PM0012 – Project Finance and Budgeting / Assignment Set- 1 Q.1. Write short notes on the following:a. Risks Related to Contractors: There are several risks related to Contractors. If the project has unsuitable construction program planning, it might be the result of inadequate program scheduling, innovative design or contractor’s lack of information in planning construction programs. The variations in construction programs also lead to the same results. You can reduce the negative influence of the two risks by working out an informative program in the design phase, and by examining the constructability of innovative design.

It is advisable to appoint a Contractor or a Project Manager to avoid chaos in the management of construction team and programs. The lack of sufficient professionals and managers, and sufficient amount of skilled labour, results delay in the construction phase.

The Contractor can conduct frequent meetings with the team and the Project Manager so that he will be able to avoid difficulty in construction and the changes in design. He should also arrange a suitable time for the work so that the workers will not be distracted because of sound insulation and construction. They should work out perfect safety measures to improve the awareness regarding safety. For example, if the contractor provides proper guidance to the employees to tackle the changing weather, it will reduce the health problems of the employees.

Q. 1. b. Key Risks Vs. project life cycle.Ans: Although the entire purpose of a project is to produce a product, the specific goals of the team will vary substantially throughout the project. In the beginning, there usually is considerable latitude in the requirements for the product. It may not be clear whether the project is feasible or even if it is likely to be profitable. At that time, it is critical to bring an answer to these questions and of little to no value to start developing the product in earnest. Toward the end of the project, the product itself is usually complete, and issues of quality, delivery, and completeness then take centre stage. At different points in time, tasks are undertaken in new ways and work products will have new content.

It helps to organize iterations into phases. Each phase ends with a milestone aimed at providing oversight by raising and answering a set of questions that are typically critical to stakeholders:

Inception. Do we agree on project scope and objectives and whether or not the project should proceed? Elaboration. Do we agree on the executable architecture to be used for developing the application, and do we

find that the value delivered so far and the remaining risk is acceptable? Construction. Do we find that we have an application that is sufficiently close to being released that we should

switch the primary focus of the team to tuning, polishing, and ensuring successful deployment? Transition. Is the application ready to release?

If the answer is Yes to those questions at the phase review, the project continues. If the answer is No, the phase is delayed (usually by adding an extra iteration) until a satisfactory answer is received, or the stakeholders may determine that the project should be cancelled.

One of the objectives of the project lifecycle is to focus on two key stakeholder drivers: risk reduction and value creation. As the diagram below shows, the four phases here described focus the team on risk reduction related to the questions to be answered at the end of the phase, while tracking value creation.

Diagram 1 - Risk reduction (red curve) and value creation (green curve) during the project lifecycle

Risk is a manifestation of the likelihood of unexpected things happening to the project, and risk stands in the way of value creation. Risk is directly proportional to uncertainty in estimates, and stakeholders typically want to know sooner rather than later what value the project can deliver in the stipulated time. In many cases, you reduce risk when you create value by implementing and testing the most critical capabilities. However, there are situations where risk reduction and immediate value creation are at odds with each other, requiring careful balancing of these competing priorities to maximize stakeholder value.

Q.2. Explain in brief all the factors which should be considered while budgetingAns: How much will this project cost? Are we on budget? How much have we spent on material resources versus labor resources? You can accurately answer such questions by learning more about how Project handles cost data. Then you are ready to set up your project budget in five easy steps.

Understand Project Costs:

Work (work: For tasks, the total labor required to complete a task. For assignments, the amount of work to which a resource is assigned. For resources, the total amount of work to which a resource is assigned for all tasks. Work is different from task duration.) on a project is done by work resources (work resource: People and equipment resources

that perform work to accomplish a task. Work resources consume time [hours or days] to accomplish tasks.) and often requires specific material resources (material resource: The supplies or other consumable items that are used to complete tasks in a project.) that are costed against the project. There are three basic cost types in Project:

Resource rates: The cost of a work resource based on the amount of time that the resource spends working on the project. Rate-based material costs are the costs of consumable material resources, such as building materials or supplies, to which you have assigned standard rates.

