Finance Raising Considerations

Fri, August 24th, 2018

Finding the right funding structure for your business is key to growth

Finding the right funding structure for your business is key to successful growth, however raising finance is a complex area.

Some of the common pitfalls and areas to consider are summarised below.

Understand the funding requirement

It is important that the funding requirement is understood in sufficient detail prior to entering into discussions with funders. The best advice is to take the peak funding requirement per the financial projections and add a sensible contingency.

Without a financial projection it is difficult to understand the peak funding requirement, this is because the contribution of existing revenue streams, and the profitability and cash flows from these need to be considered. Also the phasing of revenues/costs and the impact of working capital assumptions i.e. debtor days/creditor days etc is difficult to establish without a financial projection.

Understand the drivers of business finance

The key drivers of business finance are risk and reward.

Equity funders will typically look to take more risk in return for higher rewards.

Conversely high street banks aim to take a low/medium risk, with a lower return i.e. the bank base rate plus a margin, and other returns on borrowing i.e. (bank charges, transaction fees etc). These returns are significantly less than an equity funder, for example private equity investors can typically be looking for an IRR of 40% or 3 times their investment over 4-5 years.

It would therefore be unusual for a bank to fund a business looking to move into a new and unproven product or market with significant potential, but with a high risk of failure.

It is important therefore that business owners have a realistic view on how their business is likely to be viewed by potential funders, and understand the type of funding structure most applicable to their business.

One way a business owner can reduce the perceived risk of the business is to validate the strategy as far as possible using existing funding lines- personal capital, cash flows of the business, friends and family, prior to seeking external equity or debt investment.

Effective communication of the strategy and funding requirement.

Funders will require a clear summary of the business strategy, the funding requirement, and the assumptions on which the funding requirement is based.

Funders are typically faced with a large number of funding applications, and those applications which clearly articulate the strategy and funding requirement will have the greatest chance of success.

This is best achieved through the preparation of a business plan with a set of 2-3 year P&L, balance sheet and cash flow projections, with supporting assumptions.

Funders will also expect the business plan to be stress tested, and include a base case and downside scenarios.

Consideration of alternative funding solutions

In recent years there has been a significant growth in alternative sources of finance, for example crowdfunding, and peer to peer funding. These funding streams are relatively new which can sometimes mean they are not fully considered, and significant potential funding opportunities can therefore be lost.

Role of an advisor

The above are just some of the areas to consider when seeking to raise finance for your business.

Raising finance is a complex area and with the range of funding opportunities available, it has never been more important for businesses to use a Corporate Finance advisor to navigate through the funding options available, and who will work with management to provide the business plan and other key information required by funders.

The Corporate Finance team at MHA Moore & Smalley has significant experience in assisting SME’s across a wide range of sectors to raise finance. Our work involves raising finance from both high street funders and alternative finance providers.

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MHA Moore and Smalley

Hoghton Chambers, Hoghton Street, SOUTHPORT, Merseyside, UK, PR9 0TB

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