Precis of a telephone conversation yesterday:
Customer: I'm looking for £50,000 to finance scaffolding, but no-one will do scaffolding at the moment.
Me: Yes, scaffolding is tricky, there are lenders out there who will do it, but they need to be comfortable that the credit is good.
Customer: So you can do it?
Me: Yes, if the underlying information is strong enough.
Customer: So what do you need to see?
Me: I need [list of underwriting requirements for unsecured lend]
Customer: What do you need all that for?
Me: [explain underwriting process]
Customer (clearly frustrated): So If I get that information you can do the deal?
Me: If it all stacks up, yes..
And so the conversation continued to circle around the actual provision of hard facts, with a slightly uncomfortable reliance on promises and assertions.
On the back of this - far from unusual - scenario, I did a thumbnail analysis, and concluded that 70% of enquiries fail to result in information being supplied. I spoke with a good friend in the factoring industry who opined that, in his case the figure was closer to 90%, so it is by no means isolated to lease broking.
Put into context, this is almost entirely information that most business owners or FDs should have at their finger-tips; we aren't asking them to prepare business plans nor, in most cases, projections.
We can only guess at reasons, but with many years' experience I would put this down to one of 2 factors:
The information is bad, so they don't want to provide it: Fully understandable (interestingly pre-crunch we had many customers who would cheerfully send the most appalling information then act surprised when it was questioned) but I am always at pains to stress that underwriters do understand recession,and that they don't necessarily expect positive trends, nor even profit - they are looking to understand where the business is now and where it is going to.
The customer isn't fully engaged, but is just testing the water: In my opinion, the more likely in most cases. As a broker I rely on long-standing contacts - in some cases contacts of 20-years plus. I am very happy to test the water and have general discussion on the assumption that we will talk again when a real need arises - feel free to tell me you are just exploring and we can have an open chat!
This brings to mind the recurring stories about how businesses are afraid to apply to their banks for funding for fear of losing their existing facilities. Really? Your business is thriving and moving forward, but you are frightened of losing your facilities?
So, what is the point here? well, fundamentally it is about having some clear goals and definitions; by all means test the water, but you cannot judge any situation by a response based on insufficient or indeed, misleading information.
Most important, if you actually are looking for business funding, then you must be prepared to back up your application with solid, current and coherent information. Obviously what will be read into that information will depend what you are looking for - if it is a refinance proposition there will be some assumption that business is tough, whereas if you are looking to open new branches, we will need to see that your current business is working.
VCs and equity funders have long used the term investment ready - perhaps a similar criteria should now be applied to applications for finance 'Why will a financier want to invest in you?'.
I've been in the game a long time, give me the facts and I will provide honest feedback
Wednesday 28 September 2011
Tuesday 20 September 2011
Is Venture Capital the right source of funding for your business?
Despite being one of the most difficult sources of business funding to secure, many SMEs see venture capitalism as an attractive funding option. There are hundreds of VCs in the UK with money to invest and a successful pitch could see your business provided with millions of pounds in financing, the counsel of highly successful business people, access to a huge network of established contacts and even the possibility of increased media exposure. However, despite the many advantages evident, the fact remains that the criteria set out by venture capitalist firms, and the commitments resulting from a successful funding round, are often very specific and not suited to a lot of small businesses.
There are a variety of factors that could influence the suitability of Venture Capital for your business:
Very high returns: It is not uncommon for VCs to expect a return of 5 to 10 times their initial investment. The majority of small businesses cannot provide the potential for growth to generate such returns.
Short exit periods: The desired exit period for a lot of VCs can be in the range of 3 to 5 years. If this is in line with your goals then no problem, but if you are considering long-term investment then venture capital may not be for you.
Large cash injection: This is good for helping the small proportion of companies for whom a cash injection of £3-30 million will materially increase their growth rate and chances of success. If this is not the case for your business, is it worth the high level of dilution that such a large equity investment will incur?
Large proportion of control: Often, a prerequisite for a VCs investment is a high level of control within the investee company and therefore a major influence in the decision making process. This requires a lower level of independence for an entrepreneur in areas such as the direction of the business, business strategy, management decisions etc. If you want to be an individual and retain a large proportion of control in your company, VC funding is probably not a suitable option.
Time consuming process: Obtaining equity investment can be time-consuming, with deals typically taking 6 months or more to arrange. So if you require a quick cash injection into your business, VC may not be the best funding option for you.
It may be that venture capital is not a suitable funding option for your business. However, this should not be cause for concern as there are a wealth of other business funding sources available in the form of grants, loans, angel investors or crowd funding to name a few.