Fixed costs: One total cost that represents the price for doing a task or project, regardless of the number of resources assigned, the number of hours worked, or the amount of materials used.

Per-use costs: The single amount that it costs each time you use a resource.You can use Project to create cost estimates and to track actual costs (actual cost: The cost that has actually been incurred to date for a task, resource, or assignment. For example, if the only resource assigned to a task gets paid $20 per hour and has worked for two hours, the actual cost to date for the task is $40.) - and even to compare actual costs against your original baseline budget (baseline cost: The original project, resource, and assignment cost as shown in the baseline plan. The baseline cost is a snapshot of the cost at the time when the baseline plan was saved.). Generally, to do even initial cost estimates, you need to enter cost information and assign resources (resources: The people, equipment, and material that are used to complete tasks in a project.) to tasks in the project. There are two distinct ways to track (tracking: Viewing and updating of the actual progress of tasks so that you can see progress across time, evaluate slippage of tasks, compare scheduled or baseline data to actual data, and check the completion percentage of tasks and your project.) costs:

Have Project automatically calculate costs for you. This requires you to use resource rate-based costs or per-use costs (per-use cost: A set fee for the use of a resource that can be in place of, or in addition to, a variable. For work resources, a per-use cost accrues each time that the resource is used. For material resources, a per-use cost is accrued only once.), assign resources to tasks, and track progress on those tasks.

Use fixed costs (fixed cost: A set cost for a task that remains constant regardless of the task duration or the work performed by a resource.). This requires you to enter fixed costs per task.

Often, you will use a combination of these cost-tracking strategies in your project. In most cases, the cost is determined by the pay rates for resources or the cost of materials, so you'll want to use resource rates to track most costs. However, if a vendor gives you a fixed cost to do a task, then you will want to assign a fixed cost to that task.

Lastly, you can track costs at several levels. For instance, if you are interested only in rough estimates, you can enter costs at the summary task (summary task: A task that is made up of subtasks and summarizes those subtasks. Use outlining to create summary tasks. Project automatically determines summary task information [such as duration and cost] by using information from the subtasks.) level. If you want a more accurate picture, you can enter and track costs at the subtask (subtask: A task that is part of a summary task. The subtask information is consolidated into the summary task. You can designate subtasks by using the Project outlining feature.) level. Each summary task will still show the cumulative costs for its subtasks.

Use the following table to help you decide how to enter and track costs.

If a task's cost is based on:And you want approximate costs, do this: Or you want detailed costs, do this:

Hours worked or amount of material used

1. Specify rates for all work resources and material resources.

1. Specify rates for all resources/materials.

2. Assign resources to tasks. 2. Assign resources to tasks.3. Track hours worked or percent complete.

3. Track hours worked.

A set fee for a task 1. Specify fees for tasks. 1. Specify fees for tasks.2. Assign resources to tasks only if you have tracking needs beyond cost tracking.

2. Assign resources to tasks.

3. Track hours worked or percent complete.

A set fee for use of a resource 1. Specify per-use costs for resources.

1. Specify per-use costs for resources.

2. Assign resources to summary tasks or subtasks.

2. Assign resources to tasks.

3. Track hours worked or percent complete.

3. Track hours worked or percent complete.

Step 1: Set pay rates:For the tasks for which you want the cost to be based on the hours that the resources work on them, Project bases the cost on the standard rate (standard rate: A base rate that you assign to resources [such as people, equipment, or material] and that Project uses to calculate resource cost totals.) that is applied to each assigned resource. For each resource in your project or resource pool (resource pool: A set of resources that is available for assignment to project

tasks. A resource pool can be used exclusively by one project or can be shared by several projects.), you need to specify a standard pay rate. You can also assign a separate overtime rate (overtime: The amount of work on an assignment that is scheduled beyond the regular working hours of an assigned resource and charged at the overtime rate. Overtime work indicates the amount of the assignment's work that is specified as overtime work.) in case you want to account for overtime hours on a task.

