Is your business in the fast lane?
In this the sixth article in the series – “Is your business in the fast lane?” – I concentrate on the importance of Access to Finance in helping your businesses reach the fast lane. Subsequent articles focus on other areas to ensure improvement, growth and sustainability of your business.
The rules for obtaining funding have radically changed since the global economic downturn and the start of the credit crunch. This is because traditional debt funding usually requires security and since the collapse of the property market it is becoming increasingly more difficult to raise funds in this way.
However, businesses need adequate funding and need to be able to secure different lines of funding. This is particularly critical given that the main reason for business failure is not the lack of profits but poor cash flow as a result of working capital shortfalls – see my last blog. Hence, the following options are available depending upon the different stages in a company’s evolution:
- Family and friends – the first £100k of funding is usually regarded as a family and friends’ round and demonstrates the entrepreneur’s commitment. The owner retains control but it is unlikely to take the company beyond its initial start up phase.
- Bank Debt – is an available option but usually with restrictions and it is unlikely to be a cheap alternative. You retain control of the business and it is perceived as being less complicated to obtain, however, banks have recently made this form of funding much more expensive.
- Debt Factoring & Invoice Discounting – these are methods of raising funds against an invoice as soon as it is raised rather than waiting for longer periods until the customer pays. It dramatically improves cash flow but it tends to be expensive and requires relatively stable customer invoicing.
- Trade Finance – is the provision of funds to enable goods to be purchased to satisfy a specific order and it is provided by the financier to bridge the gap between the purchase and the sale. It can fund between 80% and 100% of the cost of goods plus duty and VAT. However, it is becoming increasingly harder to obtain since the credit crunch.
- Enterprise Finance Guarantee Scheme (EFG) – this scheme was launched by the UK Government in January 2009 to help small businesses struggling with finances. Under the scheme, the government aims to provide viable businesses lacking collateral and in some cases the track record with the working capital investment they need. The EFG provides loans up to £1m for businesses with a turnover of up to £25m, which can also be used to convert overdrafts. However, EFG loans are only granted to viable businesses. The government secure 75% of the loan and the bank takes the risk on the 25% unsecured balance, which makes these loans difficult to obtain.
- Angel Investment – is backing from an individual investor who provides capital of between £100,000 and £3m in return for a share in the company. The Angels aims tend to be closely aligned to the entrepreneur, and as such, provides resource and knowledge often lacking within the company. However, there can be a perceived lack of control and equity – it depends on personal relationships. There are at least four types of businesses well suited for the category of funding:
- Start ups / early stage companies who have developed their prototype or IPR and need funding to take their product to market or finalise development.
- Established businesses that need investment for additional working capital to fund growth or launch a new product line, in order to expand.
- Companies requiring bridging finance, often because they have had to defer an Initial Public Offering, such as AIM, due to the current economic climate.
- Companies requiring credit to replace credit lines withdrawn by the banks as a result of the economic climate.
- Venture Capital – many entrepreneurs are put of from this type of funding because they consider it would be more demanding than borrowing from the banks and that sharing control is to be avoided. However, if seeking funds in excess of £3m to £5m then Venture Capital is a serious option.
In summary, the simple fact is traditional funding lines from banks, trade finance and Government are extremely hard to come by and increasingly expensive for the business. When looking at alternative funding options, many businesses simply do don’t require sums of investments that are attractive to Venture Capitalists and few business people have the sorts of friends and family who are collectively able to lend more than £100,000 thus, for the time being, at least, this leaves the angel investment as the optimum financing route for the vast majority of UK small businesses. Is your business financially fit?