By Carol Cheesman, Principal of Cheesmans Accountants
Funding. Sooner or later, every business needs an injection of cash. Whether it’s for launching a start-up, investing in new technology, or financing an expansion, sourcing fresh funds can be crucial. That funding may take a variety of forms—loan; investment; grant—but regardless of the route taken, funder confidence is vital.
So, how do you promote confidence? I advise business to be like a Boy Scout; be prepared.
Here is my advice for business preparing to seek finance:
First, you need a Business Plan.
Do it yourself – don’t delegate. It can involve some tough soul searching, but when you’ve finished, your business’s strengths, weaknesses and trigger points will be even clearer. Tough questions from potential funders become much easier when you know what you’re talking about.
Your Business Plan should include:
• What the company does
• Who owns the company and what are their expectations
• Who runs the company and what is their experience and loyalty
• Who the company’s main competitors are
• The historical financial results of the company (if any)
• The projected financial results of the company
• How are you going to achieve those projected results
• What could go wrong and how you plan to minimise these risks
Who will these potential funders be?
Identifying the most appropriate form of finance for your business is another important part of the funding process.
Here are a few suggestions:
(1) If you need equipment, consider a Medium-term Loan or Hire Purchase
• A Hire Purchase agreement involves making monthly payments in order to lease an item of equipment and the equipment will only be “owned” once the full amount of the contract is paid
(2) If you aim to fund a growing business (to buy stock, etc.) then consider an Overdraft or even Invoice Discounting or Factoring
• Invoice Discounting is generally aimed at larger businesses, allowing the business to use its unpaid sales invoices as collateral (i.e. the business will be able receive funds for its sales invoices before they have been paid)
• Factoring is where a business sells its “future sales” invoices to a third party at a discount and the third party/factor collects the full amount from the customer paying over a proportion of the invoice to the business minus costs and commission
(3) If you plan to develop a building project, then Project Finance that can be drawn down at key stages of the project should be considered
(4) If you are undercapitalised then perhaps consider a Medium-term Investor (e.g. loan notes)
Whoever your potential funders are, they will need to understand why you need the money. They will want to know how the funds will be spent, what contribution you and the company are making, and (if appropriate) how the money will be paid back and over what period. The key issues are:
• What do you need the money for?
• How will it benefit the company?
• What difference will it make?
• Can you afford the interest payments each month?
• How are you going to meet these?
• Can you afford the capital repayments?
• How are you going to meet these?
• What security is available?
• What other sources of finance are available?
• Have you looked at these and what was the result?
The cornerstone of any funding process is Accounts: they are the core of your Business Plan and the heart of your goals and ambitions. A potential funder will always want to see an established business’s track record. For start-ups, detailed Projections are necessary.
• Accounts are two things: a factual document and a sales document.
• Accounts must be prepared in accordance with the relevant legislation
• Accounts should be clear and factual, explaining in detail how the company has operated so far (if it has) and its plans for the future.
• If Accounts show a poor result or you haven’t yet started trading, explain this and how it will change in the future.
There may not be a finance merit badge at the end of this process, but you should have the funds your business needs provided by a happy funder. And all you need to make that happen is to be prepared.