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Entrepreneurs: how to get your hands on funding

Bdaily has entrepreneurship in the spotlight in our latest focus week. Funding is an imperative consideration for every aspiring entrepreneur.

Although the economic difficulties continue abound for many businesses, others are thriving, but need a cash injection to enable them to grow. In the third article in this series, Stuart Stones, partner at Ratio Law LLP discusses the roles of the banks in funding enterprise and offers some tips on accessing and securing bank finance.

As mentioned in my previous articles on asset based finance and private funding, many businesses continue to grow, and need access to funds in order to secure further expansion or to purchase capital items. SME clients often complain that, despite their successes, securing finance is still one of the biggest challenges they face. The government Enterprise Finance Guarantee (EFG) scheme has gone some way towards helping businesses with a turnover of less than £41 million to gain access to lending facilities, but anecdotal evidence suggests that enterprises continue to be turned down by financiers on the high street.

The EFG scheme provides banks lending to businesses with a guarantee to meet 75% of any monies loaned, if these cannot be recovered from the creditor. The government’s approach is completely ‘hands-off’, with decisions as to lending resting entirely with EFG approved banks. EFG loan applications are treated in exactly the same way as standard applications, with banks required to assess eligible businesses against their own standard loan criteria. EFG loans are often approved for businesses that are viable, i.e. assessed as being able to meet the repayments, but unable to provide security. It should be noted that banks are encouraged to take security wherever possible (as in the usual course of business financing), including securing personal guarantees where appropriate. However, banks are not permitted to secure a principal place of residence of, say, the company directors/shareholders under the scheme.

Regardless of whether SME owner-managers seek EFG bank funding, or a standard bank loan, there are certain steps they can take to ensure that their application has the best possible prospects of success.

For a start, they should undertake an audit of all of their internal systems, and make sure these are ready to be reviewed and understood by an outsider. This audit should cover internal mechanisms for agreeing targets, the methods used to create and agree sales forecasts, along with systems for the management and measurement of the sales pipeline, process and sales ledger. Owner-managers should also ensure that they are fully up to date with the company’s outgoings, including any tax payments due and employee liabilities. Most importantly, they will need to have the ability to talk any potential bank manager through the business’ figures, projections and ongoing strategy.

Bankers will also expect to see a detailed financial model spelling out future cash flow, business direction and revenue streams. Owner-managers will be well used to talking-up their business, but they’ll also need to ensure they have enough detail to hand to prove it can meet the monthly payments, even if neither they nor the business are in a position to offer security.

Whilst the EFG scheme continues to enable some businesses to access much-needed finance; as discussed above, others are turned down due to viability reasons coupled with an inability to provide any security, or due to an unproven track record.

Owner-managers seeking a loan would be well advised to get internal systems and records up to date, and be prepared to ‘sell’ the business to prospective financiers. Those refused bank finance should look further afield ? there are alternatives out there ? and these may provide rich pickings for the ambitious, but well-prepared entrepreneur.

Please see other articles from Stuart here.

This was posted in Bdaily's Members' News section by Ratio Law LLP .