Top Tips in how to secure business finance – part 1

By Julio J Faria BSc., C.Eng., M.IChem.E.

Know how it feels?  You have that great idea or your existing business needs an injection of
cash to move onwards and upwards; all you need is the money to get it going. This is a
“how to” based on over two decades of experience; learnt the hard way which is often
the best way.

The Bank will tell you to do your business cash flow to find out how much you need. That is
not a bad idea but just remember that enthusiasm and ignorance of what may happen means
you will probably be out by a factor of at least 4 – if you are accurate. So double your best
estimate of costs and halve your sales to create some “worst cases”. Also be prepared to cut
costs quickly if the cash does not come flowing in; so avoid long leases or major financial commitments; keep it a “soft” start up where possible. A good business plan is very important.
Keep it updated, keep your 3 year horizon and use it as your measure of progress.

First port of call for business finance is obviously yourself. If you are not prepared to shoulder
much of the responsibility then how can you expect others to follow?  However; do not
mortgage the family home. Divorce is very expensive and not what is needed when you are
starting up or growing a business!

Next you have the “friends and family”  category.  If they believe in you and can afford it
then they sometimes help. Also giving them “first refusal” can often be a psychological plus
and help with future requests.  Be warned however, it is a good way to lose friends and when
it comes to money you will often see a “dark side” to friends and family.

Next step is government grants. They can be an excellent way to finance a business,
particularly technology based ones, and can often help you in a myriad of ways. These days
the first contact is probably “Business Link”.  But there are many other sources, from local
councils, University schemes, the monolithic EU etc.  There are also many organisations which
will help you get a grant for a percentage; often very useful but be careful, they can be greedy.
5-10% of the net grant is acceptable but there are those who charge much more for much the
same service. Be prepared to negotiate hard.  That goes for all areas of business finance; never
take the first offer; also set your limit and be prepared to walk away. There are many
competitive grant schemes; the DTI SMART scheme (renamed many times, now called GRAND)
is one of several. It comes with great support (up to 60%) and the kudos of winning which is
what you want to be doing in business. Also there is the little known NESTA organisation which funnels lottery funds into new businesses, in exchange for equity.

Then we have the Banks. They are great for “secured” loans including HP on plant on
machinery, but for risk finance be prepared for a polite no thank you. You ought to get some
free banking from them however as they know that if you start out with them you will
probably stay.

The next place to go is into the river of finance- but beware, it is full of alligators, piranha and
the vultures are overhead waiting to pick your bones clean.  You have seen glimpses on TV programmes like  Dragon’s Den; well in my experience the reality is much worse!!

The first of this genre are called “business angels”.  These are generally rich individuals
who wish to become much richer by investing in your company.  They often come with
significant business experience which can be helpful; especially if they get into a position
where they can control your company.  Good but only in very small doses- less than 10% of
the business in their ownership is probably a good guide. With ownership close to 50% they
will take you over and hang you out to dry. As former business people they of course know
better how to run a business than you the entrepreneur. Be very careful.

Then we have Venture Capitalists- often called Vulture capitalists for obvious reasons. 
At one time they were the major source of business investment cash – think of an alliance
of the Vikings, Romans and Moguls and can envisage their impact on business.  They loved “ratcheting”, which involved clauses in the contract with the company that enabled them to increase their shareholding if the company underperformed.  The experience of talking to
them is one every businessman should go through, and there may be instances where they can
help; but you need the best lawyers you can afford to ensure they do not take you to the
cleaners -and poker like negotiating skills.

Fortunately, despite all the gloom so far, there is a light at the end of the tunnel, a pot of gold
at the end of the rainbow,  and that is in the form of private placings,  OFEX  (now called
PLUS) market and the London Stock Exchange AIM market. It took me 12 years to find them,
and in reality they probably did not really become accessible to small UK business  until the late ‘90s/early 00’s, but they rapidly changed the face of business finance.

All will be revealed in part 2 very soon.