UK Debt finance - financing business growth

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.
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.ecademy.com/account.php?id=41788

Where do you go for UK business funding?

Let me recall, tongue in cheek, the old joke about
the guy who asks the finance company 'how do I
stand for a loan?' To which the finance company
replies 'you don't, you kneel!'

Most business require extra funding at times
and some may even relate to the old joke above.
Broadly speaking there are two settings for
business that ask for funding. One where funding
is needed because business is expanding and requires
more resources, or secondly because things are going
badly and the business is running out of money.

Depending on what setting a business finds themselves
in will determine where's the most appropriate place to
source some finance.
If things are going well, business is expanding and orders
are strong then almost anyone will kindly offer you finance
to continue the growth of your business.
About 70% of businesses will go to their main bank for
extra funding and may well get it. The major disadvantage
is that the bank will usually require some form of security,
usually your own home. If things go wrong then it will mean
the loss of your home if you've secured funding against it.
If you are still feeling confident then you've just found a
source of funding. Perhaps the bank will lend against your
debtor book (yes, that's an asset in your business too).
They will still probably look for some form of Personal
Guarantee which usually involves a charge that will see
them securing the finance to your personal assets
(yes usually the home again) if things start to go wrong.
If cashflow is tight or non-existent then things are going
badly! If things are going badly and let's face it lots of
things can go wrong, where to go for your financing then?
Let me use an 'F' word - Factoring!

A company's largest asset, next to property, is usually
their debtor book. It is possible to outsource the
collection of monies on invoices to a factoring company
who will then forward you a percentage of your debtors
outstanding monies for a fee. Factoring used to be
considered a 'dirty' word but these days more and
more companies now outsource their credit control
to factoring companies, than at any other time.
This can be a very overt project called factoring
or a very confidential project called invoice discounting.
Your clients will know if you are factoring your debtor
book but will not have any idea if you are using invoice
discounting. Both methods will inject much needed
cashflow into your business.

Still need money but the banks and factoring
companies won't lend what now?
Typically there are three common sources for money:
friends, family, and the foolish!
If you can make a good case for your business then
there are foolish people out there who will lend to you.
Well OK, they are not so foolish as to just give you
money but they will take a risk if the proposition
seems profitable. If friends and family rally round
too then perhaps you can get the much needed funding.
If all the above fails then it's time to look around again.
Commercial lenders, grant funding, business angels and
venture capitalists are all possible ways to get funding.
Some will only lend a few thousand pounds whilst the
likes of commercial lenders may be able to fund into
millions of pounds. All have their strengths and drawbacks.
The bank needn't be the only place to consider when
asking for funding but do make sure that you have
calculated your figures.

If you are looking for funding to simply get out of a
difficult place with your business and you are not sure
about a bright future then do consider foregoing extra
funding in favour of a chat over a coffee with one of our
advisors who specialise in debt help and advice including
corporate recovery and turnaround. Maybe the answer
lies elsewhere and certainly there are many more
solutions to consider that don't involve any further
commitment to funding.

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.

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