credit clearance to determine your credit worthiness. Even big businesses like Pick ‘n Pay use this method of financing. It is said that nothing on Pick ‘n Pay’s floor has been paid for. Pick ‘n Pay takes on average 30 days to sell an article while they take 90 days to pay their suppliers for that article. They therefore have the added advantage of 60 days of interest on money that is due to the suppliers.
PAUSE FOR THOUGHT
Trade credit means a business will require less working capital.
This method helps the small entrepreneur to borrow less money for working capital purposes. Remember that money received from goods sold but not yet paid for, must be kept aside and not used to cover other expenses or to buy fixed assets. This is a sure way of creating cash-flow problems.
• Medium-term loans
These loans can either be obtained through commercial banks or development corporations. They are normally granted only for the purpose of purchasing machinery, equipment and such items that keep their value for a reasonable period and which can be taken back if the unexpected happens. Hire-purchase and leasing form part of medium-term financing.
• Long-term loans This is a very difficult form of financing since financial institutions are very reluctant to grant long-term loans for anything but land and buildings (Items that appreciate in value, partly because of inflation).
1.2.3 Financial assistance for small businesses
A wide variety of financial institutions provide banking facilities to small businesses. They offer different types of services. Examples are:
Banks Many banks have a small business section. They can be approached with your Business Plan when you are looking for funding. A detailed evaluation of your business plan will follow, with specific emphasis on your financial plan.
Typical questions the bank would expect you to answer: • How much money do you need and how much of this will come from your own resources? The more you contribute yourself the easier a bank will make up the difference.
• On what specifically are you going to spend the money? • How are you planning to repay the bank and do you have a Plan B if the business does not do as well as you expect?
• What “surety” can you provide? Surety is when someone else is prepared to repay the bank if you fail. Normally only a family member will be prepared to do that. You can also provide surety in the form of an asset to the value of the money you want to borrow from the bank.
Different forms of bank assistance Bank loan
A bank loan is a fixed amount you borrow and which you need to repay over a predetermined period of time. The bank will charge you interest on the money they lend you. The interest rate
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