05/40/2012

By Roger Browne, MD Futurology Limited

Many businesses assume that their bank is the only source of finance. This is unlikely to be true, and spending time thinking about why and indeed whether you need the money, and exploring all the funding options will almost certainly be time well spent. In this, part one of a two part series, we look at financing your company.

1. Not just one and not necessarily the first you try.

There are many different sources of finance, and the ideal is to get the right mix to suit your business. This could be a combination of, for instance, your own money, family money, an overdraft, a Bank loan and perhaps some risk finance from a third party to fund a new venture. Understanding the right mix for your business is an important first step.

Money is the life-blood of business - you get blood from a [blood] bank so why not money? Well that may be possible but the bank isn’t always the best option and it is rarely the only option. Even if your Bank has turned you down, another financier with a different appetite for, or attitude to risk, may welcome your proposal!

2. Think and get advice

The old Department of Trade and Industry described raising finance as an art form and not a science. Given this, and the fact that the future of your business could be at stake, means that it really is sensible to take time to think about what you plan, the attendant risks, and ALL your options. It is also well worth taking professional advice from for instance, your independent business advisor or your accountant.

3. What for?

Businesses need money for a number of things – critically to buy capital equipment, to market the businesses products or services or to develop new products. Or ‘simply’ to bridge the ‘gap’ that exists for most businesses between having to pay for component parts and wages, and receiving payment from customers and clients.

What the money is wanted for is key, since to a large degree the source must match with the use the money is to be put to. For instance Banks are not generally appropriate sources of risk finance, and Venture Capitalists may not be the best port of call for working capital!

4. Enough working capital?

As businesses grow more working capital is almost certainly needed - making sure that it is provided is important since without an injection of extra cash there is a danger that the business will ‘overtrade’ and run out of working capital. A business may be trading profitably but few businesses survive being unable to pay their debts, and particularly their wages, on time. Cashflow, or rather lack of it, still sinks more businesses than lack of profitability.

5. 'Managing'

Do you really need to spend the money? Are you really sweating your assets? Can you squeeze more out of your existing equipment, resources or people? Can you do ‘stuff’ for free? Is it possible to form some kind of joint venture with a cash rich business to jointly exploit a new market.

This is not intended to question whether what you plan makes sense but rather to question whether you can achieve the same end result at zero or much lower cost.

Thinking about what you will do if you cannot raise the funds you would like to raise, can be very helpful.

In next week's article we continue to look at gaining the right finance for your company.