How To Raise Fund During Crisis
By John Paul, founder For Smallstarter Business Africa
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Many businesses are struggling to raise funds these days, and it’s getting more and more difficult.
The economic uncertainty triggered by the COVID-19 crisis has caused most investors, banks and funding sources to hold on to their money.
Most funding sources are in “wait and watch” mode.
As a result, to raise funding in the current climate you have to get creative.
An interesting insight
This week, I had an interesting conversation with one of my senior clients.
He was in the middle of expanding his business when the coronavirus crisis broke out.
Before the crisis hit, he had a loan application in the bank for the Nigerian Naira equivalent of $100,000.
But since the economic uncertainty hit, his account officer and bank manager have been unresponsive.
With the rising rate of defaults on existing loans, many banks are jittery about giving out new loans.
In the face of mounting frustration with funds to complete the expansion of his business, he devised a creative strategy to get around the money problem.
So, here’s what he did…
He developed an investment memorandum in an executive summary format.
Just about 2 pages long.
The memorandum presented the market opportunity his business is focused on, a snapshot of his financial performance over the last 3 years, and explained the rationale for the business expansion.
Then he added something interesting.
He proposed a 15% interest rate on the loan, and compared it to the existing investment options currently available on the market.
Using a simple table, he compared his proposed return against bank deposit interest, treasury bills, the stock market, and real estate.
And then he got on the phone and started reaching out to key contacts and emailed a copy of the investment memo to them.
Of the 22 people he reached out to, 7 of them have committed to contributing loan capital.
The terms of the loan
To give him and the business enough breathing space to pay back the loan, the terms are as follows:
The loan is structured so he only pays the interest portion of the loan for the next 3 years.
That comes to $15,000 in interest payments annually.
The interest will be paid on a quarterly basis – that’s $3,750 every 3 months.
And at the end of the 3rd year, he will pay back the full principal ($100,000).
The upsides of this approach
During times of crisis, most traditional forms of investing and saving money tend to be unattractive.
Usually, during an economic crisis, the central bank lowers interest rates as a way of discouraging savings and influencing people to spend more so the economy can recover.
As a result, many people who have cash are looking for savings and investment options that provide better returns than traditional options.
By offering a more attractive alternative, you can position your business as a preferable option to bank savings, treasury bills, stocks, and even real estate.
Also, proposing a loan deal to people who know you (and trust you) allows you to get favourable terms.
The downsides of this approach
Pitching to your friends and colleagues is a good strategy, but you need to keep in mind that the collateral you’re offering for their investment is your reputation and the trust and relationship they have in you.
Therefore, make sure your business proposition is rock solid and low risk.
And even if the risk is high, you have to make sure they are sufficiently aware of the risks before they give you money.
However, if you are able to deliver on your promises, you will boost your reputation and the word will travel around.
And when that happens, you may never have to worry about raising funds again from investors or banks.
I will be sharing a sample investment memo inside the private area
Next week, I will be sharing a sample of the type of investment memo my client sent out so you can get creative.
If you belong to our Insiders community, please look out for it.
I want us to discuss and analyze the memo, and explore creative options you can use to apply this to your situation.
In the end, it’s your reputation that will really influence your contacts to take up your offer.
I hope this email puts ideas in your head.
I look forward to your comments and questions when I post the sample memo inside the private members' area.
And if you’re not yet a member of our Insiders community, you can follow the link below to learn more and join:
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