Accessing Capital for Growth 

Gaining access to outside investment means you don’t have to give up on your dream. So how do you prove to any potential investor that your business model is worth investing in. What information will they need from you? What timescales are involved and what are the likely costs/cash flow implications. 

Who are you and what is the business? 

Information an equity investor or more traditional funder is likely to need, can include: 

• A Business Plan – this articulates your dream.  You know why you are doing this and where you want the business to go.  Your business plan explains who you are, what you are looking to do, why and how. 

• Trading history – how has it gone to date (assuming you have started trading).  We can learn a lot from what you have done so far.  What has worked well, and also not so well. 

• Contracts and orders – have you won any contracts, what does your order book look like 

• Forecasts and scenario analysis – using your business plan as the base, what are your future numbers likely to look like.  It’s good to understand this with and without investment, plus build in any other sensible scenarios. 

• How much cash you need and for how long? 

• What will the funds be used for? 

• Equity investment details – If you are pursuing equity investment, what percentage of share you are looking to give up and for how much (to do this you will need to value your business) 

How much cash you need and for how long? 

Regardless of the funding provider, you are going to have to know your numbers before anyone is even going to consider injecting funds into your business. 

Having a robust forecast covering the next 2 years will provide the incite equity investors need.  This forecast should cover the Profit and Loss format and also Cash Flow.  Cash Flow is key to knowing how much cash you need and for how long.  So this is a great place to start. 

Steps to building a forecast: 

Sales/Revenues – in your Business Plan you may have had a high level revenue aspiration for the next few years, but now we need to break this down.

• Show monthly
• Possibly by product or service (or product and service type)
• Show growth rates, and in the assumptions, what are these growth rates based on

Direct/Variable Costs – based on your sales from above, what costs are directly related to these, you need to ensure that they all hang together in the way your investor would expect.

• What costs will you incur for each £1 of revenue you are forecasting;
• Costs of materials, Direct labour, Utilities, Marketing, Warehousing space Etc.

Indirect costs – some of these may remain the same regardless, but other will change, just not necessarily directly in line with Revenues.

• Rent – are your offices, or other premises adequate, and at what point will this need to change

Finance and interest – if you are looking at more traditional finance routes, you will need to include interest in the profit and loss forecast and also repayments in the cash flow

For the cash flow forecast you need to also consider:

• VAT
• Payment terms
• Repayment of any loans or buy back of equity (unless the plan is to sell the whole business in the medium term rather than buy back the equity)
• Stock purchases
• Resources lags – if your revenue numbers are highlighting you need more people, then you need to build in time for recruiting and training, as well as recruitment fees and any equipment they may need.

These numbers will highlight when your cash flow will be negative and for how long.  So, this will give you the answer to how much and for how long.

What will the funds be used for?

Equity investors and traditional funders alike are interested to know where the cash will be spent. 

Spending that can go down really well with investors and funders (they are all different, so these will not all be acceptable to all funders):

• Plant and machinery
• Vehicles
• Stock
• Working capital
• Marketing
• People
• Premises

Red flags – these are things that cause concern amongst equity investors and traditional funders, again, not all of these will create a hard no, as all funders are different, but you should be aware that these are not desirable:

• Overdue taxes (even if they are on time to pay arrangements)
• Repaying Directors for monies already put in
• Paying high levels of directors’ loans to Directors generally
• Paying off other loans
• Poor company credit history
• Your length of time in business
• Bankruptcy
• Debt to income ratio
• The market is deemed to be too high a risk

Knowing your investor

If you are looking for an equity investor, someone who will own shares in your business, then it is good to know who they are and what they are looking for, from you and your business, as well as what they can offer.

What are you looking for?

Are you looking for a silent investor, who just provides funds for shares?  Or are you wanting someone who will take on some of the burden of running the business, open doors to new markets, provide knowledge or specialist skills that will help the business move forward?

It is important to decide what is important to you, as this could have an impact on which investor you choose to work with, or even the value you place on the shares they purchase.

What does your investor want from you?

