Gaining financing is difficult for an SME at the best of times and the current economic environment can make it feel nigh on impossible. Whatever the banks may say, it feels very tough at the moment if you’re at the sharp end seeking finance either to start a new business or develop your existing business. However there are some tips and ideas that can help SME’s access the right source of financing.
Firstly you need to develop a strong business case as to why you are seeking additional financing. This should help potential investors or lenders understand the vision or goals for your business and why you need financing to progress these aims. It should incorporate an executive summary, a company description, details of key personnel with an organisation chart, market research on the sector, competitors and how your product or services sits within its marketplace including a SWOT analysis (strengths, weakness, opportunities and threats), a marketing plan, historical financial information including key ration, financial projections for the next three to five years, cashflow forecast, an indication of the amount of funding needed, where this financing will go and how it will help the business to develop. Also you should include why and how the financing will be managed and how and when investors can expect get their money back. You should also outline any existing financing sources from banks and other investors as that can be evidence of your credibility and worthiness of investment.
Also bear in mind that the investors may not know your sector or business – if there are any trends such as seasonality which may add lumpiness to your earnings, make sure these are explained in detail. Banks and other investors like consistency – but failing that they like to understand any anomalies.
It may sound like a huge amount of data and information to collate – but if you haven’t done your homework, then it would be unreasonable to expect anyone to back you and take a risk on your business. Some people say it’s good to build about 20% headroom into your projections as the bank will automatically discount anything by at least that amount whilst others say you must be realistic in your projections, if not even erring on the conservative side. But the one thing that is absolutely sure is that you must be honest and truthful in your disclosure of your current financial position.
Also you need to know your audience. Research the background of those you will be approaching for funding. If you’re approaching a bank, know their exact criteria and whether they have a track record in lending to businesses in your sector/of your size. Find out what other businesses they have lent to, and why. If it’s a private equity company or business angel, then find out all you can about their expertise and background as well as track record. We’ve all seen people crumble in the Dragon’s Den once they realise they’ve been talking unknowingly to a Dragon with twenty years’ experience and a multi-million pound business in their exact sector.....so rehearse and practice your pitch beforehand as you’ll only get one shot to get it right and know who you are addressing.
Alongside traditional debt financing from banks, it’s worth thinking about other options such as early stage investment VCs and business angels. This can be a particularly good option where the project is such that conventional lenders may not be attracted to it, or when the business will be putting most of its cash into core activities or funding growth so may not have enough cash to repay loan interest. VCs and BAs tend to be paid their investment back through dividend payments as the business grows – and because of the increased risk tend to expect a higher return. There are many networks and associations that can introduce SME’s to such companies and this is where effective networking can really come into play. The British Venture Capital Association is at http://www.bvca.co.uk/home and The British Business Angels’ Website is at http://www.bbaa.org.uk/ for more information.
Finally, even though we see huge cuts at every level and the Government has announced its intention to abolish the RDAs, it’s still worth investigating possible help from Government grants. Business Link has helpful information about the types of grants available at http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073869074
So no one is saying that it’s easy. It’s very hard to find finance - but at least you can get yourself in the best possible position to do so. The key is to do your homework and know your own business as well as your audience inside out and to think laterally about potential funding sources. Even if you don’t succeed in gaining financing, the knowledge you gain in the process can help solidify your current business model and even potentially improve your relationship with your existing lender.
Deborah Done, the author of our Big Ideas, is founder and director of Nab Communications, a freelance public relations agency which provides sensible and value for money PR advice to regional and national businesses. www.nabcommunications.co.uk