Business Funding – How easy is it to get it?

Not easy at all, is the simple answer and it is not just about your businesses credit score… although it helps to have a good one.

Who you approach and in what order and how you prepare for it is key. If we assume for the moment that your business has a good credit score, is profitable, has consistent financial ratios with a strong balance sheet and assuming you have a good relationship with your bankers you should always approach them first. As long as your business is not overly reliant on debt or other loans (highly geared) and you are not over-stretching the business with the new loan proposal, there is a good chance you will be successful and the process will be relatively painless and simple.

Yes… Banks do still say yes; but what happens if your bank says no? Is that it or should you try to find out why and whether you may be more successful elsewhere?  The ‘why’ is always an important question. Banks like all commercial organisations use in the first instance credit scores and your business financials to determine whether they will lend. They will also look at your business plan and the reasons cited why you are seeking finance. How you present your loan application to the bank or indeed to any prospective funder is critically important. In the short term there is not much you can do about your credit score, unless you have satisfied County Court Judgements (CCJ’s) which can be removed. Likewise your financials cannot be improved overnight and you cannot change your profit and loss account and balance sheet from a period which has already finished.

You can though showcase your business in a favourable way, by projecting your financials forward, showing that the business is growing and that profitability levels and balance sheet ratios will improve. Putting this in a concise and easy to read format will help a prospective funder to view your loan application more favourably than it might have done had it just been reliant on your credit score and year end financial statements.

The 5 Year Plan

So how do you achieve this? Keep it simple. Draft a one page business summary, introducing your business and its strengths, then outline on the same page, your 5 year plan and why you need funding.  The 5 year plan, should try to show an increase in sales, gross profit and net profit, but keep it realistic. Too big an improvement in any area will make your plan look unachievable. You should summarise your 5 year plan like this:

A O BUSINESS LTD- 5 YEAR PLAN
year	sales	gross profit	gross profit %	net profit	net profit %
1
2
3
4
5

As suggested above and within the same A4 page, you should detail what the prospective funding will allow you to invest in. e.g.; 2 additional staff members, new software and a marketing programme. And try to make it look as if the additional investment in staff etc, will assist your growth and profit plans.

The twenty-four month profit and loss and cash-flow projection.

That was the easy bit. A prospective funder is going to want some flesh to be added to the skeleton plan that you have outlined. Don’t go mad and give them 5 years of detailed data. Take your last set of financial results and current monthly actuals and breakdown for the next twenty-four months, month by month, your Profit and Loss account. Then link the data to your current bank account and try to produce a working cash-flow forecast for the same period, making sure you include the anticipated injection of cash (the loan) and the new costs for which the cash will buy. Linking the two documents together, to show changes on one document will make changes on the other is a little complex, but will make it more credible, particularly if you are sending a soft copy of this document to your prospective funder. Remember, that the 1st and 2nd year end of year figures here should equal the year 1 & 2 figures on your 5 year plan. Finally, if you have the gumption… have a go at generating a balance sheet from the data derived from the end of the 24 month period. If you can tie this in accurately, to really shows you mean business.

So who do you approach for funding?

As suggested above, you should always try your bankers first, as they already know you and the process for obtaining perhaps an increased overdraft or a new loan, may well be quite straightforward. If this is unsuccessful, then you need to find someone who will agree to fund your requirements and at a good rate and post 2008, there are now a whole raft of additional areas to explore. Perhaps the most popular form of business funding now is peer to business lending or crowd-funding.  This is where individual lenders each bid to lend you part of the loan at their preferred interest rate, thus making up the whole loan required with a large number of lenders. Once you loan application has been approved by the Funding Company and a bidding platform has been opened; over a period of days, a large number of individual lenders will build up to the point where the loan becomes fully funded. With new bidders coming in and gradually reducing the overall interest rate. If you leave the fully funded loan right to the end of the bidding process, you will frequently see interest rates similar to those offered by the banks. Loans of this type have become very popular. They are usually web-based, fast and as long as you follow the rules and make your funding proposal attractive will usually be successful. An alternative to this is of course peer to equity lending, where individuals provide equity for your business and are given shares in return. This is a little more complex and is akin to seeking funding from business angels or indeed the ‘Dragons Den’, but this may be an option worth considering if you are prepared to let go of some of your share of the business, rather than burden your business with a repayable loan. There are of course a number of other funding options, notably from local chambers of commerce etc which should be considered, but for sheer simplicity crowd-funding looks to be the way forward.

