By Dominic Buch, co-founder and managing partner, Caple
Starting and growing a business is hard. While the UK is a good place to start a business, growing and scaling up can be more difficult.
For small but growing businesses the crucial difference between growing and not is access to appropriate sources of funding.
Many firms raise finance from their bank, but often are not able to raise enough for their needs. This may be because their banks are constrained and can only lend against available assets the firm has, not that firm’s potential. So, the availability of additional funding, that sits alongside bank lending, and is genuinely unsecured provides firms with real opportunities to meet their ambitions.
Very often, the key to raising finance is to take the right steps to be in the best position when it comes to searching for and securing finance.
So, what should those business owners who are looking for funding do to get prepared? There are five critical steps.
First, keep accurate forecasts
With the recent proliferation of funding options and the changes in the asset base of many growing firms, funders have developed different requirements on which they will make a lending decision.
Rather than just relying solely on high-level accounts, funders often need detailed cash flow forecasts that project the future performance of the business.
Firms asking a lender to fund growth, and to buy into the strategy of the business, must support their case with clear, high-quality forecasts.
Second, be prepared to be challenged
Next, as the forecasts and plans that firms prepare are only as good as the assumptions, business owners need to be able to explain them.
Often these challenges, and a bit of tension, can help create higher quality and more accurate forecasts. These are far more useful than presenting an overly optimistic view of the future.
Third, seek professional help
Accountants or business advisors are crucial for SMEs wanting to secure funding. They will help clarify what the firm is trying to achieve and the purpose of the funding.
With this understanding, the advisor will be able to assess potential sources of capital, as well as the cost and suitability of that for the business. As well as recommending appropriate source of finance, they can then help develop the business plans and forecasts that make the case for funding.
Fourth, look for appropriate sources of growth finance
From peer-to-peer lenders to banks and specialist debt funds, there are now many different options for SMEs looking for funding.
Many of these firms will offer one of two options, either secured lending or equity funding. However, by its very nature, secured lending requires a physical asset against which the loan is secured.
Getting such secured funding can be a problem for UK SMEs, many of which simply do not have necessary physical assets to use as security. Equity financing may provide an option for SMEs. But third-party investment does not suit every sector, business or owner manager. It also dilutes ownership immediately and over the longer term it dilutes the reward if the firm is sold.
As a result, small but growing firms often must consider the difficult choice of scaling back their growth, diluting their ownership or agreeing to personal guarantees. The antidote to this might be to look for finance which is complementary to secured finance, generally available from banks.
Fifth, keep control and ownership where possible
However, asset-light businesses or ones which have exhausted the secured-lending available, can now benefit from unsecured lending.
Unsecured lending is based on an understanding of the future cash flows generated by the business. It does not require physical assets or floating charges as guarantees of payment.
Such unsecured lending provides the finance SMEs need to grow while removing the need for security and personal guarantees. Crucially, it means business owners do not need to give up ownership or control.
While UK has an impressive number of start-ups, we need to do more to help these firms to scale-up. This means helping them to get properly prepared for funding. In doing so, more small businesses will become mid-sized firms, benefiting the business, creating jobs and boosting the UK economy as a whole.