There are any number of reasons why small to medium enterprises (SMEs) might decide to raise additional finance. These include a desire to take on new staff, boost production capacity or expand into new markets. But before rushing into anything, here are four important factors to consider advised by Simac Konkader, business leadership coach, in order to ensure you get the process right first time:
Explore realistic funding options
The first thing to think about when evaluating whether to go down the funding route or not is to understand your risk profile – are you a risk-taker, risk-averse or somewhere in between? This stance is important to understand as it will make a material difference to how you move forward.
If you decide to go ahead, a first port of call for many SMEs is their local bank, particularly if they have a positive rapport with their Relationship Manager. Many banks will offer unsecured loans of up to about £25,000, mostly if the business is profitable or in good standing. To obtain more will require you to put up collateral, for example by remortgaging your house.
Another option is to go to independent lenders, such as financial brokers Rangewell Business Finance or Funding Circle, an online marketplace that enables investors to offer money directly to SMEs. Compared with banks, their interest rates tend to be competitive and they often also have faster response times as they are subject to fewer regulatory compliance demands.
If neither of these possibilities work out though, it may make sense to try, crowdfunding or applying for a second mortgage. Going down the venture capital path is another consideration.
It may also be possible to identify potential funding sources and receive recommendations to smooth the path, by networking with members of local Chambers of Commerce or the Federation of Small Businesses.
Have a good story to tell
Put together a strong business plan, or update an existing one, to clarify how you envision the company developing into the future and how you intend to ensure this vision becomes a reality. This plan should include market research and a SWOT (strengths, weaknesses, opportunities and threats) analysis.
In addition, be specific about why, how much and for how long, financing will be required in order to help you achieve your goals. Such aims could include growing the business by hiring new staff, asset purchases, or making a strategic acquisition.
Another vital consideration is getting basic business hygiene right. For instance, ensure you can show three-years-worth of accounts, obtain a statement from your accountants and run a credit check.
Also undertake some sound, justifiable forecasting to demonstrate you are a safe investment bet. As part of this process, be certain to evaluate your brand reputation on social media sites, such as Trustpilot or LinkedIn – ideally a minimum of 12 months in advance – and make moves to improve it, if required.
Because investors will undoubtedly do their own due diligence, any failure to address these issues effectively will inevitably damage confidence, which at the very least could lead to a hike in your proposed repayment rates.
Practice your pitch
Once the groundwork is complete, the next stage is to prepare the proposal you intend to present to investors and practice it at home until perfect. The starting point here is to develop an ‘elevator pitch’ to grab their attention from the outset – such pitches summarise your idea, product or company and why it is important or different in a couple of sentences that could be easily understood by anybody.
Investors will ask probing questions so be well prepared, but do not provide them with too much detail – just offer enough information to help them understand that their money is not at risk and stick to both the numbers and the facts. This includes explaining why you want the loan, what led you to this point and what you intend to do with it. As part of this affordability check, investors may also want to see your personal expenses, so be ready for that. Also be sure to provide any additional information they require as soon as you possibly can.
But also don’t forget to ask your potential investors about their service level agreements, and be sure to follow up regularly with them until the application goes through.
Consider alternative options
If funding fails to be forthcoming, do not give up hope. One option here is to save money by cutting inventory or streamlining your operations and using it to fund the core business.
Another is to outsource backend functions, such as IT or document processing, to companies based in more cost-effective overseas territories. Segmenting and rationalising the customer base to focus on the most profitable is a further option. Finally, consider working with other SMEs that have complementary businesses and offering mutually-discounted rates or even skills swaps.