The current economic climate makes raising funds a challenge for many
entrepreneurial businesses —but it’s not impossible. “I have heard equity
investors and banks saying they are still willing to invest or lend,” says
Gerard Burke, director of the business growth and development programme at
Cranfield School of Management. “They always add ‘to the right proposition’.
The finance is there but it is harder to get at.”
His words are backed up by a survey from Cambridge University’s Centre for
Business Research, released last month, which found that 29% of those
seeking finance in 2007 were wholly or partially rejected, compared with 26%
in 2004. The average amount sought had soared from £82,000 in 2004 to
£470,000 in 2007.
Nick Palin, director of finance and administration at the Forum of Private
Business, which was part of the survey, says: “Although the funding
requirements rose steadily, the likelihood of banks awarding funds fell just
as steadily. The credit crunch has made accessing finance more difficult.”
However, the entrepreneur in the southeast is at an advantage, according to
Ciaran Leaden, area director of the St Albans region for Bank of Scotland
Corporate. “There are substantially more banks and venture capitalists
available to entrepreneurs in the southeast, simply because we’re so close
to London, so people have many more choices.”
The relative affluence of the southeast means fewer grant opportunities are
available, but private financing and networking opportunities abound. The
region attracted 21% of venture capital investment in 2007, according to the
British Private Equity and Venture Capital Association. London took 48%, but
the southeast was far ahead of other regions (the East Midlands came third,
with 7%.)
Businesses seeking investment should expect much more stringent criteria now.
“Equity investors will be looking for a strong business, with robust
financial controls; looking for leaders with a proven track record of
resilience in adversity, and the ability to respond quickly to a changing
market,” says Burke.
Venture capitalists are demanding more from their investments than they did a
couple of years ago. “The cheap money has gone and there is a return to
fundamentals,” says Leaden. “VCs are looking for a much better return.
Werecently spoke to a £3m turnover business that was valued at £10m, but a
VC had offered only £3m for a 55% stake.”
Not all great ideas need to be developed by the entrepreneur; sometimes it may
be better to find partnership funding. Verd- Erg, an oil and gas technology
company in Knaphill, Surrey, has developed a wave and tidal energy machine
but does not want to take the project to the next phase itself. “It’s not
our core business,” says Renato Martins, finance director. “We are primarily
an entrepreneurial manufacturer.”
VerdErg has developed a specialist connections system for the oil and gas
industry. Turnover has risen from £3m last year to a projected £8m in 2008-9
and it wants to focus on finding new clients for that innovation. So it is
looking for a partner to take forward the tidal energy project. “You have to
be able to fund early stage development, and without government support or a
partner we will shelve it,” Martins says.
The economic slowdown also means businesses need extra cash flow. “Where it
used to take six to nine months to sell, it now often takes nine to 15
months, and a company needs robust revenues to cope,” says Sally Goodsell,
chief executive of Finance South East, a regional funding organisation. “We
see many businesses that are not being realistic about the money needed to
survive.”
Entrepreneurs also need to be clear about what kind of funding they are going
for. Generally, for finance of less than £2m, they are likely to be looking
at debt packages from the big lenders. And in the current climate, it pays
to be prudent and consider the sustainability of cash flow; would you be
able to service the debt if you lost 20% of your customers? It could be
worth settling on a fixed rate cap or considering some kind of hedge for
themoney.
If the business will not support a loan, selling part of the equity may be the
only option. “There is often a reluctance to raise enough money to fund
growth if it means giving away equity,” says Goodsell. “A lot of
entrepreneurs are very focused on the short term and fail because they
underestimate the amount of money needed to build the business. They need a
long-term funding strategy.”
New Dimension
Barriers to entrepreneurial growth are many—and sometimes include your own
shareholders. For Simon Barnes, CEO of Hertfordshire-based Plowman Craven,
taking a traditional chartered surveying company in a different direction
meant buying out the shareholders he inherited.
Barnes was looking for new opportunities and found the solution in 3-D laser
scanning: creating the kind of 3-D computer images of landscapes and
buildings seen in computer games and adding the precision skills of the
surveyor. One application is in forensic work, using the images to
reconstruct crime scenes.
“We raised finance for a major capital purchase first through the equipment
supplier,” he says. “It became more of a burden, and the other shareholders
didn’t have the desire to be so entrepreneurial.”
In March, Barnes led a buyout, funded partly with a bank loan and partly with
invoice discounting. “Now we will sink or swim on our own decisions,” he
says.
Without the need to pay dividends, the company can service the loan, and
Barnes believes it can be repaid within a few years. From a turnover of
about £1m and staff of about 50 in the 1990s, Plowman Craven has grown to
about £11.5m, with a staff of 206.
Helping hands
Finance South East (www.financesoutheast.com)
runs a £10m loan fund to support entrepreneurial businesses in the region.
It lends from £25,000 to £100,000.
Selective Finance for Investment in England (www.seeda.co.uk)
offers support for capital projects and up to £2m for large corporates and
SMEs.
Equity finance of between £100,000 and £500,000 is available from the South
East Growth Fund (www.segrowthfund.co.uk).
South East Grant Advisory Service (www.se-gas.co.uk)
gives free grant advice to companies looking to relocate in Kent and Medway. Grants
of up to £2.5m may be available for businesses operating in assisted areas.
Oxford Investment Opportunity Network (www.oion.co.uk)
focuses on innovative technology.
