Bob Taylor, partner at venture capital firm Envestors, gives advice to an early stage design and innovation company with £600,000 of sales to date that is seeking further growth and expansion capital
The design and innovation company says:
"Our company has been trading for nearly two years and has developed an ultra luxurious lifestyle product that has gained significant interest from two key market segments: end consumers, including celebrities and trendsetters; and business customers who use the product to help promote and elevate their brands. Our business has collaborated with a leading engineering brand to create this product, and now needs funds to build stock and grow sales. We already have an impressive roster of blue-chip clients ordering our products and a growing sales pipeline. We need around £500,000 of investment. Should we be looking for business angel finance, an investment fund, or might we be able to secure some debt finance?
Bob Taylor says:
"You have done really well to just get out there and sell your product. It's one thing to develop and build a product that works, but even better if you can demonstrate there are customers out there willing to pay for your product—and £600,000 of sales would say there are customers.
"Raising debt for early stage businesses is usually very difficult, as most lenders want either some security/collateral or else confirmed customer orders before they will make any funds available. For many young companies this situation means that debt isn't feasible.
"One option that might be available to you is the Small Firms Loan Guarantee (SFLG), which is an initiative sponsored by the Department for Business, Enterprise and Regulatory Reform (formerly the DTI), aimed at being the lender of last resort for companies in the predicament described above. SFLGs can be worth anything up to £250,000. While it is a good initiative, many testify to the challenges in getting SFLGs agreed. Most high-street banks and lenders don't advertise the fact that they offer them, and finding the right person within the bank to approach is key. They can also be expensive in terms of borrowing rates (often 3 or 4 per cent above base) and other charges that lenders make (arrangement fees, annual fees, key man insurances). There are also set rules about who qualifies for an SFLG, including the age of your business. You also need to sign a declaration that you have no other assets available that could be used as security.
"The first stage is to get the bank manger or commercial manager on your side—don't forget that lenders are more interested in your ability to service debt, than the future growth prospects of the company. Aside from the SFLG, you might also investigate whether you could raise some asset finance and, should you secure future orders, you might be able to get some trade finance to help cover the costs of fulfilling these orders.
"Between these three debt options you have a chance that you not require additional equity and thus you will have retained a greater share of your business."
Posted 19 December 2007 : Director.co.uk