109. The ins and outs of raising finance

At some point, your business will probably need to consider raising money to take it on to the next stage – or even simply to survive.

This article provides a quick overview as to what you should be thinking about and outlines some of your options.

What are your choices?

Historically, you had 2 choices – either:

  1. Debt Finance
  2. Equity Finance

But there is a new(ish) kid on the block – called cash flow financing. Essentially a form of debt but it has the huge advantage for some businesses – you do not need to offer security.

Debt – someone lends you money which is typically secured by assets in the business. This means that if you default on the loan and/or interest payments the loan will be “called in” and the charge over your secured assets could be exercised resulting in these assets being sold. And if you do not have sufficient business assets to offer as security, you will probably need to sign a personal guarantee (PG) meaning that you stand personally behind any shortfall. This can be, quite understandably, an emotional challenge for many individuals who are very often already heavily invested in the business and who are not happy being put in a position where they might lose private assets, including their house.

Debt finance is typically offered by the banks and specialist debt funds.

Equity is different. An investor advances money to the business and takes shares (or “equity”) in the business – like owning shares in BT. It differs from debt in that if the business fails, the investors take the hit. An often cited advantage of offering equity is that you may be able to get someone on board who can really add value to the business due to their experience and contacts.

Which route you go for is, in large part, a mind-set thing.

In recent research project, over a half of businesses looking to raise funding did not want to issue equity. In part, because they believed that they did not need more experience in the business. And I cannot help feeling that a large chunk is to do with a certain ignorance and short-sightedness and not really getting the bigger picture – not recognising that (say) 60% of a big pie is probably worth considerably more than 100% of a smaller pie.

Some said that they did not want to lose control of their business – or did not want to be told what to do (or held to account) by others; a quite understandable sentiment.

So you will probably be faced with a choice.

Either you go the debt route and will need to put up assets as security and/or face having to give onerous personal guarantees. Or you go the equity route and dilute ownership.

Alternatively, you may need to think again about whether raising finance is right for you right now; or scale back your growth aspirations and plans.

On to that more recent arrival – it is early days but something that has been gaining traction is what is called cashflow lending. Companies are essentially borrowing from cash flows they expect to receive in the future. It has the big advantage of being unsecured – so no assets need to be offered as security and no PGs are needed. The amount you can raise will be based on your future cashflow projections and relies on having reliable cash flows. This is where the Tectona team can help.

You will need robust and accurate forecasts of activity – meaning not just a profit and loss account but also a cashflow forecast and balance sheets which all link together. Tectona can run you through our Quad² Review.

Having identified that you do need funding (and how much) we can then help you review the funding options available to you.

Contact the Tectona team so that we can talk you through your options.

About Tectona

Tectona Partnership helps business owners sleep at night by embedding one of our 15 commercial finance directors in your management team. Very often, a part time solution is usually the most effective for small businesses. We make sure you have the necessary management information and strategic insight to make informed decisions and will tell you what you need to know, when you need to know it.

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