Financing beyond day to day survival
An understanding of how to finance your business is just as important as selling your product or service.
In many respects the success of an SME is not measured against what profit it makes but whether it has enough cash to meet its immediate payment requirements. To achieve this every SME allocates most of its resources to achieving sales and then chasing customers/clients to make payments thereby generating enough cash to survive. Very little is made available to operate the business organisation that delivers it.
For many, the requirement to pay corporation tax, VAT and PAYE on time has been a game changer. It is becoming increasingly difficult for companies to delay these payments and it has forced owners to ensure there is enough cash in the bank to meet these expenses as they arise. The well-known difficulties in getting companies to pay suppliers on time means that it is, for many, quite stressful to find this amount of cash.
Payment of taxes is just one aspect to financing your business and, if the sustainability of your business is to be achieved then it has to do more than simply get enough cash to be able to survive from day to day. Therefore, there is a need to properly finance the business in a way that reflects the realities of working in your sector.
Unless you are fortunate to have your own capital, it will be necessary to find finance to help you achieve the goals that have been set. Raising finance is difficult but the mistake that is often made is not to ask for enough at the start of the process.
Whether the capital is being provided by family or friends, the bank or angel investors, it is in reality just as difficult to raise £100,000 as it is £1,000,000 or more so make sure you are in a position to ask for what you need!
4 financing success factors
1. Know where you want to get to
Decide where you want your business to be in three years’ time. It is not enough to say you want to get larger. Put targets that are measurable. For example "I run three shops today but want to have ten in three years’ time". By making this statement you will know what needs to be done to achieve success and more importantly you will have an idea of how much cash and when you will need it to get there. Identify milestones along the way by creating a business plan so you can monitor progress and ensure you can repay any amounts you have borrowed.
2. Understand that Finance needs to be repaid
Many business leaders make their presentation on the basis that they have a product or service that everyone will want to buy. The reality is of course very different and the lender knows this and is more concerned about getting their money back than your business success. Therefore think about your application from the perspective of the lender. Address concerns that they might have upfront and be prepared with accounts; usually prepared by a professional accountant who may not be your bookkeeper.
3. Know the difference between Capital Expenditure and Working Capital
Too many businesses do not work out exactly what they will need to make their plan a success. It is relatively easy to identify build and fit out costs (Capital Expenditure) but that in itself is not enough to create a sustainable business. Having enough working capital to meet the day to day needs of the business is just as critical. In this respect, work out how much it costs to run your business for three to six months without receiving any income and ensure that this amount is included in any request. Try and keep at least one month’s costs in your bank account as a reserve so that you can always meet unforeseen expenditure.
4. Know what different forms of finance are available
Providing finance is like any other business sector in that financiers provide different products or services. Take some time to learn the market and use it appropriately to identify the right source of finance for your business. Finance can be divided into three elements as follows:
Capital is an amount of money that is invested in the business for the long term without any specific repayment terms and often confers an ownership interest. Capital is typically returned only when the business is sold but interim payments (dividends) can be made depending on the performance of the business. The most common form of capital is shares and this group of investors are interested in growing the value of the business. Sources are family and friends, angel investors and venture capitalists and as they are interested in the success of your business, they may want to receive regular reports on progress.
Long term Finance
Long term finance is money which the lender expects to be repaid over an extended period usually between three to five years. Lenders will charge a fee for this service that usually take the form of interest payments. Commonly, long term finance is secured against an asset such as a car, a piece of plant and machinery, or a property but here do not expect to be lent money over a 25-year period as you would with your own property. If payments are not made the lender will take control of the asset. They are only really interested in your business to the extent that it indicates the likelihood of repayment. Sources are banks and asset financiers.
Short term Finance
Short term finance is finance that is provided to meet short term needs. The most common form of short term finance is the overdraft provided by banks. This is one of the most important sources of finance as it enables short term issues on cash flows to be smoothed. It should not be regarded as a permanent loan. Sources are family and friends and the banks.
It is always wise to hire an accountant or business consultant with experience in raising finance, to help you obtain the right type and amount of finance in the most appropriate way.
If you are looking for an injection of cash and would like a conversation, please give us a call on 020 7965 7216 or email us .