RAISING FINANCE - WITH EASE!
The availability of funds for banks to lend is very much less than before. This is down to their inability to source funds from wholesale credit markets to supplement retail deposits, a key funding source which vanished almost overnight last year. This has resulted in a sharp contraction of lending - with reported withdrawals of support from businesses which one might consider to be verging on the obsene.
But against that background, if you need to raise finance what are your best options?
1. Look inside your business first - cut your need for funding. Only two things need funding in any business: Assets and Losses. If you need to raise money to re-finance your business due to losses, you will have your work well and truly cut out. You're up against perfectly viable businesses that are struggling for funding too. But there is plenty you can do to stem the losses yourself and mitigate the need for funding but it's a problem rarely solved purely by cutting overheads.
2. But let's assume you've explored the options internally and you still need to borrow. Prepare (or commission) proper cash flow projections so that you are clear what your funding-need actually is and hence what you need to borrow (your funding-gap). This might sound terribly patronising but extracting this information from the books is, in truth, often far from straightforward and the size of this gap will vary month to month (and in some months may disappear altogether).
2. If you bring in (say) your accountants to do this for you, take full responsiblity for the outcome. You must understand it. Too many see no point in reviewing the work of somebody who it is easy to assume knows more than you do. Not true. They will know less than you about your business. Client #1 below fully bears out the perils of leaving it to others. It was self-evident, when they did study the cash flow, that it presented a wholly unviable business-case to the Bank. The lender has to be able to see a clear route to getting their moeny repaid.
3. Do you remember the old saying that 'banks will only lend you money when you don't need it?' More than a grain of truth to that of course and for understandable reasons - why put good money after bad? But there is an important message here; you need to demonstrate that by having the money you will generate cash. A bank does not want to lend you money to see you come back in 3 months time having used all that, wanting more. A lender needs evidence that your business will generate cash, not absorb it. And this is not as straightforward as it sounds - it's not the same as showing the business will make a profit.
4. It is essential to be realistic about how much you might expect a bank to be willing to provide (and on what security) and what you need to find yourself personally or by making changes within the business. Again Client #1 bears this out.
5. Think about what sort of funding is likely to best meet your needs. Invoice finance-based products typically give you access to more funds than a conventional bank overdraft but at a cost. And precious few people truly understand how these facilities work in practice. This is terribly naive and dangerous. Follow this link for more information on the realities of invoice discounting and invoice factoring or what a prospective lender most likely won't tell you.
6. Beware. Lenders are keen to identify core borrowing and transfer some element of what you have borrowed through an overdraft on to a repayable term loan. But in truth, there are few businesses where the underlying funding-needs are likely to drop over time so these sorts of changes might serve to protect the interests of the Bank but are found to be less helpful by entrepreneurs.
In this climate of course, you could have given due thought and consideration to all of the above and still fall short. But, if your business-case stands up, and lenders can see that you have a clear focus on cash flow, you'll stand a better chance than most. Here are some example cases:
Client #1
"We first had projections put together for the bank by our accountants. We never gave it a second thought - it seemed a quick, almost mechanical process and we barely looked at their work before sending it on. And that almost sealed our fate. I would urge others to avoid the same mistake."
"In our case, the projections elicited no response from the bank and the silence, when we were well over our overdraft limit, was deafening. We had run out of cash; we didn't really know why or what to do. Someone in the trade referred us to Bottom Line Impact for advice."
"It was soon clear that what the Bank had been sent originally by our accountants was basically unfundable. The overdraft (already uncomfortably high for the Bank) was projected to grow by a further £120k. To the accountants I guess it was just a fee. They either didn't know or didn't care about the likely impact onus or our business."
"No longer was this just about convincing the Bank to give us more money but about being clear ourselves that the business had a future. The last thing I wanted was to be ‘on the hook' to the Bank for more money when I should have walked away."
"Looking closer at the numbers, Colin showed us that the originally projected debtors figures had been too high and that we needed less money. After carefully reviewing other aspects including sales, margins and overheads, we had a viable business on existing facilities, so we put new cash flows to the bank."
"But again there was no response."
"Why? Because (as we later learned) the first projections had‘put down a marker' as far as the bank was concerned. They had, by this point, lost confidence in us and chose to ignore these revised figures. Overnight, our overdraft facility was slashed."
"This was a terrifying time - we were under huge pressure but we now knew, that given a chance, the business could be made to work. And, in Bottom Line Impact, we had advisers who would convey this, on our behalf, in the strongest possible terms."
"So we set about restoring the Bank's confidence. We learned how to explain our strategy and quantify the impact of the changes we were making. This ability, to (in effect) see the business as the Bank saw it, was fundamental to keeping them on board in what were still difficult times. Banks' aren't stupid, they see through bullshit. But, for the first time, we were truly understanding the financial side in the way, and at the level, we needed to. And our Bank knew it. And, of course, we had to deliver on the revised projections."
"Our original facility was eventually restored (albeit structured on a different basis) and we are with the same lender - more by choice than necessity - and the business has the funidng it needs."
"I can't pretend we haven't been to hell and back over the last few months. Like many, we were guilty of leaving the financials entirely in the hands of others - and we nearly paid the price. We just happened to find the right help at an absolutely critical time."
Client #2
"At the time I recall being pretty indifferent about who helped us. But cash flow was under pressure and I had no further security I could pledge with the Bank so I guess there was something about working with advisers who had ‘been there, seen itand done it' that swayed me."
"Looking back, I wanted value for money in terms of the fee but frankly I had so much at stake - what I really needed was ‘quick hands' and the right result."
"Despite getting on well with our Bank, securing more money was a difficult ‘sell'. Particularly as we had experienced a downturn in trading over recent months, which given what we needed, could seriously undermine our credibility."
"But despite our recent financial performance, the effort put into proving the business case (with some slightly tweaked targets) and the diligently compiled cash flow projections, paid off. Both withstood the Bank's probing questions."
Client #3
"We were looking at invoice finance options. We knew we weren't in the best shape financially and had assumed we couldn't work with amainstream lender. But Bottom Line Impact thought otherwise. Introducing us to one of their lenders, we found we could potentially access a higher '% advance' at less than half the cost of the specialist lender we'd previously seen."
As these cases demonstrate it is possible to secure funding despite finding yourself in a situation that you would rather not be in. But very often, less needs to be borrowed than anticipated. Indeed, not infrequently, the best you can hope for, is that you can convince a lender to stick with you based on current facilities. And other times they might stick with you short-term with a lower facility. The good news? Well you might be surprised what can be achieved with the appropriate targets and some relatively minor tweaks to the cost-base, margins or systems. Even serious financial pressures can be worked through without recourse to any extra borrowing but you need to map this out in an appropriate cash flow.
If you would like advice on raising finance for your business or if you are struggling to retain existing facilities, you can call use to discuss your situation in confidence and without obligation.