The type of lending most suitable for a firm heavily depends upon its catalogue of assets and risk profile – one size does not fit all
For many fast growth start-ups and entrepreneurs, negotiating the funding landscape to attract potential investors is still a challenge. To make sure that business owners secure the most cost-effective option available and gain lender confidence, planning is essential. The creation of a robust business plan, cash flow forecasts and a frank analysis of external influences must be completed in order to make the business finance ready. Crucially, the ability to demonstrate value, whether it be in the firm’s assets, order book or intellectual property is vital.
Below is an overview of the key steps business leaders should take when preparing their firm for investment.
Make a financial forecast
Aside from showcasing historic growth and financial performance, the ability to secure investment hinges upon a firm’s ability to demonstrate projected sales performance, expenditure and a clear business plan. These documents are often a requirement during the lending application process and should be prepared with care. For example, financial stability can be illustrated by calculating the firm’s cash position in each upcoming month. This means that expenditure can be adjusted where necessary to preserve working capital – providing assurance that the firm can afford loan repayments, for example.
The preparation of a realistic business plan requires the business owner to take a critical look at the firm’s sales pipeline, dividing the number of leads or potential wins by the typical success/failure rate at tender or in the existing commercial landscape. Any projections will likely be closely scrutinised by investors, so be prepared to justify any expected increases in revenue, whether they are the result of increased marketing activity, a growing sales team, or new product launch.
Evaluate the impact of external influences
Before presenting to investors and selecting the most suitable source of finance, business leaders should complete a full audit of external factors, both legislative and relating to the business’ marketplace, to identify any potential risks. For example, for some firms the introduction of the National Living Wage on April 1 could significantly increase their wage bill and put pressure on cash flow. Alternatively, exporters could see a reduction in orders in the event of a ‘Brexit’ and retailers may require increased investment as they adjust to planned increases in business rates. Such factors should be considered, and the required contingency plans made.
Firms should also be sure that they have a good understanding of their customers’ creditworthiness, the more creditworthy their order book is, the more likely they are to secure finance. This is always something that should be checked and factored into the decision making progress when committing to new contracts.
Be prepared to demonstrate business value
While traditionally, a strong portfolio of assets such as stock, property or machinery was essential in securing finance, the alternative lending market has opened up investment opportunities for firms able to demonstrate value in other ways. Often a firm’s assets, when combined with the business’ goals and individual financial requirements, are a deciding factor in which type of finance can be secured. Therefore, analysing where your business’ true value or strength lies can be extremely useful in creating a shortlist of suitable lenders.
For example, a firm that owns a quantity of high value machinery may look to secure a business loan to fund further capital investment, as these assets provide a high level of security. However, a fast-growth start-up might find that most of the firm’s value lies within its strong order book and outstanding invoices; so may opt to secure cash flow finance in order to fund growth. Alternatively, firms with a traditionally high risk profile, where their worth is tied up in a particular product or intellectual property, could find that venture capital or crowd-funding is the most suitable route to finance.
In order to find an effective finance solution, business leaders must take care to prepare all of the necessary information required to attract lender interest, and make a smart investment decision. It is important that firms recognise ‘one size does not fit all’, an open mind is essential in pinpointing the most suitable funding model, with alternative finance solutions providing a plethora of options for fast growing businesses.
John Atkinson is managing director at Hitachi Capital Invoice Finance.