Typically, an investor is looking to grow the capital they put into your business.  They do this when the business grows in value.  So, if you are looking for your business to grow in value, your objectives are aligned.  However, your investor may have a different approach to achieving this increase in the value of the business, so it is important to understand this up front.

Timescale

Before you enter into something, think about the exit strategy!  Is your investor looking for a quick turnaround 2 or 3 years strategy of increasing the value of the shares they purchased, and would you also be ready to sell to this timescale? 

1. Sell the whole business when the investor is ready to devest.  The investor then gets a percentage of the sale of the business.
2. Find the funds to buy the shares back from the investor when they are ready to sell, at the increased value
3. Find another investor to take the original investors shares

Do you just need cash?

If the business needs cash for growth, and you are not looking to utilise any expertise from an investor, then perhaps you should consider a more traditional route to accessing finance.  The great thing about a loan, or other forms of more traditional commercial funding, is that the terms are prescribed in advance.

Depending on the results of your cash flow forecast, you may find that one of the following more traditional loan products is the most suitable way to unlock funds whilst keeping hold of all of your shares:

• A loan

We are all familiar with loans.  You describe an amount you are looking for, and a term (the amount of time you will pay it back over), then make repayments each month, along with interest on the amount loaned.

• Asset Finance

Similar to the above, but in this case the loan is secured against a specific asset.  The most common form of this is a mortgage.  The loan is secured against your house.  In a business situation, this could be commercial premises, or plant and machinery or vehicles.  A valuation of the asset is done, before a rate and term is agreed in the same was as the loan above

• Invoice Finance (confidential)

A more specialised product whereby when invoices are raised, on say 30 day terms, you can draw down funds against the invoice raised the same day, or the day after it is raised.  You can generally draw around 80% of the value of the invoice.  You are charged an upload fee as a percentage of the value of the invoice, and an interest rate based on how much of the available funds you have drawn down.

You would have a different bank account associated with this kind of finance product, but your customers would just think you had changed accounts.

There are lots of other rules also associated with this kind of product, so be sure to get advice before entering into it.

The great thing about invoice finance is that it grows with you.

• Factoring

Similar to the above (invoice factoring), but not confidential.  This means that your customers will be made aware of the facility.  Another main difference to invoice financing is that with factoring, the factoring company do the debt collecting.  This increases the charges associated with the facility and can also upset your customers.

• An overdraft

No longer as common as they once were.  Overdrafts, are a flexible loan that is available to you, but you only typically pay a set up fee, and then interest on how much you use it, for as long as you are using it.

Terminology

With any product, the devil is in the detail, and a common cause for confusion is APR rather than fixed rates of interest.

If you are quoted a flat rate of interest, you are paying interest on the whole amount for the whole time.  No account is taken of any reduction in the capital amount over the term.

If you are quoted an APR, you are paying interest on the balancing amount each month.  An APR will also take account of any standard fees

You can easily pay twice as much interest on a fixed rate as on an APR.

You should look at the total amount you will repay over the term of the loan, rather than the headline interest rate displayed, so that you know exactly what you are agreeing to.

Personal guarantees or other security

Most commercial lenders will want some form of security on a loan.  This could be the asset, in the case of asset finance, or a personal guarantee for many of the other loan products.  It is unusual to be offered unsecured finance of any size.  Although start up loans are a good example of where you may not need to provide a personal guarantee.

Timescales

Finding an investor that is a good fit for you and for them can take time.  So, the sooner you start down this path the better, if your forecast suggests that this is the best option for you.  The due diligence alone can take two to three months.

More traditional finance options are generally much quicker in comparison.  Perhaps a month to getting the funds in the bank, assuming you have all the necessary information required by the lender.

Management Information

When you have a funder of some sort, they will generally want to know that their investment is safe, so will stipulate that they be provided with information on the business each month.  This varies between equity investors and lenders, and you tend to have to provide more, the more funds you have taken.

• Monthly Profit and Loss v forecast
• YTD Profit and Loss v forecast
• Monthly Balance Sheet
• Monthly cash flow forecast
• Some KPI’s (key performance indicators)

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