Grow Exeter | Sep 17, 2018 | 0
Let’s Talk Finance – Shaun Elliott
Start Up to Scale Up. Raising Venture Capital
Written by Shaun Elliott
When it comes to raising capital, entrepreneurs and business owners have more choice than ever before.
From traditional business loans or asset and invoice finance, to angel investors and crowdfunding, there are many different options.
However, not all of them will be appropriate for all businesses and you need to make sure you are making the right choice for your venture.
What is the best way to borrow money for your business? Which options are best avoided? And how do you ensure that you are investment ready?
Are you ready?
Investment readiness is a term that can intimidate even the most ambitious of entrepreneurs.
But, if you’re smart in the ways that you research, plan and ultimately present your venture, being investment ready could be the key difference between success and failure.
Setting your business plan, understanding your competitors and your figures, and leveraging your network are massively important. Careful management of cash flow enables you to survive then thrive but it all starts with a robust business plan.
Many businesses can shy away from setting a plan – we all know it’s easy to get caught up in the day-to-day necessities of getting running a business.
But setting a business plan not only helps you scope out your short term goals, but allows you to benchmark your performance and look to the future with long term priorities and ambitions.
Creating even a simple document filled with thoughts and ideas can pay dividends for any business.
It could contain anything, like at what point you may need to employ additional staff, or even a calendar showing new business opportunities or milestones you want to hit – big or small.
Of course, when approaching a bank or potential investor then the more information the better – demonstrating the strength, capability and potential of the business.
Using your plan to set a contingency for economic downturn or competitor activity is also key.
Investors or financiers will also want to see a plan detailing how the funds will be used to drive the business forward.
Having big ambitions is great. However, you also need to demonstrate how you‘re going to make them happen. You have the vision, but what are the steps to make sure that materialises?
If there’s no demand for your service, or if its associated costs are prohibitive, the chances of receiving investment are slim.
You must display a depth of knowledge about your industry, customers and business, have a clear idea of how you will make money, and have a good management structure in place.
Having a business bucket list is also a good idea to make sure you keep yourself motivated. Starting a business is incredibly hard work – and the work continues as the business matures.
A business bucket list is not a million miles from a good old-fashioned business plan, but it has more to do with the more inspiring, punch-the-air moments than studying a spreadsheet.
A bucket list includes more personal challenges with a professional slant. Being in business to make money is extremely limiting; it’s better to have milestones that are symbolic of success to you.
And that could be anything from luxury holidays to hiring or training new young talent.
Anything that helps you get out of bed in the morning and keep striving for success will help.
So nurture your bucket list, and keep striving to tick things off it.
The best option for your business
However, before you start to think about any application process you need to be aware of the best possible solution for your funding needs.
According to a report from financial services software company Misys, 24% of small business owners are using a combination of traditional and new models of finance to meet their funding needs.
Before making the leap, you need to consider the full cost of financing, the security required, time spent on making the decision, the opportunity, costs and the fees.
One of the most obvious is a loan or overdraft from a bank. A bank will need to see evidence that the business is able to pay back the loan (which is where your all-singing business plan comes in) and that you have the capability and resources to make that happen.
Invoice finance and asset based lending can be another option for businesses. These basically act as an ongoing credit facility that could grow with your business.
Although your cash may be tied up in unpaid invoices, inventory, plant and machinery or property, with invoice finance and asset based lending, you can raise funds against your assets and unpaid invoices.
We’ve worked with Sandra Smart, of South West recruitment consultancy Octopus Personnel, for a number of years and supported her throughout the growth of the business.
After setting up and growing rapidly, invoice finance helped bridge the gap between paying temporary workers and being paid by clients.
She said: “Cash-flow proved to be one of the major concerns for the business. You pay temporary workers on a week in hand basis but you have to wait at least a month before you get paid by clients. The ‘Bank of Mum’ helped on a weekly basis to pay the temps and without her input we would not have survived.
“We almost became a victim of our own success. Recruitment is such a cash hungry business
the demand for temporary workers was increasing week-on-week and after speaking to my bank manager he suggested I consider invoice finance.
“To be honest I had never heard of it but he put me in touch with RBS and after several meetings I gave it the green light, the whole process was quick and very easy. We were allocated a relationship manager who guided us through the following weeks until we were totally confident in the system. For the first in many months I slept! Invoice finance lifted the weekly worry of how I was going to be able to pay the temporary workers.”
Barnstaple based Extreme Cases, recently voted Small Business of the Year by the North Devon Business Journal, also relies on invoice factoring. Allowing them to maintain cash flow and continue to grow their engineering business.
Founder Mark Brown said: “As an SME with a team of four, factoring invoices has aided Extreme over the years as it has saved the company time and the costs of having an in-house credit controller, it has also meant the capital is available to pay suppliers on time which has kept the relationships strong between the company and its suppliers and safeguarded the business so that it could grow successfully.”
Extreme Cases has also utilised invaluable local funding services available in the South West, most recently being awarded funding to support their investment in new CAD and simulation software, enabling them to strengthen their team with the addition of a new innovation engineer.
An alternative route
However, there are now so many sources of funding available and bank borrowing (debt) may not be the best option for your business.
The financial landscape has changed considerably over the years, with the largest and most recent change being the growth of alternative finance.
Banks can’t be all things to all people and can’t lend to everyone – and it wouldn’t be right to.
Two of the most common forms of alternative finance that have emerged in the last few years are peer to peer lending and crowdfunding.
Although it has been around for over ten years, peer to peer lending has only recently become a more popular option for businesses – and investors.
Peer to peer lending brings together investors with businesses (or individuals) in need of investment.
For investors, the benefits can include a higher return than regular outlets if they spot a high growth potential business. And for businesses, gaining funding can often be faster and more flexible than traditional methods – although you may also be required to give up a part of your equity.
Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to a large number of potential funders.
And there are different ways to go about it:
- Rewards-based crowdfunding platforms allow entrepreneurs to raise funds from the community in exchange for simply giving their tangible products or other relative gifts;
- Debt Crowdfunding is similar to peer to peer lending where investors receive their money back with interest, and
- Equity crowdfunding, where money is exchanged for shares or a small stake in the business.
With a growing number of online platforms to provide investments and support – most often in return for equity – angel investment has become a much more common avenue for entrepreneurs.
Running a small business is inevitably stressful and demanding and it requires people to commit extensively.
Angels are looking for someone with almost unusual levels of resilience – as well as a realistic idea of what’s going to be involved.
Four ways to get angels onside:
- Share your passion;
- Don’t be afraid to think big;
- Practise your pitch; and,
- Know your limitations.
Now is the time
Thanks to new technology you can literally set up a business from your smart phone on your kitchen table – so getting a business started has never been cheaper or easier.
There are also so many ways to use other people’s technology platforms to scale up your business – from sales force & CRM systems to the cloud – so opportunity and potential is unlimited.
Just be sure to understand the best options for your business, the opportunity and the market and make sure you surround yourself with the best possible advisers and supporters to keep you on track.
Shaun Elliott is an Exeter based Director of Invoice Finance for RBS
Reach him on 07961 202019 or at email@example.com
Follow him @Shaun_Elliotts