Article by Ed Pearson, Debt Dr

There are so many questions from SME businesses that are looking for debt finance of some sort or another. Valuable time is wasted by SME stakeholders trying to source the right deal from the right people at the right price for the right reason. It can be a minefield which may not be as desperate as leading to a company downfall but lack of funds not available within a reasonable timeframe can spell the beginning of missed opportunities, months of struggle and eventually an insolvency disaster waiting to happen.

What is the finance for?

Be clear on what you want your finance for. If you are looking at:

* Working capital* Expansion – skills, diversification or perhaps acquisition* Development of ideas * For use in the actual product or service * Proving the market* Proving the product

Or something else in this vein then go for it.

If you are looking for funds to:

* Cover losses * Repay your debts * Paying your salary

Then generally speaking, forget it!

Have you seen Dragon’s Den on BBC2? What happens when the entrepreneur divulges the fact that the funding they are looking for is to go on wages? Yep, even if you’ve not seen the show you can probably guess. The entrepreneur walks away empty-handed. If you are just trying to repay debt then perhaps it’s time to talk to the professionals and get some sound advice.

Types of finance (UK)

Consider all the funding options available. Look around your local area, talk to the chambers of commerce, find out the local investment trusts. Ultimately, make sure you pitch to the right type of funder to suit your borrowing requirement.

As a rough guide, consider:

 Debt finance / Small firms loan guarantee (SMFLG) (£5k+) Friends and family (Up to £80k) Business angels (Typically £50k up to £500k) Specialist funds / sometimes wealthy business angels in a niche market (Up to £2M) Venture capital firms (£1.5M+)

Outside or in conjunction with the above you may also do well to consider asset finance companies (assuming you have assets in your business) and also invoice discounting / factoring (assuming you have a debtor book and robust contracts terms and conditions of business).

Some key issues

The funding companies that you approach will be looking at other issues surrounding your business. To be a little crude, they’ll want you to ‘show them the colour of your business underwear’. So what will they want to know?

- Financials – How do the numbers relate to your plan? – Are the numbers consistent? – Can you confidently recall the key numbers and understand how they relate to your business?

- The management team – The right blend of skills to see the goal through? – Concentrically focussed? – The right product with the wrong team is generally less attractive than the wrong product with the right team! – Ability to deliver in spite of setbacks

- Product / Service – Do you have a unique selling point (USP) that makes you stand out from the competition? – Have you protected your interests in the product or service?

- The marketplace – How big is your market? – Who’s your competition? Tip: Never say ‘we don’t have competition’. You may have a USP but there is always competition even if it’s an alternative solution to your offering. Make sure you come across as knowledgeable about how you fare against the competition. – How will you get access to your market?

Really understand these key issues. The funding companies are checking you out as much as the numbers relating to the deal.

Don’t ask for too little or too much

If you really understand your business to the level that a funding company would like then you would get the request for money correct the first time you ask. It’s embarrassing if you get the figures wrong.

Write out a cashflow forecast for your proposition.

Remember that the greatest gap between revenue and overhead costs may not be month 1 or 2, it may be 8 months down the line.

A typical cycle for raising finance may take 2 to 18 months. If you run out of cash in month 9 and you’re 5 months from the next injection of funding then you may not survive the year. The extra costs associated with filling a cashflow gap may also squeeze your margins to the point you operate at a loss.

Too much funding is equally embarrassing. You have to pay the funding company for that extra cash in the business and potentially at a later date request more funding if say you hit upon a needed expansion plan. What will the perception be of a company asking for funding who were wildly out on figures the last time around?

Summary

There are a number of options available in the UK for business funding.

Asking for the right amount of funding, for the right reason with the right lending source will save you time and costs. Make sure you do the work and demonstrate your ability to run and manage your business.

As a footnote, if you still cannot get funding and are faced with insolvency / personal debts and you would like some help and advice then do get professional help as early as possible.

Ed Pearson is a Debt Dr. He can be reached in confidence on 07970 659266 or e-mail on ep@debtDr.co.uk.

http://www.debtDr.co.uk ‘Prescribing a life without debt’

This article does not constitute regulated advice. Please remember that any action regarding financial advice should always be taken only after considering the specifics of your own situation.

To find out more about Ed try, http://www.advice4debt.co.uk/debtquiz.htm