Funding Business Growth

Why Do Growing Businesses Need Funding?

At some time, most small to medium sized businesses (SME’s) will have a need for additional funding for a wide variety of purposes including:

• To take advantage of growth opportunities such as: new product development; to enter new markets; acquire new businesses; for research and development; to undertake marketing campaigns; and/or develop export markets
• The need for new plant and equipment to increase capacity or efficiency
• To purchase and/or improve business premises
• Having higher trade receivables due to increased sales putting pressure on working capital
• Having more funds tied up in stock due to increased product lines, long lead times (eg on imports) or higher order quantities to gain cost savings
• Suppliers insisting on quicker payment due to increased or over limit exposure
• Extended trade cycle (including the above) from time of ordering raw materials (especially imports), to delivery, dispatch to customers and final payment
• Lack of profitability in early growth phase due to increased infrastructure and development costs

The Importance of Ongoing Financial Planning for Your Business

From a growth perspective, one of the worst scenarios would be that your business has run out of funds due to cash flow pressures caused by the factors noted above. This may mean that your plans for growth cannot be funded until new financing facilities are arranged or worse still that your suppliers are demanding payment for overdue accounts.

In order to avert this cash flow crisis, it is essential, especially in a growing business, to develop realistic profit and loss and cash flow projections to determine the amount, timing, duration and seasonality of the businesses funding requirements.

The owners should also determine the available security and its valuation, whether it is internal (eg plant or debtors) or external (eg owner’s residence) and their willingness to put at risk personal assets to secure business debt.

Financial planning should also include a review to determine if the funding requirement can be satisfied without recourse to additional borrowings - this may include:

• Reducing drawings and re-investing profits into the business
• Negotiating more favourable terms with suppliers
• Collecting trade debtors quicker by reducing or enforcing terms or giving incentives for early payment (eg settlement discount)
• Improving credit policy and customer terms and conditions
• Targeting your market to improve quality of customers thereby improving collections, reducing bad debts and returns and/or cutting out sale or return
• Ensuring Retention of Title (ROT) to goods until customer pays
• Reduce stock levels by: stock control systems; “on-time” ordering; economic order quantities; and/or discount selling or discontinuing old/slow moving lines

As a result of this process, cash flow projections should be modified as applicable to provide a clearer picture of the movement of funds within the business and any revised funding requirement.

Determining the Best Funding Option

Now the business has determined the funding need, the next step is to choose the best funding option or options.

Business owners are faced with the spectrum of a large number of funding options which may or may not be suitable or acceptable for the specific purpose depending on issues such as:

• Available security and risk/benefit in providing security
• Up-front and ongoing costs and interest rate
• Amount of funding required
• Perceived status and credit standing of the financier
• Flexibility in term, amount, rates and conditions
• Tax position and consequences

One important point to keep in mind is whether it is possible or preferred for the business to secure the funding in its own right without the lender resorting to security over the personal assets of the owners. The way the security is structured is also important as it is usually beneficial, if possible, for the lender to have first recovery rights over the assets of the business rather than the owner’s personal assets. Most financiers will require personal guarantees from owners to further safeguard their position but will only exercise these guarantees after other avenues for recovery have been exhausted.

Generally speaking:

• the lesser the quality of security offered the higher the cost to the business;
• the term and flexibility of the funding need should be matched as far as possible by the finance facilities (ie long term need/long term facility); and
• • fixing interest rates on longer-term facilities will reduce the risk of rates increasing as long as the need is finite and funding is not likely to be repaid early thereby incurring break-costs.

>> Click here to download a check list to assist in the funding process

Once the best funding option has been chosen, the projected drawdown of funds and the repayments and/or interest cost should be incorporated into the cash flow projections to determine repayment capacity.

How to Access the Funding?

Now we should know:

• How much we want to borrow, for how long, what are the high and low funding points and what is a reasonable repayment schedule;
• What security we have and are willing to put up and what it is worth; and
• The best funding option for the business based on amount, flexibility, security, risk, rate, term and use

How do we now source the best funding for the business? There are a number of options available:

1. Go direct to your current bank or financier: this may be the first port of call as you have already established a relationship which they should be keen to expand on
2. Go direct to a new bank or financier: this may keep your current financier “honest” by getting a competitive quote or may result in a more flexible or appropriate funding mix
3. Utilise the services of a finance broker: choice of a reputable broker is essential - a reputable broker will have a wide range of financial institutions to choose from so as to find the best funding solution for your business on the best terms. Less reputable brokers may try and push you towards a less suitable financier from whom they obtain the best commission. Brokers should not charge you for their services unless they have to do additional work such as prepare a funding submission
4. Utilise the services of your financial advisor, consultant or accountant: they should have your interests at heart although some may also get a commission from the financier (which they should disclose to you). They would normally charge you to prepare the necessary funding submission and attend meetings etc. You would need to know that they have the right contacts in the industry.

No matter which option you choose the key is to be as prepared as possible so as to reduce the up-front cost of borrowing and indicate to the financier that you know your business and have a proper security and repayment plan in place. A funding submission should be prepared which would include:

• An overview of your business, the shareholding and directors and its growth opportunities
• Why you need the funding
• The security you are willing to provide and its approximate value
• Your repayment plan and repayment capacity illustrated by detailed financial projections for the term of the funding
• Latest (last 2 years) financial statements and tax returns for the business and statement of personal assets and liabilities