When projecting costs, Project simply multiplies the standard rate of the assigned resource by how many hours (or minutes, days, weeks, months, or years) that the resource has been assigned to a task. For example, if a programmer costs $100 per hour and is assigned to work 10 hours on one task, the cost would be $1,000. As you enter information about the actual progress on a task (the hours worked on it or the percentage that has been completed, for example), Project multiplies the amount of time spent working on the task by the assigned resource's standard rate to determine the actual costs of the task to date. If you use an overtime rate as well, Project applies the overtime rate as needed to properly calculate the total cost of the task.

Material resources work similarly. You enter the names of material resources and specify a standard rate that can be applied to the number of material units (units: The quantity of a resource assigned to a task. The maximum units is the maximum number of units available for the resource. For example, if you have three plumbers, the maximum units is 300 percent or three plumbers working full-time.) that you assign to a task. For example, computer software may have a standard rate of $100 per license. If you assign 10 licenses (units) to a task, the cost is calculated as $1,000.

Step 2: Enter per-use costs:Per-use costs act as a lump sum cost for the resource, so that every time you assign the resource to a task, this lump sum or per-use cost is applied. You can combine per-use costs and standard rates. For example, if you have a large setup cost for a piece of equipment and you also pay for it by the hour afterward, you can enter both the per-use cost and the standard rate for the piece of equipment. The per-use cost value is added to the total cost for the resource on any given task, along with the hourly rate.

Step 3: Enter fixed costs:Fixed costs allow you to assign costs at the task level, summary task level, or even the project level. You don't have to assign resources to see the cost calculations for fixed costs. This is a great option if you don't plan to assign resources in the Project plan, but you do want to estimate the project's costs.

Step 4: Set task types:Task types (task type: A characterization of a task based on which aspect of the task is fixed and which aspects are variable. There are three task types: Fixed Units, Fixed Work, and Fixed Duration. The default task type in Project is Fixed Units.) are a critical element of how Project schedules tasks. However, before we discuss task types, here is some starter information on the general scheduling rules in Project as they apply to costs. For rate-based costs, Project bases its calculations on the amount of work (work: For tasks, the total labor required to complete a task. For assignments, the amount of work to which a resource is assigned. For resources, the total amount of work to which a resource is assigned for all tasks. Work is different from task duration.) done on tasks. That is, the cost is determined by multiplying the hours of work done by the hourly rate for the assigned resources. Thus, work is an important factor in cost calculations.

To calculate the hours of work, Project uses this three-variable formula: Work = Duration × Units. This formula is called the scheduling formula and is sometimes represented in different ways, such as: Duration = Work ÷ Units. Remember, work is the number of hours of effort needed to complete a task; duration is the actual amount of time that will pass before the task is completed; and units are the percentage of a resource that is allocated to work on the task. For example, 50 percent of a one-person resource means that half of the resource's working time is being spent on the task.

By default, work is effort-driven (effort-driven scheduling: The default method of scheduling in Project; the duration of a task shortens or lengthens as resources are added or removed from a task, while the amount of effort necessary to complete a task remains unchanged.), and units default to 100 percent. The scheduling effect is that if you enter a task and a duration, and then you assign resources, Project determines the number of person-hours required to complete the task by multiplying the duration that you specified by the units assigned to the task. For example, if you assign one person (a work resource) to a task that has a 10-day duration, Project does this calculation: Work = 10 days (duration) × 100% (units) = 10 days (or 80 hours of work). On the other hand, if you initially assign two people to that 10-day task, Project calculates the duration as follows: Work = 10 days (duration) × 200% (2 people assigned full-time) = 20 days (or 160 hours of work).

Each task's task type determines which element of the scheduling formula changes when another element is changed.

Step 5: Assign resources:The last step to creating your project budget is to assign resources to the project and to tasks.

Next Step:At this point, you have entered all of the cost information necessary to create your Project budget. Now, you're ready to review the cost totals, optimize the budget, and distribute it.

