What you need to know to raise money for your business
If you have an ambitious idea for a new business venture or you already have an established business, you may need to look at external finance options to help your business grow to the next level.
Recently I worked with a client, who needed extra finance to boost their business and to help push the growth it needed. We managed to successfully secure an initial loan of £70,000 together with a further £200,000 made available to fund future expansion.
As a result, they have been able to immediately expand into two new locations. They can now plan ahead with confidence, knowing they are able to finance their growth plans for the next two to three years.
So, if you too have the vision and ambition but need external money to help make it happen, here are some ways in which you can boost your chances of securing a loan:
- Know your bank
Get to know your Relationship Manager at your bank. As the name would suggest, build a relationship with them and communicate regularly. A ‘no’ at the first attempt might not mean the door is permanently closed. Instead, a lender should be able to let you know what you may need to change to secure funding or what elements of the business plan could be more robust.
- Know who else is out there
Spread your own risk and explore alternative sources of finance. A report by British Business Bank shows that half of all SMEs seeking finance only approached the big four banks. And only seven per cent approached other non-bank lenders first. Alternative forms of finance such as crowdfunding and peer-to-peer lending are providing increased choice for small businesses.
- Know your numbers
A robust set of management accounts is vital to demonstrate the trading position of your business. The lender will want to quickly and easily be able to assess the profitability, working capital and net worth of the business to give an initial view of risk.
- Know your risk
One of the first things a lender will do is look at the credit ratings of the directors and the business. The British Business Bank survey shows only 16 per cent of SMEs manage their credit score. Make sure you know your credit score, your track record of any lending in the past and anything that affects your score. Also, be prepared to answer any questions about your score.
- Know your future
Have a really clear, compelling strategy and plan for the future of your business. If there is more than one director, make sure you are all singing off the same hymn sheet. The lender is looking for confidence that your business is sustainable. You need to be able to explain what makes you different, better and the gap you fill in the market.
- Know why you need it
How often are you reviewing the financing needs of the business? How far ahead do your cash flow forecasts extend? Be clear about how much finance you need to support your strategy. It’s also important to be able to explain why your vision and opportunities would not be realised without the investment.
- Know your assumptions
A forecast is ‘the estimation of the value of a variable or set of variables at some future point in time.’ Forecasts therefore rely on a set of assumptions. Be able to clearly explain all of the assumptions on which your forecasts are based. Importantly also spend time ‘stress testing’ your assumptions and forecasts to understand what happens under different scenarios. For example, what does your ability to repay your finance look like if your sales are 20 per cent less than you forecast?
- Know what makes them tick
Put yourself in the lender’s shoes – what are they looking for and how will they decide whether or not to invest or lend? Lenders pay close attention to balance sheets and any discrepancy will raise a red flag. A key metric for lenders is Interest Cover Ratio (ICR) – essentially your Net Operating Income divided by the annual loan payment. This tells them how able your business is to generate sufficient cash to repay your debt. Most lenders will be looking for an ICR of 1.2 or better – generating cash at least 20 percent greater than your total debt burden. Lenders will also look at the owner’s equity in the business. They want to know the borrower’s own financial fortunes will rise or fall depending on the success of the business.
- Know what you are prepared to give on Every loan is a risk but banks generally want to take as little risk as possible. The Government introduced the Enterprise Finance Guarantee as an incentive for banks to loan to small businesses. It reduces the lender’s risk by providing a Government-backed guarantee for 75 per cent of the loan value. However, lenders may still look for extra security, such as asking for directors’ loans to be converted to equity. Or they may take steps to ensure they have preference on repayments over and above other loans. The key here is to be aware of possible demands and know what you are willing to compromise on in order to secure finance for your business.
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