The smart approach to raising business finance

Ahead of his talk at this year’s Sage World small business conference, the ICAEW’s north east regional director Keith Proudfoot explains how to secure that all-important funding for your business and what not to do when wooing investors.

Q: What are the key things for business owners to remember when seeking to raise finance?
Keith:
The most basic point is to match the source of finance with the purpose – you need to make sure the finance you’re getting is applicable for what you need it for. You should always try and match the period of your finance with the life of the asset you’re looking to cover. For instance, if a business is looking to take the next step up for the long-term, they should be looking to extend their equity base and not just borrow from the bank, so in that case you might look to private finance houses or investor angels. On the other hand, if you’re looking at property, that’s a long-term asset, so you should make sure you’re getting a long-term loan – so for this you might look to a building society, for example. It’s about making sure the loan you get is appropriate to your situation.

Q: What are the main barriers to entry for small businesses looking to raise finance at the moment?
Keith:
The only barrier to a small business is trying to think a little bit bigger; business owners need to realise that some of those alternative sources of finance that they might not think are aimed at the likes of them could in fact be suitable. They also need to ensure they present themselves as a smart business – and smart businesses can be any size.

Q: How can businesses make themselves more attractive to investors?
Keith:
It’s all in the story they tell to investors - and that’s not just about what you say, it’s about how you present yourself. In my talk at Sage World I’ll draw a parallel between raising finance and dating; when you’re going out on a date you dress up in your best clothes and think about what you might say to make yourself sound good. This is what businesses need to do. Your proposal to a lender should demonstrate you’ve got the expertise and skills to run the business, and you need to have researched the market so you can show that know how you’re going to approach it and ensure a profitable future through sound decision making.

The feedback I get from a lot of lenders is that this is where businesses typically let themselves down. They often don’t think through their proposal and will ask for money without knowing what period they want it over or whether they want it as an overdraft or a loan, so in many cases what could be a good application and a sound business idea gets knocked back because of the way they’re presented. It’s all in the presentation.

Q: What are the main risks businesses face when looking to raise finance?
Keith:
The main risk is that the business doesn’t succeed, and business owners need to consider how much of their own assets are in jeopardy if that happens. Sadly, this is the same approach banks have; just because they can lend to a large number of businesses, that doesn’t mean they can afford to be a bit more gung-ho with who they lend to. Propositions always need to show a good solid case for success. That’s not to say failure is bad – failure happens and some of the best entrepreneurs have a failure on their CV, but the business has to be a good proposition.

Another thing business owners need to think about is where their business going and whether they’d be happy working with someone else. Often people start their own business because they don’t like to take orders, so having to go back to a position where they have to consult with other people before they can do things if often a tricky step, but this isn’t so much a risk as a mental consideration business owners need to face.

Q: Are friends and family a ‘no no’ when it comes to raising finance?
Keith:
Not necessarily - it is an alternative source of finance. It depends whether those friends and family are working in the business too. If not, I would always advise having a formal arrangement for that funding and try to separate it from your friendship/family relationship by ensuring there are proper payment terms in place. There has to be a clear timescale for when the money is going to be paid back. It’s important to treat it just like you would any other loan.

Q: Where can businesses turn for support and advice when it comes to raising finance?
Keith:
I’m going to say exactly what you’d expect at this point, but mainly because it’s true: look to an accountant. You’re there to run your business, not to lose sleep over accounts, bookkeeping and tax returns. If you can get an expert to help you with those things, you can get on with running your business; focus on what you’re good at and sleep soundly at night. Another thing is to ensure you seek the appropriate advice at the right time and don’t leave it too late. That’s an important tip both for businesses on the downward slope and those heading upward.

Keith Proudfoot is speaking at Sage World 2010, a free event for business owners, directors and entrepreneurs offering practical advice on all aspects of maintaining and growing a business, on 8–9 September at The International Centre in Telford. To find out more about the event and reserve your free ticket, visit www.sageworld2010.co.uk/