Friday 2 September 2011
Do you need business finance? Really?
Rather a strange question for a finance broker to be asking, isn't it; but this topic frequently comes up on the lender side of the business fence and will actually, in many cases, form part of the business argument for (or against) lending.
The question broadly speaking has 2 key components:
Firstly, is it possible to utilise your existing resources to better effect? The prime example of this is customers who come looking for cashflow facilities (debtor finance or bridging overdrafts). In many cases the best avenue is conduct a careful review of both debtor and creditor terms - set a simple goal - to see if you can improve your cash position by 10% by adjusting and managing your debtors and creditors.
Sorry, but I will definitely upset a few people here - however good you feel your credit control is, it is almost certainly not as good as you think. That is a simple, statistical fact. Most people resent bringing in 'specialists' to do what they feel they can do themselves, but will then go on to pay arrangement fees, management fees and charges to a factoring company to bridge the cashflow hole. An external review of your terms, systems and effectiveness can add a lot of cash (your cash!) to your business - and that is for ever - not just to bridge the gap!
So, if you want invoice/debtor finance I would be delighted to chat, but for your own sake, first of all ask yourself if you are really doing all you can to bring in money yourself.
The second component could be called aspiration (or perhaps expecting too much); and much of the blame can be put on the doorsteps of 'TV entrepreneurs' and motivational literature constantly urging us to 'think big', 'live the dream' and so forth; thus wannabe entrepreneurs approach funders with what amounts to a plan requesting finance for a fully-functioning business. (The good news is that it is always 'cast-iron' or 'fail-proof').
In one extreme - but entirely true - example, we were approached by a young person wanting to set up a retail based IT business - the plan included staff, vehicles, stock, marketing and - yes - freehold premises. What was he bringing to the venture? A degree in IT. This particular person did actually go on to complain that banks wouldn't help small businesses, even after I pointed out that even in the days of lending hedonism he wouldn't have had a chance!
An extreme case, but not wholly unrepresentative of many people's aspirations. The banks got very, very silly with lending and in the process created very strange expectations; the commercial reality now is that you need to build a business from scratch not to start at a jog or least of all to walk into a fully-functional, externally funded enterprise.
Having aspirations built into your plan is probably a good thing, but day one expectations must be realistic.
So, before you waste lots of time doing big business plans and presenting them to banks or funders, ask yourself 'can I get going without the money' - an up and running business is always an easier proposition than a pre-start.
The question broadly speaking has 2 key components:
Firstly, is it possible to utilise your existing resources to better effect? The prime example of this is customers who come looking for cashflow facilities (debtor finance or bridging overdrafts). In many cases the best avenue is conduct a careful review of both debtor and creditor terms - set a simple goal - to see if you can improve your cash position by 10% by adjusting and managing your debtors and creditors.
Sorry, but I will definitely upset a few people here - however good you feel your credit control is, it is almost certainly not as good as you think. That is a simple, statistical fact. Most people resent bringing in 'specialists' to do what they feel they can do themselves, but will then go on to pay arrangement fees, management fees and charges to a factoring company to bridge the cashflow hole. An external review of your terms, systems and effectiveness can add a lot of cash (your cash!) to your business - and that is for ever - not just to bridge the gap!
So, if you want invoice/debtor finance I would be delighted to chat, but for your own sake, first of all ask yourself if you are really doing all you can to bring in money yourself.
The second component could be called aspiration (or perhaps expecting too much); and much of the blame can be put on the doorsteps of 'TV entrepreneurs' and motivational literature constantly urging us to 'think big', 'live the dream' and so forth; thus wannabe entrepreneurs approach funders with what amounts to a plan requesting finance for a fully-functioning business. (The good news is that it is always 'cast-iron' or 'fail-proof').
In one extreme - but entirely true - example, we were approached by a young person wanting to set up a retail based IT business - the plan included staff, vehicles, stock, marketing and - yes - freehold premises. What was he bringing to the venture? A degree in IT. This particular person did actually go on to complain that banks wouldn't help small businesses, even after I pointed out that even in the days of lending hedonism he wouldn't have had a chance!
An extreme case, but not wholly unrepresentative of many people's aspirations. The banks got very, very silly with lending and in the process created very strange expectations; the commercial reality now is that you need to build a business from scratch not to start at a jog or least of all to walk into a fully-functional, externally funded enterprise.
Having aspirations built into your plan is probably a good thing, but day one expectations must be realistic.
So, before you waste lots of time doing big business plans and presenting them to banks or funders, ask yourself 'can I get going without the money' - an up and running business is always an easier proposition than a pre-start.
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