Raising finance - it's not impossible by Paul Stephenson, MD, Results International on 10-Apr-2012

If you believe everything you read you’d think it was impossible to raise business finance at the moment - but that’s not quite true. Some things have changed since the recent financial turmoil but many things have not. Whether you are a small lifestyle business looking to sustain your current operation, a mid-sized player struggling to maintain margins in the face of soaring prices, or an ambitious business looking to accelerate growth, proactively managing your finances is vital. So how do you get it right?

Data

The first golden rule is all around data. Over the last two years we have seen many businesses struggling because they have not had accurate and timely data to help them make the best financial decisions - often leaving it to the last minute to take action. Raising finance when the business is in distress is frankly too late – you probably won’t get what you need, or if you do it will come at a high price.

In our experience you need to focus on the finances from two perspectives – good housekeeping and financing for growth. And you need a proper budgeting and forecasting regime to help your planning. Not the most thrilling prospect, but without an accurate view of the past and an informed view of the future your plans won’t stand up to much scrutiny.

Good housekeeping

Credit control – you might not have the benefit of a dedicated credit control department but this must be someone’s responsibility. Your sale is only completed when you get the cash in the bank so an organised approach to this is essential if you are to ensure your customers pay to the terms agreed. And on the subject of payment terms, if you can tighten yours up and also negotiate a longer term from your suppliers you might be surprised how much cash that can release.

Invoice financing: for some businesses where cash availability is a real problem, this can be a useful way to improve cashflow. There are various forms of this but typically the finance company will lend you a proportion of the value of your invoices at the time they are issued, but of course at a cost to you. Whilst your bank might offer this service don’t assume you have to use them as there are many other suppliers out there.

Asset financing: for instance contrary to popular belief there are still many asset finance providers who are happy to buy the equipment you need and lease it to you. Some will also buy your existing equipment from you and lease it back to you, providing another potential source of cash. Just make sure you understand the true cost of this sort of finance and do shop around as it is a competitive market.

Financing For Growth

It is possible to raise major finance for growth if you know how.

Bank Loans: whilst there is evidence to suggest that many firms are still struggling to get bank finance in the current climate, I do have some sympathy with the banks and other lenders who say they are happy to lend but the demand isn’t there or the quality of the proposals just isn’t good enough. The lesson here is you must present your case better than ever before – whatever the audience.

Family and friends: it’s not surprising that when entrepreneurs are looking for finance, family and friends are the first port of call. Arguably such investments are the easiest to negotiate. However, our experience shows it is crucial to tread carefully. Just because you are dealing with family, do not short circuit the proper procedures for raising finance. You must put formal agreements in place, so that all parties understand not just what the returns could be but also the risks.

Liberate your own working capital: some businesses may have too much working capital in the business. The important distinction is being able to identify where the cash is tied up. If stock is important to you then revisit your stock control procedures, are you carrying too much stock or is stock approaching obsolescence and quite simply needs to be shifted. As discussed above, ensure your credit collection is working effectively. Also, it may sound strange but some businesses just love to hoard money. Seriously consider how much cash you do need in the bank account verses the short term liabilities you need to cover. Being comfortable using the current/ working capital ratio would help and provide a good snap-shot guide. For example, it calculates the amount by which your current assets exceeds your current liabilities and allows you to consider 'for every £1 we owe in the next year how many £xx do we have to cover it'. It’s entirely down to you but we’d suggest that a ratio of 2:1 is sufficient and anything above this may indicate surplus cash tied up in the business that could be used to finance growth.

Equity: if you’ve started your own business it’s tempting to try to hold on to 100% of it, but sometimes taking in outside equity investment can not only provide the capital for growth but also bring new skills to the board. Experienced and successful individuals prepared to invest in your business (often known as business angels) can bridge the gap between investment from family and friends and institutional venture capital investment. These investments are sometimes a mixture of equity and debt so it’s crucial to be clear about the costs of servicing that debt component and the possible drain on the business cashflow at a time of growth.

Grants: public sector support is still available in selected regions and to the right sort of businesses.

Conclusion - which option is right?

As with most aspects of running a business, when it comes to finance, your starting point must be your business objectives. Get very clear about what you need the money for, the risks and returns. Be able to make the case and demonstrate a track record and you will find that there are more finance options than the headline writers would have you believe.

Paul Stephenson is Managing Director at Results International, business coaching and training specialists. He is a finance and people specialist working with major brands and small business owners. For more information: www.resultsinternational.com.

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