How to Raise Finance
Start
Up Finance will be needed for…
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Premises
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Equipment
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Goodwill if purchasing an existing business
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Installation of utilities
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Legal and professional fees
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Stationery
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Advertising and publicity
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Insurance
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Stock for resale
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Wages of employees
Then as you expand, further finance may be necessary to
support any of the above that may increase before you make the sales and
get paid. Businesses that are profitable can go bust if they don’t have
the appropriate finance arrangements in place to deal with expenses that
need paying before their customers pay them.
You may have cash flow difficulties caused perhaps
caused by needing working capital for debtors and stock or seasonal
business variations.
You need to try to match the appropriate source of
finance for what you are trying to achieve. Generally, long term finance
for long-term investment and short-term finance for short-term working
capital requirements.
How To Get Your Bank To Say “Yes”
Banks are the major source of
finance for small business in the UK. When applying for finance from you
bank it helps if you follow these procedures…
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The management team background with details of
qualifications and experience.
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The type of business.
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Previous trading history.
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Details of the market in which you are going to
trade.
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Likely extent of the competition.
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How you will market your business.
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A cash flow forecast for at least the first 12
months that demonstrates you can meet the loan repayments and a
project profit and loss account and balance sheet.
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Your break-even point.
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A SWOT analysis of Strengths, Weaknesses,
Opportunities and Threats.
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Details of any expert advice you have sought.
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How much you want to borrow and over how long.
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Commitment from the borrower.
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What other sources of finance you will be
using.
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Security being offered.
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What savings, investments and other assets you
have.
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Produce a 2-page summary of the
plan.
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Ask for a 25% longer repayment than you need and 10-20% more money than you need.
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Send the plan to banks with an invitation to visit your premises.
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Prepare before meeting the bank
manager. Think of the questions that are likely to concern him and
have your answers prepared.
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Always negotiate the interest rate
and terms after the offer has been made, not before. There is
normally an arrangement fee of at least 1% for bank loans.
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Offer a charge on assets rather
than personal guarantees.
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Try to avoid personal guarantees but if you have to give them ensure they are limited to the amount
of the loan.
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Do not agree to too much security – only agree to
the bank’s maximum exposure to loss.
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Get the agreement in writing.
It helps to keep a good relationship with your bank and
you can do this by…
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Keeping to agreements made –
making payments on time, not going over your agreed overdraft limit,
etc.
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If you are going to go over the limit or default on
payment, warn them in advance.
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If there is bad news, let them
know and let them know what you are doing to do to remedy the
situation.
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Supply them with any information they require on time.
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Try to prepare the bank in advance for requests for additional finance.
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Borrow for the right reasons.
Overdrafts are
normally reviewed annually.
Bank Loans may be
secured or unsecured. Secured loans are just like a mortgage with
repossession of the secured property possible in the event of default.
The property could be your home. The loan may be used for a totally
different purpose to the property on which it is secured.
The security may be a second charge on the property
meaning that another lender has the first charge and the second lender
only has the rights to any sale proceeds after the lender with the first
charge. A lender with a second charge is therefore likely to charge a
higher interest rate as would a lender of an unsecured loan.
Mortgages are the
usual way of financing the purchase of commercial property with the loan
being secured against the property, giving the mortgage company the
right to repossess the property in the event of you defaulting on
mortgage repayments. They tend to be for 10 to 25 years in length.
Small Firms Loan Guarantee Scheme
Where you have insufficient security to satisfy the bank to qualify for a bank loan, the Government have a
scheme whereby they guarantee up to 85% of the loan up to £250,000 for
businesses trading for over two years and 70% of up to £100,000 for
other businesses. The lender makes the final decision. In return for the
guarantee, a fee is charged on top of the banks normal arrangement fees
and interest. Loans are available for most business purposes although
there are some exclusions.
Factoring
Factoring is offered by banks and finance houses. The factor buys the
debts off of you, paying you a high percentage such as 80% up front and
then the balance when the customer pays the debt in full. They of course
charge a fee for this. They are likely to charge 2-3% over base and a
service charge of between 0.5 – 3% of your turnover, making them a
potentially very expensive source of finance.
They can also provide other services such as…
Factoring your debts can be a good source of finance for
those businesses that really need the money to help them grow. Viewing
them as a finance source of last resort is probably the best approach to
take.
Invoice Discounting is
similar to factoring, but all that is supplied is the finance facility
against the invoices. There is no involvement with the sales ledger
administration and the customer does not know the invoices are being
discounted.
Hire Purchase & Leasing
With hire purchase you obtain the
goods or equipment and make repayments (normally monthly) under a hire
purchase agreement to cover the cost of the goods plus interest over a
period of time. You own the goods or equipment once all payments have
been made. The interest rate is often higher than for bank loans.
Leasing
There are two types, purchase leases which are in essence just
like hire purchase and operating leases. With operating leases you pay a
rent for the use of an item and sometimes at the end of the lease there
is an option to purchase the item or extend the lease with a reduced
rental. Every lease is different and you need to look carefully at it.
Leasing is available to higher risk cases that an unsecured loan may be
because of the collateral of the equipment.
Trade Credit
Trade credit when you buy from other suppliers is
generally an interest free form of finance unless the
supplier is prepared to offer a discount for payment up front. It
therefore makes sense to take advantage of it.
However, always bear in mind good supplier relationships
are important to the success of your business and paying them on time or
even in advance will contribute to this.
Equity Finance
This is not a loan but the person providing the
finance becomes a part owner in the business, who may
or may not be involved in the running of the business. It is important
to fully understand the terms of the arrangement with an equity partner.
It could be by giving shares in your Limited Company or by a partnership
arrangement.
Venture Capital
The British Venture Capital Association www.bvca.co.uk represents companies offering venture capital. Apart
from finance, the venture capital firm provides strategic supportto the
business, often with a seat on the board.
It is generally a higher risk type of investment where
the Venture Capitalist is probably looking for a 300-500% return on
their investment over a 4 to 5 year period. The amounts tend to be for
over £100,000. Most investments take the form of equity capital.
Business Angels
Business Angels are private individuals who invest on
their own or sometimes as part of a syndicate for larger amounts. They
rarely have a connection with the company before they invest but often
have experience of its industry or sector. They look to invest both
money and their business expertise.
Business angels usually invest between £10,000 and
£250,000 in an investment. Business angels invest across most industry
sectors and stages of business development, but especially in early and
expansion stage businesses. Most prefer to invest in companies within
100 miles of where they live or work.
The National Business Angels Network is a good starting
point to find a business angel. A list of their full members who can
help can be found at:
http://www.bbaa.org.uk/portal/index.php?option=com_contact&catid=19&Itemid=57
Grants
The Department of Trade & Industry www.dti.gov.uk is often the best source to find out about grants
that may be available to you. Grants are often available for…
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Assisted geographic areas.
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Exporting.
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Research and development activities.
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Training.
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Business start up support.
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