It goes without saying that I am more than happy to discuss any of these points in more detail if you think that I can be of assistance. Please see our website for details of how to contact me

 

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Is your business one of the ‘Walking Dead’?

This extended downturn has now been with us for nearly 6 years and despite recent figures from the ONS (Office of National Statistics) suggesting that UK PLC avoided a double dip recession last year;  at best we have bumped along the bottom and we are years away from achieving the levels of GDP which we sustained in early 2008.

We must not be negative though. We have seen how important good news is at providing that much needed feelgood factor which actually helps to buoy the economy. Whilst we are not looking at Chinese or Indian rates of growth, we can at least look forward to sustained growth over the next few years.

That is good news for the country, but not necessarily great for the individual companies, whose very existence may well be governed by whether they are still supported  by their bankers. These are the ‘walking dead’, a term used quite widely in the last eighteen months (and indeed by me) and one which has come to encompass those businesses, who are only still in existence because their bank have not yet pulled the plug…

Are you one of these businesses?

Typically, you will have extended your overdraft facility with your bank, perhaps several times over the last few years and you have tried to arrange for a loan from your bank to pay off the overdraft and they have refused to provide one and now they wont extend the overdraft anymore and you need more money, because your creditors are growing at a faster rate than your sales. And you cannot generate significant additional sales, because you have not got the marketing budget to go out there and increase your sales.

Waiting for the green shoots of recovery?

This puts you right on the edge, every single day, and at several critical times throughout the month, dependant on on so many external factors to allow you to pay those most important creditors. Yes, you know the ones, your wages bill, PAYE and your key suppliers. And you can’t think about anything else, apart from cash-flow, cash-flow, cash-flow.

It is either a constant spiral of decline or you are just treading water, waiting for the next bad issue to set you down still further… Should you still be trading? Probably not, but this is not just about the here and now, it is about the company’s future prospects and of course your staff. And business owners and directors make critical decisions like these every single day. 

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Thankfully, most companies decide to continue and for now many of them will reside fairly and squarely within the ‘Walking Dead Zone’;  keeping the bank and your critical creditors happy and hoping your sales grow strongly enough to show you that there just may be light at the end of the tunnel.

But is this enough? Is there anything else you could be doing that could preserve your business, your staff’s livelihood and reduce your business from its mountain of debt? You could try to change your bank and apply for finance or an overdraft facility from a new bank… But this is unlikely to be successful  in the current climate.

You could consider entering into an Corporate Voluntary Arrangement (CVA) and allow an insolvency practitioner (IP) to help you clear your debts with the agreement of your creditors. At least this would cast light at the end of the tunnel. You would be severely restricted in terms of how you trade, but your debt ratios would be going down and within a few years you could actually be debt free. You would be more ‘wounded than dead’.

If all else fails and you still want to keep the essence of your business going you could, enter into a pre-pack administration  This is where an IP places your business in administration, but a new leaner version of your business rises from the ashes ( sometimes known as  Phoenix from the ashes administration), but this is dependant on you being able to 1) Find funds to acquire the phoenix business from administration and 2) Being able to persuade your key creditors and indeed your customers that this is a positive thing and that continuing to trade with the new business would be a good business decision. This is a complex move and even after your new company rises into the sky and begins to trade debt free and as a new entity your business may still be rife with problems. You won’t be able to get credit, your critical suppliers will want cash in hand and even your customers will treat your every move with suspicion.  if you can get through this though and you begin to grow your business again, your new business will be free from encumbrances and you will now be ‘walking tall.’ Fail to secure enough new business however and you may end up back where you started.

The truth is there is no easy answer. Doing nothing and just standing still is almost certainly the worst thing you can do. But which avenue should you take and do you want to stay one of of the ‘Walking Dead’?…