How to raise finance for your business
Raising finance is often the first hurdle business owners have to jump. Certainly it's one that will face all SMEs at some stage. As tougher lending restrictions take hold, businesses need to get smarter if they are to get their hands on any investment.
Phil McCabe, of the Forum of Private Business (FPB), says a greater number of restrictions are being put in place, making it more difficult for small business owners to raise finance. "It is becoming increasingly more expensive, particularly from traditional avenues. Add to that the over centralisation of banks and the lack of competition around, and finance is hard to come by."
1. Stay smart
No one can afford to be complacent when it comes to raising finance. "Business owners need to get smarter when they're applying for loans. They need to make sure they have business plans in place and all the paperwork that finance companies want to see" says Phil.
Huw Morgan, Head of Business Banking for SMEs at HSBC Commercial Banking UK, agrees. He says HSBC looks at each business on a case-by-case basis when deciding whether to lend. "When making lending decisions we are looking to support firms with good cash flow management, a strong balance sheet, a sound business plan, a well-balanced management team, a good business record, and who are looking to develop and grow."
Neil Mackay of Advantage Business Angels suggests "you need to put some real effort into preparing a business plan: not a consultant template driven one but a well thought out document. Particular emphasis should be placed on sales and the plan should be less than 10 pages of A4".
2. Know the rules
When it comes to raising finance there are a number of legal issues to consider. Joe Bedford, Partner in the corporate department at Stevens & Bolton LLP, says when small business owners are raising either debt or equity finance, legal issues to look out for include the use of standard documents by debt providers, requirements for personal guarantees or other security, and the setting of achievable and clearly understood financial covenants.
"When raising equity finance (even money from friends and family), small business owners will need to comply with the Financial Services and Markets Act 2000," Joe says. "This protects acquirers of UK equity and is often overlooked in such circumstances." It is also important that small business owners are clear at the outset as regards any strings attached to the finance that find their way into documentation. A detailed term sheet provided early on in the process should, but won’t always, highlight any snags.
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