Finding funding
Anyone seeking evidence that UK businesses are finding it difficult to raise funds need look no further than a recent survey by the Institute of Directors (IOD). Based on a sample of 1,045 managers, the IOD found that out of those companies who had sought new finance from their banks, 60% had received a polite but firm ‘no’. Indeed, according to the IOD, one in five businesses had been forced to fall back on personal credit cards to make up for shortfalls in more conventional commercial funding.
Raising finance is currently a much greater challenge than it was in the years leading up to the global financial crisis. The cost of capital has risen, with banks charging higher margins and private equity investors requiring a larger share of the businesses they back. Raising finance is also costly in terms of management time. In the current financial climate, finding a backer and agreeing a deal is an increasingly time-consuming and onerous process.
This shouldn’t surprise anyone who has lived through previous downturns. Strange as it may seem, it’s during periods of recovery that the bulk of insolvencies take place. In the past, this has largely been down to overtrading. As demand rapidly rises, companies rush to supply customers by ramping up production or hiring new staff. Such actions require upfront investment while payment may be deferred for several months. Unless the finance is in place, there exists a real danger of a cash flow black hole that may result in insolvency.
As we emerge from the 2008/2009 recession, the recovery is expected to progress (at best) slowly and steadily rather than rapidly, so arguably the dangers of overtrading are not as great as in the past. However, there are other factors at work.
Impact on the economy
All this is having an impact on the health and wellbeing of the UK corporate landscape. The shortage of funds has stunted the growth of some companies and reversed the fortunes of others. In the absence of credit or investment, many companies have been forced to address their cash flow pressures through a range of other measures, such as cuts in discretionary spending or the sale of noncore assets.
The funding-friendly business
Regardless of the sector in which your business operates – or indeed its revenue model – you should be taking steps to make yourself as attractive as possible to financial lenders or investors. In the current climate, housekeeping is crucial. Businesses with a strong management team – with no underperformers or gaps in the skill set – will find it easier to raise cash than those with a weaker line-up. The presence of an experienced finance director, for example, is always helpful. Backers are also looking for evidence of robust financial processes, procedures and the ability to forecast accurately. Managers should be able to produce accurate and timely financial reports, with the key performance indicators clearly identified.
Potential backers will also look carefully at the revenue streams of applicants. Those businesses that have recurring – and preferably diverse – revenue streams are always preferable to those that struggle to win every new sale and have little in the way of repeat business. Equally, companies who rely on just a handful of major customers – and are therefore vulnerable to financial difficulties should clients suddenly decide to jump ship – are seen as particularly risky prospects.
Begin the process early
It’s vital to plan ahead. In the past, securing finance took an average of three to six months. Today, you’re certainly looking at a timeframe of six to nine months. The upshot is that if you know there’s a funding event coming up, you should allow yourself plenty of time to identify, approach and negotiate with potential backers. In the case of banks, you can expect the credit committees to take a much closer look at your business and for them to ask challenging questions. In the past, the received wisdom was that banks would be somewhat less robust than private equity backers when it came to assessing the business plan and due diligence ahead of a deal.
That’s certainly not the case today. Managers seeking bank finance should prepare to undergo the same rigorous assessment process that would be expected from a venture capitalist or private equity fund. And, of course, all this additional scrutiny on the part of the banks will only prolong the fundraising process.
Alternative sources
Shop around and approach several different providers of finance. If your own bank refuses credit, you can approach other lenders, including those who specialise in asset-backed solutions such as invoice discounting and stock finance. Private equity is also an alternative, with many funds now offering growth finance, rather than exclusively focusing on buyout opportunities. A degree of government support is also available, notably through Capital Enterprise Funds aimed mainly at small and medium-sized companies.
Specialist advice can help in terms of identifying appropriate providers, facilitating introductions, and preparing your business for the capital raising process. These remain challenging times, but there is funding out there. As the economy begins to recover, now is the time to consider your options.