Q.3. List and describe in brief the 10 golden rules for managing risk in a project.

Ans: Rule 1: Make Risk Management Part of Your ProjectThe first rule is essential to the success of project risk management. If you don't truly embed risk management in your project, you cannot reap the full benefits of this approach. You can encounter a number of faulty approaches in companies. Some projects use no approach whatsoever to risk management. They are either ignorant, running their first project or they are somehow confident that no risks will occur in their project (which of course will happen). Some people blindly trust the project manager, especially if he (usually it is a man) looks like a battered army veteran who has been in the trenches for the last two decades. Professional companies make risk management part of their day to day operations and include it in project meetings and the training of staff.Rule 2: Identify Risks Early in Your ProjectThe first step in project risk management is to identify the risks that are present in your project. This requires an open mind set that focuses on future scenarios that may occur. Two main sources exist to identify risks, people and paper. People are your team members that each bring along their personal experiences and expertise. Other people to talk to are experts outside your project that have a track record with the type of project or work you are facing. They can reveal some booby traps you will encounter or some golden opportunities that may not have crossed your mind. Interviews and team sessions (risk brainstorming) are the common methods to discover the risks people know. Paper is a different story. Projects tend to generate a significant number of (electronic) documents that contain project risks. They may not always have that name, but someone who reads carefully (between the lines) will find them. The project plan, business case and resource planning are good starters. Other categories are old project plans, your company Intranet and specialised websites.

Are you able to identify all project risks before they occur? Probably not. However if you combine a number of different identification methods, you are likely to find the large majority. If you deal with them properly, you have enough time left for the unexpected risks that take place.Rule 3: Communicate About RisksFailed projects show that project managers in such projects were frequently unaware of the big hammer that was about to hit them. The frightening finding was that frequently someone of the project organisation actually did see that hammer, but didn't inform the project manager of its existence. If you don't want this to happen in your project, you better pay attention to risk communication.

A good approach is to consistently include risk communication in the tasks you carry out. If you have a team meeting, make project risks part of the default agenda (and not the final item on the list!). This shows risks are important to the project manager and gives team members a "natural moment" to discuss them and report new ones.

Another important line of communication is that of the project manager and project sponsor or principal. Focus your communication efforts on the big risks here and make sure you don't surprise the boss or the customer! Also take care that the sponsor makes decisions on the top risks, because usually some of them exceed the mandate of the project manager.Rule 4: Consider Both Threats and OpportunitiesProject risks have a negative connotation: they are the "bad guys" that can harm your project. However modern risk approaches also focus on positive risks, the project opportunities. These are the uncertain events that beneficial to your project and organisation. These "good guys" make your project faster, better and more profitable.

Unfortunately, lots of project teams struggle to cross the finish line, being overloaded with work that needs to be done quickly. This creates project dynamics where only negative risks matter (if the team considers any risks at all). Make sure you create some time to deal with the opportunities in your project, even if it is only half an hour. Chances are that you see a couple of opportunities with a high pay-off that don't require a big investment in time or resources.Rule 5: Clarify Ownership IssuesSome project managers think they are done once they have created a list with risks. However this is only a starting point. The next step is to make clear who is responsible for what risk! Someone has to feel the heat if a risk is not taken care of properly. The trick is simple: assign a risk owner for each risk that you have found. The risk owner is the person in your team that has the responsibility to optimise this risk for the project. The effects are really positive. At first people usually feel uncomfortable that they are actually responsible for certain risks, but as time passes they will act and carry out tasks to decrease threats and enhance opportunities.

