Six steps to secure finance for your business
Lots of businesses are seeking out finance at the moment, whether to fund an acquisition or finance investment, but given the challenges the economy faces, it is becoming increasingly difficult to secure the right deal.
If a business hasn’t sought out finance for a while or there has been a significant change to their operations since they last requested funding, then there are a few steps they should consider to improve their chances of success.
Review your business plan
A business plan is often one of the first documents that a potential lender and/or investor will want to see, as it clearly lays out your vision for the company. Having an up-to-date business plan will show financiers that you have a path to profitability and growth, giving them the confidence to invest or lend you the money you require.
If you haven’t reviewed your business plan in a while, take the time to review it and update it, highlighting potential future risks, as well as opportunities. Investors or lenders will appreciate transparency as it makes it easier to calculate the benefits and disadvantages of a deal.
Get the figures to back you up
As well as having an effective business plan, businesses will need to be able to demonstrate that they can service the debts of any loans that they make or offer the right level of return to investors.
A key aspect of this is demonstrating financial health and positive cash flow. Although not essential, it is highly recommended that you produce detailed management accounts in the months leading up to seeking finance.
This should demonstrate profitability, cash flow, debts and sales. Doing this over a period of several months will give a lender or investor confidence that the business is stable.
If you are borrowing for a specific reason, such as investment in a particular piece of equipment or to hire a certain type of employee, borrow as much or a little more than you need. Lenders will want to check the value of the investment you are financing and may be concerned if you borrow too little or far too much.
Both may indicate that you are taking on too much additional risk, which could affect your ability to repay them.
Prepare for due diligence
At some point during the lending or investment process, the other party will want to conduct financial and legal due diligence. It is unfortunately fairly common for deals to fall through at this late stage because a detail has been missed.
Remember, lenders and investors tend to be risk-averse. If they feel that something uncovered during due diligence should have been revealed to them earlier it can put them off entirely. Try to be as open as possible early on and you should avoid any complications during this stage that may prevent you from obtaining the finance you need.
Try alternative finance
If you can’t get a loan from a traditional lender or you are struggling to find investors that will finance you, then you may want to consider an alternative form of funding. There are a growing number of alternative finance options out there to help. If you need money in the short term, for example, you could use invoice finance.
This allows a lender to effectively ‘purchase’ your unpaid invoices for a fee. Then when the invoice is paid by the customer, you get the remaining balance minus the fee.
If you need to borrow a larger sum then you could borrow against your existing assets or property owned by the business. This could help you secure a larger sum over a longer period but may put the assets you own at risk.
Finally, there is crowdfunding and peer-to-peer lending. This approach allows businesses to seek finance with a number of individuals, often online.
Typically, investors will be offered a small percentage of equity in the company in the case of crowdfunding or will see numerous lenders loaning money and earning interest on repayments. This allows investors and lenders to share the risk, which makes it easier for them to lend the money.
Get in touch today if you require any advice.