THE turmoil in global credit markets has raised the bar for ambitious
entrepreneurs seeking funding to expand their business, as lenders become
more cautious about signing on the dotted line. The good news is that the
money is still out there provided you are realistic about what you ask for
and think hard about your proposition. Banks and venture capitalists still
have the cash for those with the determination to secure it.
Doug Richard, chairman of Library House, which researches high-growth private
firms, and himself an active entrepreneur, said that in this more cautious
climate it was vital for businesses seeking to fund growth to adapt their
plans and improve their proposition. Also, equity deals take longer to
complete, said Richard, a former judge on the Dragons’ Den television show,
who sits on both sides of the funding fence, raising money for his own
start-ups as well as backing other businesses.
“I’m telling people to give themselves six to 12 months to do a deal now. I
think it’s also important to plan for deals to cost you more than you had
originally planned. Unfortunately, that does affect how you do a deal if you
have to be putting it together early. It’s frustrating knowing you will be
able to put a much better case for it in six months but that’s where we are
right now.”
David Giampaolo, chief executive of Pi Capital, a private-equity club, said
venture capitalists still had an appetite to do deals but impressing them
was harder. “People will be scrutinising business plans much more closely
and looking harder at the assumptions of growth they contain, so make them
as convincing as you can.”
He said venture capitalists were now very aware that time was on their side.
“Although we are looking at deals, we are in no rush. The fact is that a lot
of businesses will be cheaper in six months. The good news is that there’s
still a lot of equity capital around.”
Venture-capital deals are also thinner on the ground. Figures from Library
House show the number of equity deals completed in the UK fell in the fourth
quarter of 2007 to 98 from 139 in the previous quarter and 131 in the fourth
quarter of 2006.
Some businesses have successfully adapted their plans to prevent their growth
being stunted. Aware of a more cautious lending climate, Lee Wade, managing
director of the network equipment supplier Exponential-e, successfully
secured £5m in January to fund his company’s rapid growth in two stages
instead of one.
Splitting a planned expansion of the business into two parts was the best way
to maintain growth, said Wade. “From October onwards last year we realised
that we were heading for the credit crunch and we decided that £5m of
funding straightaway was just not going to happen,” he said.
“It’s slightly frustrating to have to slow down our roll-out because of the
opportunities we see out there, but we thought it was the best way to
maintain our growth levels of 50% a year since we launched in 2002.”
Whether you are seeking bank funding or venture-capital backing, the quality
of your proposition and the way you present it is more important than ever –
so revisit it, advised Andy Collins, senior consultant at Results
International Group. “The quality of the management team is still the most
important thing to demonstrate along with the strength of the business
proposition. Clearly outlining your growth strategy is also crucial.
“Prepare your case in advance. Have meetings with prospective investors early.
Leave it too late and you will be under huge pressure. You will also be less
appealing to private-equity backers in particular.”
Richard McNeilly, head of business development at the Dains chartered
accountancy group, certainly found it harder than he thought to secure
finance needed at the end of 2007 to turn the group into a limited liability
partnership and build a £3.5m war chest.
It was unnerving, said McNeilly. “The funding was there from everyone, but the
conditions varied enormously and most of the banks wanted the directors to
retain a high level of liability.
“With eight years of profitable trading and a strong capital base, we were
quite surprised. Some banks were not prepared to take us on our merits and
seemed more bothered about the sector we were from.”
After talking to several banks, Dains secured the funding it needed on the
terms it required through Bank of Scotland Corporate. But the caution he
experienced from banks in general was not unique, according to Collins at
Results International. “We are hearing from our clients that it is much
tougher to secure funding and I think there is a strong possibility the
market is going to get tougher as the year goes on.”
But although anecdotal evidence suggests some banks have become more cautious,
ample funding is still available for the right businesses, according to
Tommy Young, head of commercial banking for England and Wales at Bank of
Scotland Corporate.
“There has been a lot of noise around the credit crunch but we are very much
open for business,” he said. “We are out there in the regions and we are
doing deals every day of the week. We don’t look at the financial
environment when we do deals, we look at each one case by case and we look
at the individuals in charge. The businesses we are talking to are doing
well, they have good trading histories and good order books. We want to grow
our market share and we want to invest in people, not sectors.”
Credit crunch or not, businesses are also getting increasingly sophisticated
in their attitude to raising finance and becoming more and more aware of the
different funding options that are available to them, said Young.
“Customers are hungry for new solutions and new partnerships and far more
willing to have conversations about the different ways to fund their plans.
“There’s a much bigger tool box open to them now than just a traditional
overdraft. Instead of, say, a term loan of £1m over 20 years they might
consider other options, including asset finance or products like cash-flow
financing, that enable them to use their working capital more efficiently.
“I think that customers are also becoming more discriminating. Increasingly
they are looking beyond simply the cheapest headline offer and looking
instead for a partner that can support them beyond one stage of their
growth, a partner that can help them through the business cycle and plan for
the next 10 years if need be, through the difficult times as well as the
growth times.”
Top tips for securing finance
Revisit your business plan. Is it robust enough?
Prepare your funding case well in advance
Start talking to your bank and your advisers early if you think you will need
more funding in the future
Expect equity-based funding deals to take longer to complete
Make sure your growth assumptions are well founded
Be flexible and be prepared to adapt your growth strategy
Explore alternatives to term loans that could make better use of your capital