Ownership also exists on another level. If a project threat occurs, someone has to pay the bill. This sounds logical, but it is an issue you have to address before a risk occurs. Especially if different business units, departments and suppliers are involved in your project, it becomes important who bears the consequences and has to empty his wallet. An important side effect of clarifying the ownership of risk effects, is that line managers start to pay attention to a project, especially when a lot of money is at stake. The ownership issue is equally important with project opportunities. Fights over (unexpected) revenues can become a long-term pastime of management.Rule 6: Prioritise RisksA project manager once told me "I treat all risks equally." This makes project life really simple. However, it doesn't deliver the best results possible. Some risks have a higher impact than others. Therefore, you better spend your time on the risks that can cause the biggest losses and gains. Check if you have any showstoppers in your project that could derail your project. If so, these are your number 1 priority. The other risks can be prioritised on gut feeling or, more objectively, on a set of criteria. The criteria most project teams use is to consider the effects of a risk and the likelihood that it will occur. Whatever prioritisation measure you use, use it consistently and focus on the big risks.Rule 7: Analyse Risks

Understanding the nature of a risk is a precondition for a good response. Therefore take some time to have a closer look at individual risks and don't jump to conclusions without knowing what a risk is about.

Risk analysis occurs at different levels. If you want to understand a risk at an individual level it is most fruitful to think about the effects that it has and the causes that can make it happen. Looking at the effects, you can describe what effects take place immediately after a risk occurs and what effects happen as a result of the primary effects or because time elapses. A more detailed analysis may show the order of magnitude effect in a certain effect category like costs, lead time or product quality. Another angle to look at risks, is to focus on the events that precede a risk occurrence, the risk causes. List the different causes and the circumstances that decrease or increase the likelihood.

Another level of risk analysis is investigate the entire project. Each project manager needs to answer the usual questions about the total budget needed or the date the project will finish. If you take risks into account, you can do a simulation to show your project sponsor how likely it is that you finish on a given date or within a certain time frame. A similar exercise can be done for project costs.

The information you gather in a risk analysis will provide valuable insights in your project and the necessary input to find effective responses to optimise the risks.Rule 8: Plan and Implement Risk ResponsesImplementing a risk response is the activity that actually adds value to your project. You prevent a threat occurring or minimise negative effects. Execution is key here. The other rules have helped you to map, prioritise and understand risks. This will help you to make a sound risk response plan that focuses on the big wins.

If you deal with threats you basically have three options, risk avoidance, risk minimisation and risk acceptance. Avoiding risks means you organise your project in such a way that you don't encounter a risk anymore. This could mean changing supplier or adopting a different technology or, if you deal with a fatal risk, terminating a project. Spending more money on a doomed project is a bad investment.

The biggest category of response is the one to minimise risks. You can try to prevent a risk occurring by influencing the causes or decreasing the negative effects that could result. If you have carried out rule 7 properly (risk analysis) you will have plenty of opportunities to influence it. A final response is to accept a risk. This is a good choice if the effects on the project are minimal or the possibilities to influence it prove to be very difficult, time consuming or relatively expensive. Just make sure that it is a conscious choice to accept a certain risk.

Responses for risk opportunities are the reverse of the ones for threats. They will focus on seeking risks, maximising them or ignoring them (if opportunities prove to be too small).Rule 9: Register Project RisksThis rule is about bookkeeping (however don't stop reading). Maintaining a risk log enables you to view progress and make sure that you won't forget a risk or two. It is also a perfect communication tool that informs your team members and stakeholders what is going on (rule 3).

A good risk log contains risks descriptions, clarifies ownership issues (rule 5) and enables you to carry our some basic analyses with regard to causes and effects (rule 7). Most project managers aren't really fond of administrative tasks, but doing your bookkeeping with regards to risks pays off, especially if the number of risks is large. Some project managers don't want to record risks, because they feel this makes it easier to blame them in case things go wrong. However the reverse is true. If you record project risks and the effective responses you have implemented, you create a track record that no one can deny. Even if a risk happens that derails the project. Doing projects is taking risks.Rule 10: Track Risks and Associated TasksThe risk register you have created as a result of rule 9, will help you to track risks and their associated tasks. Tracking tasks is a day-to-day job for each project manager. Integrating risk tasks into that daily routine is the easiest solution. Risk tasks may be carried out to identify or analyse risks or to generate, select and implement responses.

