Funding comes in many forms, but it won’t come at all unless you know what you’re talking about, writes Carol Cheesman, principal of Cheesmans Accountants
Sooner or later, every business needs a cash injection. Whether it’s for launching a start-up, investing in technology or financing expansion, new funding is crucial.
That funding may take many forms – loan, investment, grant – but regardless of the route, funder confidence is vital.
If your funder is making a loan, they need to be confident you can make your payments; if it’s an investor, that they’ll receive a genuine return; and if awarding a grant, that you will fulfil the conditions of the award.
So prepare yourself. First, you need a business plan.
Don’t delegate this job. A business plan can involve some tough soul searching, but when you’ve finished, your strengths, weaknesses and trigger points will be clearer.
Clarity is key to a successful presentation. Tough questions become much easier when you know what you’re talking about.
Your business plan should include
- what the company does
- who owns it and what are their expectations
- who runs it and what is their experience and loyalty
- who are its main competitors – and why are you better than them
- the historical (if any) and projected financial results and how you plan to achieve them
- potential threats and how you plan to minimise them
Who will these funders be?
If you need equipment, you should consider a medium-term loan or hire purchase.
If you aim to fund a growing business (to buy stock etc) then consider an overdraft or even invoice discounting or factoring.
Invoice discounting is generally aimed at larger businesses, allowing them to use unpaid sales invoices as collateral.
Factoring is where a business sells its “future sales” invoices to a third party at a discount and the third party/factor collects the full amount from the customer, paying over a proportion of the invoice to the business.
If you plan to develop a building project, then you should consider project finance that can be drawn down at key stages of the project, and if you are undercapitalised then you could perhaps consider a medium-term investor.
Whoever your potential backers are, they’ll need to understand why you need the funding, what it would be spent on, what contribution you will be making, and how it will be paid back. If they don’t believe you can afford the interest or the repayments, your funding will be much harder to come by.
The cornerstone of any funding process is the accounts
A potential funder will always want to see an established business’s track record. For start-ups, detailed projections are necessary. In particular:
- remember that accounts are two things: a factual document and a sales document
- accounts must be prepared in accordance with the relevant legislation
- they should be clear and factual, explaining how the company has operated so far and its plans for the future
If you do all of these things – and you have a workable business – you should secure the funding you need.