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Raising finance: Part 2

Raising finance for your business means following a four-stage process. In the second part in this series, we explain how to approach investors and banks. 

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In the first part of this series we looked at preparing a well-focused business plan. Once you have a business plan, the next step is to decide on where to send it. What to send is also important because at this stage it is a ‘selling' document. So keep it brief, concise, clear and compelling.

Borrowing

Most businesses will need a combination of grants or ‘soft' loans, bank borrowing and equity. The relevant agencies and institutions should be approached in this order to maximise the grant and debt elements of the funding at the outset, whilst being aware of the dangers of over-gearing the business.

Approaching banks and other debt providers

Banks have straightforward criteria for lending money: they charge relatively little and so they want to know how and when they will get their money back. Their principal concerns will therefore be about the quality of the proposal and strength of the management team (as it will be for investors) and the cash flow and security available to repay the loan (unlike investors). They lend based on criteria like ‘loan to value ratios', ‘interest cover' and ‘free cash flow'.

Make sure you, and your advisers, understand how your bank will evaluate these criteria for your proposal. An initial meeting just to ‘run through' the financial projections is advisable before finalising the business plan.

Approaching investors

Once you have an ‘in principle' offer of bank debt you are ready to approach investors. Unlike banks, investors differ greatly from one another. The first choice is who to introduce your proposal to. You should ask:

  • Do I want an individual (business angel), institution or a fund manager?
  • Do I want an active or passive investor (hands on/hands off)?
  • What is their exit strategy?

Ask these questions and they will rule out 80% of potential investors, leaving you with the 20% you want.

You are now ready to draw up your list of potential investors. Don't cold call them. Pre-arrange a mailing/appointment, using your financial adviser, and get someone waiting for your business plan. Too many plans hit cold desks.

Realistic value

It is also important to have a preliminary valuation of your business. Be realistic. Neither over-value, nor accept too low an offer. It is vital to know the value of your business as your potential investors will try to cut the best deal they can. Always have a valuation you can support and which your advisers believe will substantiate your request.

Meetings

You are now ready to start your round of meetings with investors but how much thought do you give to them?

The first meeting is probably the most important because it is the first time the investors have met the management team. How do you prepare for this meeting to give the right impression? And how professional is your actual presentation? PowerPoint presentations, handouts and rehearsed presentations all need to be perfect.

You will only get one chance, so rehearse just one more time! And always enter negotiations with something the other party wants. In the final article in this series we look at how to manage the all-important due diligence and legal agreements stage of the process.

Read the first part of the raising finance series here.

The third part of raising finance can be found here.

Find out how the Forum can help you find appropriate funding for your business through a range of sources. Call us on 01565 626 001.

Last updated 4th July 2016.

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