Tracking risks differs from tracking tasks. It focuses on the current situation of risks. Which risks are more likely to happen? Has the relative importance of risks changed? Answering these questions will help to pay attention to the risks that matter most for your project value.

The 10 golden risk rules above give you guidelines on how to implement risk management successfully in your project. However, keep in mind that you can always improve. Therefore rule number 11 would be to use the Japanese Kaizen approach: measure the effects of your risk management efforts and continuously implement improvements to make it even better.

Q.4. Write a short note on the following measures for reducing project budget risks:a. Risk detection and analysis:Ans: Project risk analysis is the detection and quantification of the probabilities and collisions of events that may harm the project. The risk analysis process identifies risk in advance, and the risk management process established methods of avoiding these risks thus reducing the impacts that may occur.

Risk detection is an initial step in the risk management course. As these potential hazards occur causing problems in its kinetics there needs to be a plan for identification. To identify these concealed threats at their origin before their occurrences whether they are quantifiable or non-quantifiable is the foremost groundwork; this groundwork is the risk

identification course of action. Risk detection starts with tracing risk sources as a root cause, and its source branches including internal to external and primary to secondary.

Some of the most common risk detection methods in project risk management are as follows;1. Objective Oriented Risk Detection2. Scenario Oriented Risk Detection3. Taxonomy Oriented Risk Detection4. Regular Risk Inspection

Q. 4. b. Risk allocation:Ans: Contractual risk transfer is a form of risk management which has been employed for many years in the construction industry. It involves the allocation or distribution of the risks inherent to a construction project between or among contracting parties. If done effectively, risk transfer does not grossly or inequitably allocate all risk to one party, but instead places risk upon parties according to their ability to control and insure against risk. Additionally, effective risk management typically generates positive results on a project by improving project performance, increasing cost effectiveness and creating a good working relationship between contracting parties.

Q.4. c. Risk management:Ans: Project risk management is the procedure of determining or evaluating risk and developing strategies to manage it, and is concerned with identifying risk and putting in place policies to eliminate or reduce these perils. In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, when deficient knowledge is applied to a situation, a knowledge risk materializes. Relationship risk appears when ineffective collaboration occurs. Process-engagement risk may be an issue when ineffective operational procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity.

Risk management also faces difficulties in allocating resources. This is the idea of opportunity cost. Resources spent on risk management could have been spent on more profitable activities. Again, ideal risk management minimizes spending and minimizes the negative effects of risks.

Q.4. d. Risk retention:Ans: Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

Q.5. Explain & compare Finance & Budget concept.Ans: Finance: Finance is the science of funds management. The general areas of finance are business finance, personal finance (private finance), and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted.

One facet of finance is through individuals and business organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment and charges interest on the loans.

Budget: A Budget is a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.

While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years. The basic process of planning a budget involves listing the business's fixed and variable costs on a monthly basis and then deciding on an allocation of funds to reflect the business's goals. Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for instance, projects your business's cash inflows and outflows over a certain period of time. It's main use is to predict your business's ability to take in more cash than it pays out.

Q.6. What is credit risk appraisal? Explain the 5C’s of credit analysis.Ans: Credit risk appraisal is the process by which the lender assesses the credit worthiness of the borrower. The assessment of the various risks that can impact on the repayment of loan is credit appraisal. In short, you are determining "Will I get my money back?" Depending on the purpose of loan and the quantum, the appraisal process may be simple or elaborate. For small personal loans, credit scoring based on income, life style and existing liabilities may suffice. But for project financing, the process comprises technical, commercial, marketing, financial, managerial appraisals as also implementation schedule and ability.

The "Five C's" of Credit Analysis are:1. Capacity: to repay is the most critical of the five factors. The prospective lender will want to know exactly how

you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships -- personal or commercial -- is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

2. Capital: is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

3. Collateral: or guarantees are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can't repay the loan. A guarantee, on the other hand, is just that -- someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

4. Conditions: focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

5. Character: is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.