Small businesses face the challenge of responding, among many, to two important financial decisions: the first decision concerns the investment process; and the second, the financing process.
The investment process is carried out as a result of the prior evaluation, carried out by the small entrepreneur, who is motivated by any of the following situations:
- Enter new markets.
- Introduce new products to the market.
- Improve or expand its production capacity.
- Increase your sales to credit.
- Expand the level of inventories.
After identifying the reason for the investment
the small entrepreneur should assess the timing of the investment by assessing the socio-economic environment. The evaluation aims to analyze the current moment, and with a lot of common sense, decide if the conditions are conducive to be able to carry out the investment.
It would be useful to evaluate, inter alia:
Fluctuations in the exchange rate, the level of cost of loans, the purchasing power of our potential buyers, in the volume of sales expected, the term in which it is planned to recover the amount of the investment, the capacity of our competitors, among others.
DETERMINATION OF THE INVESTMENT
Likewise, the amount of the investment must be quantified in the following three areas: Tangible assets, working capital, and intangible assets.
Tangible or fixed assets are constituted by;
investment in machinery, equipment, land, buildings, and facilities.
As far as working capital investment is concerned
it refers to the logistics cycle, production, sales and collections; in other words, the process that begins with the purchase of materials and inputs, continues with production, continues with sales, and ends with the collection of our invoices or sales tickets. That is, it is necessary to estimate the investment in the items of cash, inventories, and accounts receivable, which allow the entire cycle to be carried out without setbacks.
Also, the estimation of the investment in intangible assets has to be made
That is constituted by the disbursement of the fees paid to carry out technical -economic studies, payment of interest and pre-operational expenses, patents, royalties among others.
As can be seen, the estimation of the amount of the investment means that we have analyzed and estimated the volume of the potential market, the location and size of the project, and the technology to be used.
After having determined the total amount of the investment
we will have to confront whether this amount can be paid in full from our own resources.
THE FINANCING DECISION
As in most cases this situation is not feasible, we are forced to resort to sources of financing. It is in this way, how the small entrepreneur will face the process of how to finance himself, raising among others the following questions:
- Can it be considered as a subject of credit?
- How much is my borrowing capacity?
- How will you present the information and documents requested by the Banks?
- Can I turn to funding sources that promote Small Business?
In the current circumstances, the necessary conditions to be considered a subject of credit are very demanding, since the commercial bank evaluates the borrower, because in the event that the client does not comply with paying, the Bank will proceed to execute the guarantee, and in this way the balance of what is owed can be repaired. It is advisable that the small entrepreneur establishes a credit history by managing their financial resources, through a savings book and / or a current account, in this way, the Bank will have the idea of the monthly volume that the small business handles.
DETERMINATION OF BORROWING CAPACITY
On the other hand, the capacity to which you can borrow will be established by the capacity that our project will have, but also allow not only to solve the needs of the project, but also to have a surplus, which can be used to pay the loan and interest with ease and without hardship.
With regard to the possibility of borrowing, the following considerations must be taken into account:
- First of all, the loan must be requested in the same currency in which our income is reported.
- Secondly,we should not underestimate the exchange rate risk, although in recent months, the exchange rate has remained stable, it is also true that there have been periods in which devaluation has long outpaced inflation.
- And, thirdly,consider the availability of funds from banks. Well, there have been situations in which it was more convenient to lend in dollars, but the Banks did not have cash to make the disbursement of the loan.
In relation to the submission of documentation, the submission of the following documentation is generally required:
- Letter requesting credit.
2. Copy of a photocopy of the electoral book, unified registry, and municipal license.
3. In the case of own premises, original title of ownership, original copy of the registration form, and copy of the self-appraisal are required; in case of rented premises, a copy of the rental agreement and last payment receipt are required.
4. For legal persons, the deed of incorporation and a copy of the company’s registration file are required.
5. In case of using the industrial garment as a guarantee; original invoices are required, and possess theft and fire insurance