finance 27 Seven steps to successful funding


Contrary to popular belief, banks are working very hard to make sure there is sufficient funding in the market for those companies that can present a viable business proposition, writes John Burbedge of The Business Magazine


Demand for debt in general, including the re- emergence of growth finance, will accelerate as the economy strengthens, and by 2012 many UK companies that took out three, five and seven- year finance arrangements in 2009, 2007 and 2005 will require new funding lines.


The funders’ key question has become: “Is this business fit for investment?“ The onus has increased on businesses to detail their business case and prove they are worthy of financial support.


That’s probably one reason for the good attendance at the interactive forum on access to business finance staged by bankers Barclays Corporate, lawyers Lester Aldridge and accountants Inspire in Bournemouth.


Another reason was the quality of the no- nonsense advice provided, as Ian Workman, Solent & Dorset head of Barclays Corporate, Inspire director Warren Munson and Lester Aldridge partner Grant Esterhuizen – with their ’seven steps to successful funding’ approach – took delegates through the criteria connected with the funding decision-making process.


Track record?


Prime among those seven steps is the need to demonstrate a robust and well-documented track record to funders, the trio of experts agreed.


“I can’t emphasise enough how important the track record of a business has become. Times have changed, and what we as advisers have seen change in the past two to three years is the extra detail required about the business. Funders want to understand its day-to-day running, its management and systems, and why it has come to this point in its business lifecycle that it needs funding,“ explained Munson.


’Track record’ was nowadays a combination of factors “not just the profit and loss account and an annual balance sheet,“ explained Munson and Esterhuizen. Ownership and control of the business needed to be definitively proven, from commercial property to intellectual property. Key contracts needed to be watertight, and Companies’ House filings had to be up to date, accurate and well presented to mirror the professional image of the potential borrower. Corporate governance and directors’ duties, plus implications of the new Bribery Act could also come under any potential funder’s spotlight.


The experience, abilities and quality of the management team should be included, not least for start-up and young companies that might lack a long-term track record. The driving influences and achievements of the business (including non- financial aspects) also needed to be explained.


’track record’. “You can’t monitor the progress of a business unless you have something to measure it against,“ said Munson.


Funding security?


Potential funders will want some security against those forecasts failing to become reality. Various assets can act as security said Esterhuizen but applicants should take advice and be selective before offering them. Personal and directors’ guarantees are also now more frequently being requested by banks. Security agreements can lead to serious conclusions, so taking legal advice is a wise move. But, as banker Workman added: “We don’t take any pleasure in re-possessing assets, it’s the last thing we seek to do.“


Bank-funded products?


From left: Grant Esterhuizen, Lester Aldridge partner, Ian Workman, Solent & Dorset head of Barclays Corporate and Inspire director Warren Munson


This comprehensive track record would require an in-depth information package to be prepared, Munson, Workman and Esterhuizen agreed, but it was becoming an invaluable tool for those seeking funding.


With the compilation task eased by professional help, the resulting information package could actually improve a business overall. Rather than merely preparing the information as a one-off for potential funders, it could be developed as a starting point for a business plan for the future. (Interestingly, forum voting indicated that only half of the delegates’ businesses had a written business plan.)


Acceptable purpose?


Reasons for the funding need to be clear and for valid business purposes. Funding to overcome long-term losses or to enable profit extraction to support an owner’s lifestyle was unlikely. However, business turnaround funding is becoming available, if supported by a detailed ’track record’ and solid business plan. Applicants simply needed to put themselves in the funder’s shoes, said Munson, and ask: “If I had the cash would I lend them the money?“


Projections and forecasts?


Be realistic, was the professional advice. Hopeful figures didn’t help anyone in the long run. Projections needed to look three to five years ahead and the application should include a best case-worst case sensitivity analysis taking in potential economic scenarios. Clarity and understanding should also be the aim, not least for the business owner who might be asked to explain some figures to the potential funder. And the forecasts needed to link clearly to the


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2011


The days of funding a business purely on an overdraft facility are long gone, delegates were told. Asset-backed financing, sales invoice discounting, and loan-lease agreements were now common funding arrangements. Interest only loans were very difficult to obtain and the Enterprise Finance Guarantee Scheme was often seen as a more viable option.


Other funding sources?


While banks specialise in providing debt, equity is normally just as important for supporting business growth, and evidence that a business has also been successful in securing equity funding to achieve their ambitions offers significant comfort to a bank. Amongst SMEs, equity funding may be in the form of direct investment from directors, or avenues such as business ’angels’, and Venture Capitalists. Some business applicants such as start-ups without tangible track records might be better suited to focus on equity funding as the risks around providing equity are greater, but the possible rewards for investors have the potential to be higher than debt provision. Such funding often introduces more funder involvement within the business operations, and impartial third- party professional advice may well benefit new applicants.


Business advisers?


The depth of experience, specialisms, industry awareness and reputation of professional advisers – accounting, legal and financial – and their working relationships with the applicant would also be considered by the potential funder.


Details: Ian Workman 07775-543496


www.businessmag.co.uk


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