Thursday 12 June 2008

Raising Finance during the ‘Credit Crunch’

Raising finance for a small business is always a challenge banks tend to be risk averse at the best of times so the current economic situation just increases the challenge.

But the problem is not insurmountable but like all business issues preparation is the key.

Firstly the directors or owner have to identify the best form of finance, then before approaching the source of finance a good business case must be prepared, specifically a tailored business plan. Just dusting off an existing business plan, (if one exists) is not enough. With over fifteen years experience of these situations I know that the business plan that you write for a risk averse banker is totally different to one that is required by a Business Angel (or private equity investor). But more of that to come in a latter post!

Identify the correct form of finance is critical; otherwise you will just be wasting time and effort.

Listed below are the most common forms of finance, however if you can’t find a suitable method detailed below then please contact me for more specific solutions.

Raising Finance

Loans, Factoring, outside investors, Business Angels and Venture Capital are all means of financing a business but the starting point should be using savings or borrowing from family & friends, (but make sure that there is an agreement drawn up to protect all parties).

Banks
The most common source of funding is the bank, however businesses often utilise the bank products and services in the wrong way.
For instance if a business has an agreed overdraft limit of £5,000 but the business constantly operates their account with the overdraft fluctuating from £3,500 to £5,000 but it never drops below £3,500.
The business should consider changing the £3,500 debt into a commercial loan and then change the overdraft to cover the fluctuating debt of £1,500. This could save money in interest charges.

Other Ways to Fund Cashflow.

Firstly can the terms of trade with your suppliers be extended? Often businesses are paying on Pro-forma. Once some trading history has been built up it is usually possible to agree improved terms ie 30 days or longer.

Just simply taking longer to pay your supplier can damage your relationship or even affect your credit history and rating when you try to get other products or services on account.

Invoice Discounting
This is also known as ‘factoring.’ The finance company inspect your books and agree to pay a percentage of the value of invoices that you send to your regular clients at the time you issue them and pay most of the rest of the value when they get paid.
They can either run your debtor book for you chasing the payments or you can chase payments. Obviously in the first case it relives you from that time consuming and some times uncomfortable chore but the cost are higher and you may feel that your clients might not like someone with whom they do not have a business relationship chasing them form money.

Asset Based Lending
This is a similar form of financing and the finance company agree to provide you with a percentage of the value of your sales even before you invoice, this is especially helpful to businesses who do not invoice until the end of the project. This allows manufacturing businesses or other industries like builders to fund the cost of materials and labour or other processes which extend the time before the business gets paid. The finance company inspect your books and agree to pay you a percentage of the value of the sales. Debts can be secured against stock, machinery, premises, invoices and even brands

Click here to get our finance options table

Other options include outside investors, Business Angels or Venture Capital.

Click here to get our Guide to Equity Finance:- Business Angels or Venture Capital.

For more information about how we could help you source finance to fund your business e-mail me today!

Alan Briggs

Dynamic Business Strategies Ltd

Tel: 07917 446068

E-Mail: info@dynamicbusinessstrategies.co.uk
Website: www.dynamicbusinessstrategies.co.uk

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