How to significantly increase your chances of getting finance
Financing a start-up or expansion of a business is one of the biggest challenges facing owners of SMEs. With the huge amount of surplus capital in the country, why is this so?
Well, contrary to popular belief, the solution to the problem is not solely down to the lenders changing their methodology and lending more, although there are a number of things they could do to help businesses.
There is not much that we can do to change the rules so the approach must be to work within the rules in a way that gives you the best chance of success.
A private angel investor told us that he receives between 10 – 20 enquiries every week and that most banks get several times more applications than that.
The problem is not that too many business owners are seeking financing, but that the applications are presented in a way that it’s difficult for lenders to see the good from the bad.
The result: it’s safer not to lend at all.
5 steps to make a compelling case for your finance
1. Think like a financier
Thinking like a financier is the first and most important guideline we can give you.
The overriding objective for anyone who lends you money is to get it back. You can argue that you are being charged too much, but if you want the money you’ll have to meet their demands and pay up.
Remember, this is their business. Just as you sell your product or service for a profit, financiers business is to make a profit from lending money. The higher the perceived risk the higher the profit (interest) they will expect. Believe it or not, the lower the risk does result in lower costs compared to your competitors.
Your job through the application process is to convince them that you fall into the lower risk category.
The first question you need to ask yourself is “why should a financier lend to my business?”
If your answer is along the lines of “trust me I know what I am doing”, ask yourself, would you lend your money to that person? We think you might need a bit more to convince you!
In your application the story needs to convince them and not you that your idea is worth supporting.
The second question to address is “how risky is my venture?”. The more riskier it is the less likely a bank will provide you with finance. You will need to look to alternative providers that will typically look for a higher interest rate.
Try to reduce the risks by adopting strong governance and risk management processes.
2. Follow the rules
In order to assess the potential of any investment, financiers have developed tools and systems to help them evaluate the potential of any business idea. While some of these rules may appear to have no purpose, they will need to be completed before your application can be processed.
Making the process work to your benefit will significantly help your case. Speaking first to an adviser who understands how financiers will assess your risks will help you to address those risks up front and make your application much more attractive.
In addition, remember almost everyone you speak to as part of your application process will need to report to a boss for a decision. They will only be motivated to do that if they feel able to address any query that person might have. Your job as an applicant is to ensure that those answers are made available. Therefore take advice and prepare well with internal question and answer sessions so you are ready to present your case in the best possible light.
3. Have a plan
Financial information is important, but so is your story on how you plan to deliver the results.
Preparing the financial statements is a pre-requisite part of the process, but it is the assumptions behind their preparation that are just as important.
The financial statements can only provide a picture of what you hope will happen. It is the management team that deliver the results. Financiers are far more interested than you might think in looking the leader in the eye and gaining confidence that their money will be looked after.
Use that to your advantage. Don’t be tempted to send in the technical teams. This sometimes leads to higher costs than might otherwise have been the case.
4. Do not borrow more than you need
Borrow at a level that does not stress your business.
In the immediate aftermath of expansion, businesses almost always suffer from cash flow shortages as it takes time for trading levels to reach the levels necessary to meet the extra costs growth causes.
Before the financial crises, advisors were convincing borrowers that it was better to borrow as much as possible, because it would reflect well in financial ratios and make the business more attractive.
However, this hides the fact that interest and capital repayments still need to be made on time. Not to mention the increased overheads you will have from the enlarged business.
Accordingly, you must stress test your ideas to understand in what circumstances you would find it difficult to meet your repayments.
5. Contribute to the amount required
Would you lend to someone who did not use any of their own money to back their idea? We think not.
We appreciate that it’s sometimes difficult, particularly for a start-up, to find any capital, but we advise that you consider all possibilities of getting some of the money from family or friends before you seek financing from professionals.
As a business owner, you should make sure that the way you prepare your financial statement shows you are putting aside at least a part of your profits in the business as retained earnings.
The bankers will typically only lend against your balance sheet strength and this is not something that can be corrected over previous financial years.
It is therefore beneficial to bring on board professional accountants at least a couple of years before you need to seek financing.
If you are considering raising finance and would like to have a conversation, please send us an email or give us a call on 020 7965 7216.