Identifying a gap in the market with a good idea can be the start of a great new business – but it’s not going to guarantee success without funding. In this edition of ‘tips from the experts’ we’ve gathered great advice from three experts in the field on how to fund a small business.
Alison Bradley, Managing Director at Central Finance
1) Demonstrate Commitment to the Business
When borrowing money to expand or start a business, be sure to demonstrate your commitment to the business. For example, what are you willing to risk? What is your contribution to the business proposal? Is it a business or a personal contribution? More importantly – make sure your own personal finances are in order.
2) Have a Great Business Plan
Obviously some businesses have defects – poor profits, a weak balance sheet, or a lack of security. If the business has the potential for growth, then these defects can be overcome with a good business plan and professional advice on the matter of finance.
3) Provide a Strong Presentation
One possible barrier to accessing finance can be presentation. Is the business proposal right for the target audience? Have the funder’s requirements/policy been considered? Do they require a matched cash contribution? If it’s a public sector lender, is job creation important? Are there any exclusions?
4) Demonstrate Experience and Skilled Management
A small businesses or start-up’s management team is particularly important. Do they have the necessary experience? Are good financial controls in place? This can be a massive hurdle when it comes to financing a company, and often management weaknesses will have to be overcome. The appointment of a non-executive director or finance director /controller can very often help you to avoid these weaknesses.
5) Finally – Take Advice!
The commercial finance market has changed dramatically in the last seven to eight years. There are a whole myriad of new finance initiatives available in addition to standard bank finance, which not all businesses can take advantage of. A good advisor will be able to direct you to the most appropriate method of financing for your business.
Shaz Nawaz, Director of AA Accountants
1. Stay Informed
You need to keep track of your numbers. This data will provide you with an understanding of your cash requirements alongside many other key issues. The numbers you should track here should be total debt and debtor days, weekly invoicing, bank balance, stock and work in progress, creditor balances and your weekly income and expenditure. If you keep on top of these numbers then you’ll be able to better manage your bank balance and cash flow.
2. Keep Debtors at a Minimum
It’s a common occurrence that I see small businesses having a large debt balance in proportion to the size of their business. You need to ensure your customers pay you within a stipulated timeframe. This can be difficult, especially if your customers are bigger than you. This is why you need clear terms and conditions which you must share with all of your customers. Interestingly, usually a few customers tend to owe most of the money. It would be wise to keep track of these customers and encourage them to pay in a timely manner.
3. Remember the Pareto Principle
The Pareto principle, better known as the 80/20 rule, will apply to your business just like it does to every other business. How this helps is that you need to look at the 20% of issues which are causing 80% of your cash flow or funding challenges. Address these issues first so that you can free up more money quicker. This could be linked to slow paying customers, suppliers wanting quicker payments, poor stock control, too much unbilled work (work in progress) etc. Find the one or two things which are relatively simple to address but will have a big impact on your business.
4. Know your Options
There are various options available to you when it comes to raising finance. You need to consider and review all of your options rather than just going with the first solution that comes to mind. Options include:
- Business bank loan or overdraft
- Personal bank loan
- Invoice factoring or discounting
- Crowd funding
- Loan from family/friends
- Asset finance if buying equipment, machinery or other assets
- Consider leasing versus buying
- Amending payment terms with suppliers
5. Run a Tight Ship
Keep a simple 12 month cash flow statement for your business. This doesn’t have to be a complicated document. A simple MS Excel spreadsheet will do the job. Through this you can manage your costs, because it’s important that you run a tight ship. Overspending is a major reason for cash flow difficulties. You’ll also be able to look at periods where business is slow and then plan accordingly in advance. That way you can also push harder in those months so that you sign up more business.
Terry Koutsios, Founder and CEO of fivesquid.com
1. Network with a Game Plan
You don’t need to know people who are looking to invest, you just need to let enough people know about your business model and that you have a funding round open. When networking, focus on your business model and what your three year plan is, then mention the funding round that will help you get there. Those who are excited about your business will be interested in the funding side too.
2. Create a Shareholders Network
Once you get 2-3 people to invest, you want them to be as informed as possible, so when they network they can encourage further investments. By sending shareholders monthly newsletters and hosting events, it will encourage existing shareholders to re-invest or keep momentum up to attract new investors.
3. Find Funding First
Try to get as much funding as you can before you start your business. If you don’t, it may end up distracting you and taking your focus away from business development.
4. Paint Success by Numbers
Know your current KPIs, but also know what they will look like in a year’s time with ‘x’ amount of funding. This will allow investors to visualise what impact their money would have on the business.
5. Target Investors Who Could Double as Mentors
If an advisor has shares in your business and industry experience, it will be in their best interest to help your business grow. By having an investor and a mentor for free, your business will have a good foundation to grow and enter the next stage of funding when you need it.
Thanks to all our contributors for their valuable advice. For more expert tips be sure to follow us on Facebook and Twitter.