By Christopher Maule, CEO & founder, UK Bond Network
The Prime Minister David Cameron has described entrepreneurs and small businesses as ‘the lifeblood of our economy’. Vince Cable, the Business Secretary has stated his belief that SMEs are ‘the household names of tomorrow’. Despite these accolades, many still struggle to access the finance necessary to reach their full potential.
Some of the blame lies with traditional lenders. In the immediate wake of the financial crisis, banks were unwilling to lend to SMEs, which they perceived as high risk. What began as a trend however has now become the norm — so even SMEs with solid revenues and good strong projections struggle to gain the funding required.
However, where traditional lenders are failing, alternative financiers are stepping in. Non-bank lending, virtually unheard of prior to 2008, is now a recognised route to raise capital. The pending Small Business Bill should further support alternative lending to SMEs, and help UK business owners acquire the finance they desperately need.
Nevertheless — just because these forms of finance are more receptive to SMEs, it doesn’t mean they’re any less conscientious when it comes it comes to vetting companies for investment. On the contrary, the newness of the sector means that there’s an added pressure on those within it to build confidence in alternative finance and prove its reliability to investors and businesses alike.
This means that small businesses should be ready for a thorough vetting process, no matter what their desired route to finance — whether through a bank or an alternative lender. To prepare, business leaders need to be aware of the number and variety of factors that will influence a potential investors’ decision:
1. Demonstrate financial robustness
Investors need to be confident that they’re going to get their investment back, and clarity in the company’s financial transactions and historic financial performance is key to building this trust. Providing a thorough analysis of year on year revenue, profit growth, and the factors that have caused these is crucial, as is a realistic assessment of whether they are sustainable. Sophisticated investors will also be keeping a close eye out for warning signs, such as complex financial structures, which can conceal poor performance. Businesses that are owned by a single holding company, where it’s easier to understand inter-company transactions and how funds are being used, are often preferred for this reason. Additionally, companies with lots of small loans or access to multiple forms of funding are complex to analyse and, at first glance, will appear to be in financial difficulty.
2. Give investors what they need
While audited data on customer numbers, sales, unique selling points, and key competitors is essential to demonstrate the strength of the company and its future prospects, so is addressing any negative points early on. Here, it’s vital to be honest and transparent. Succinctly detailing past business weaknesses, such as a history of bad debts or over-reliance on key suppliers for example, gives the opportunity to show awareness of potential flaws that the business has overcome. This is crucial and will give investors’ confidence that the management team is straight forward to deal with.
3. Be realistic
Any business plan presented should be realistic and sufficiently detailed. Projected growth is a calculation, not an optimistic estimate and budgets need to be accurate - a budget where every item is rounded to the nearest £500,000 suggests sloppiness and will set off alarm bells for any potential investor. Similarly, it is essential businesses provide up to date information. If the company in question has been trying to raise money for some time, it gives no confidence to see a presentation that is dated six months ago.
4. Show expertise and commitment
Potential investors want to see a proper management structure with demonstrable expertise in the business. Directors and managers must be focused on the business and they should not be paying themselves excessively — showing they value and prioritise the business over personal interests. Moreover, SMEs should consider bringing good quality external advisors or non-executive directors on board, as their presence will help build investor confidence in business decision making.
5. First impressions count
Last but certainly not least, a good website, a neat presentation and well-organised accounts can set you apart. Don’t underestimate the importance of the small things such as having a company e-mail address and professional biographies as these can make all the difference. Just like turning up to a job interview appropriately dressed, it won’t make you a more capable candidate, but will indicate the importance you place on the occasion and opportunity offered.