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Columnists

What to avoid when looking for capital

Many entrepreneurs miss out on securing healthy capital for fear of losing control of the business. FILE PHOTO | NMG 

Sleepless nights visit every entrepreneur each time there is an order beyond his or her financial ability or when the performance of the business is threatened by the need to scale up.

At such times money is needed like oxygen. The desperate hunt for capital can be the end of the business if not carefully handled.

Take for instance an entrepreneur who has a problem of delayed payment by customers which consequently results in delayed payment of salaries. To salvage the crisis he or she gets a bank loan at 14.5 percent per year yet the business profit margin is 15 percent. The business ends up making nothing from the sales since the capital sought was just too expensive.

The entrepreneur would have instead gone for a loan from family or friends which is cheaper and often interest free.

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Entrepreneurs get overexcited with the revenue projections and opt for loans with short repayment plans thinking that the repayment will be a walk in the park. They later wish that they had taken the one with a longer repayment plan. Many a time this leads to auctioning.

The untimely search for capital has curtailed the growth of many businesses. The miscalculation on when to scale up prompts the search for capital when it is unnecessary.

The money ends up being used for things it had not been envisioned for that are mainly personal needs whose end is being auctioned. Entrepreneurs should only scale when pushed by the market.

Many entrepreneurs miss out on securing healthy capital for fear of losing control of the business especially when seeking private capital. The business holds an intimate part of the entrepreneur’s life.

It’s his or her baby and the thought of it being taken by someone else is unsettling. Entrepreneurs should understand that expanding ownership of the business is critical for its sustainability.

The hunger to fulfil orders and scaling up often engulfs the entrepreneurs in the desperate search for capital.

They then focus on the money giving a blind eye to the terms and conditions of the capital which may not be at the best interest of the business.

The terms and conditions are overlooked with the common phrase; Money is what matters. A series of regrets follow when they finally catch up with them.

The writer is an economist.

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