One of the most important things to remember is what I call the ‘lizard syndrome’. A lizard can look completely dead one minute and then, with just a bit of sunshine and warmth on its body, it comes to life. Companies are the same. One minute the outlook is absolutely bleak and then a year later the position can be (and often is) transformed. OK, the business may have a different, and often leaner, base, but it’s alive and kicking.

So remember, ‘don’t give up’ is the first lesson on facing a funding crisis. Keep going if you possibly can.

Now, you will forgive me for stating the obvious, but running out of cash usually occurs for one of two reasons: either through over-trading, including a really bad acquisition; or just lack of revenue often caused by bad conditions, sometimes by bad luck.

The effect is the same – no cash – but because the symptoms arise from different ailments the treatment needs to be handled differently.

What to do when you have over-traded

Over-trading generally comes from over-confidence. A couple of great years and you expand, employ extra people or, more dangerously, make long-term commitments such as onerous property leases, often at top dollar prices. Then comes a major fall of business, a large bad debt or whatever, and your bank starts to get twitchy. That lovely man who couldn’t give you enough in the good times, suddenly turns into a Jekyll and Hyde figure. Not only does he refuse to lend you any more money but often he wants you to cut the facilities you already have, based on a clause in some banking covenant you never realised even existed!

Now, remember the lizard syndrome – survival at any cost, that speck of sunshine on your tail. Swallow your pride and retrench fast. Cut back to your core business and negotiate like hell. Negotiate with your suppliers, your employees (you will be amazed by how loyal they can be), your landlord, the taxman and the VAT man. Don’t give up; this is a marathon, not a sprint.

And talk to your bank, every day if necessary. Tell them what you are doing and ask them for their advice. Negotiate with them particularly if you are going to put up any personal guarantees or collateral (‘if I do x, will you do y?’) and document it so that everyone has a clear understanding. Be humble, which as I well know, can be particularly difficult!

What to do when trading is poor

If your problems are a result of just poor trading over a prolonged period, lack of orders and the like, you have a different set of issues to face.

Most often you are doing all the right things but just too late. A form of slow strangulation is being applied to your business – so very painful because along the way what often happens is that you cut or defer your salary at the expense of your own overdraft. God forbid you may also be tempted to enter into personal guarantees or put more of your own money in.

So, in this scenario, work on the basis that things just won’t get any better before you enter into onerous personal commitments and use this low level of trading as your base for what the business will continue to be.

Walking away from your business has to be an option. Despite the lizard syndrome, this can sometimes be the best choice to make.

Raising money in an emergency

Now, let’s assume you have made all the correct business moves but you need some extra funds. You quite rightly identify that friends and business angels are the best way to move forward when you are under pressure. Less likely providers, but still worth trying, are mainstream venture capitalists and the banks. Whichever is your preferred choice, if you try to raise money for your business when it is running out of cash, your options will be few and very expensive. Low valuations and heavy dilutions are par for the course.

Let’s deal first with friends and business angels. Try and make your financing package as secure and tax-efficient as you can. Give them security for any loans and, for their equity element, make sure you use EIS relief, which gives an initial 60 per cent tax relief (40 per cent CGT/20 per cent income tax).

Mainstream VCs are somewhat different. First, you have to realise that the process of raising venture capital takes time. I keep on repeating it, but always get yourself a proper business adviser. An adviser will make sure you don’t waste too much time on hopeless causes and will provide the right contacts in the VC community.

Raising money from VCs generally takes three or four months, so make sure you have back-up in the office for what will be a major distraction and you don’t run out of money in the interim.

So last but not least, banks. Once again, use an adviser – best of all, your accountant. See if you can qualify for one of the loan guarantee schemes operated by the banks with the Government. You can also try some off-balance-sheet financing such as factoring or leasing any equipment that is free of finance.

And remember – the lizard doesn’t give up. Be determined!

Sara Williams interviewed Michael Jackson, chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He is also chairman of Sage, the FTSE-100 accounting software group with which he has been closely involved for over 20 years, since its unquoted days. He has recently been appointed chairman of PartyGaming.