Looking for finance?
A common question in my work is “where can I find the finance to help grow my business”, or in some cases to survive in the short-term.
There is a common misconception that banks are not lending to businesses at the moment, the reality is that they are but the criteria are much tougher than for many years.
Risk management is the key factor to remember here, whilst there are government schemes coming in or in place that are aimed at freeing up of bank credit for lending, the banks need to be convinced that they are not unduly risking scarce money by lending to your business.
So, whilst there no guarantee of success, you will need to show that you are a viable, well managed business with a strong business case.
Here are some of the ingredients of a business case or plan.
Whatever the layout of the plan (many lenders have their own preferred templates) some important elements to emphasise:
The market viability of your product and services. You will need to show the reader that the market(s) that you are in, or intend to enter, has sufficient current or potential demand for your products or services.
Yours and your businesses market capabilities. For instance, that you can do what you say you can do; that you as the leader have the character and skills & knowledge to maintain or develop your viable business; that others around you, for instance your team if you have one, or however you are supported in delivering quality products / services to market, have the necessary competencies; that you have the skills to market your business effectively and that you have, or have access to, effective selling skills.
Your business is managed effectively. For instance:
- Effective use of physical resources i.e. buildings, machinery where applicable;
- Effective cost control and financial management.
- Effective supply chain management.
- Effective credit control.
- Effective performance management: meaning that you set targets for your key performance indicators and that you have a process for regularly measuring and managing these so that you can take timely action to improve or correct as necessary.
- Effective management of people: meaning that you have processes in place to get the best out of your staff and that you use any external advisers: your accountant, Business Link adviser or other business specialists intelligently to help you improve your business.
That you need the money. This sounds a bit odd given the context here, but you will need to show how the money you are asking for will benefit your business.
If the funding is distress funding, your challenge will be to convince your reader that the money loaned to you will lead to future gains. The cruel fact is that businesses do fail in times of recession and with their aversion to risk the banks will need to be convinced that they are not being asked to prop up a business that is ultimately doomed to failure.
Some well crunched numbers. A significant part of your case will be past financial records & accounts (for an established business) in addition to detailed forecasts. Most lenders will want to see the final accounts for the last year (and the two or three previous years), management accounts for the year to date and financial forecasts at least the next year.
You would usually be expected to have a detailed written narrative explaining past performance and your forecasts, also the reason for and timing of the funding.
Apart from viability and growth potential, your forecast needs to reassure lenders that you are asking for the right amount of money at the right time and that you are in a position to repay the loan. A test often applied is that the business can repay the loan from business activity rather than needing to use the loan itself to make repayments - there is usually some short term flexibility on this though.
You are likely to be asked for security: possibly business assets on which you have positive equity, but you may be asked to make a personal guarantee to secure the loan against a personal asset such as a proportion of the equity on your house.
At this point in my articles I often suggest that you call us for help on the subject in hand, but in the case of looking for funding it is usually essential to seek help and advice. Your accountant is an obvious port of call as is also the Business Link. Our service is free and the advisers are experienced in advising businesses on to write and present business plans.
Next month we will continue with this theme looking at some government schemes to help you raise debt finance, and at other sources of business funding.
That's all for this month.
Business Link - the place to go for business support