Why do it?
Knowing what lenders or investors look for in a business and its owner can help you increase the likelihood of getting what you need.
If you want to borrow money, you need to do your homework. You must be able to demonstrate clearly to potential lenders what you need money for and how you will repay it.
Even though they might be interested in seeing your business succeed, lenders are primarily concerned with getting their money back (plus interest); while investors want a high return on their investment.
By looking at a range of traditional and alternative ways of raising money, you might come up with a solution that costs you less than you originally thought.
Expert tip
Thorough preparation increases the chances of your funding pitch being successful.
Why do you need money?
Before approaching sources of funding, clarify your purpose. Lenders want to know what you need the money for. Business start-up costs can be divided into two broad categories:
1. Establishment costs
For example office and manufacturing equipment, vehicles, deposits on leases, legal fees, stock, franchise fees, etc.
2. Working capital requirements
How much money you need to cover your monthly operating costs until the business breaks even, such as phone and Internet charges, wages, electricity and gas, etc.
Template
Start-up costs
Adapt this template to estimate your establishment costs and working capital requirement.
If necessary, seek professional assurance that your figures add up. You don't want to run into a cash crisis after your first month. Later, when you have completed a break-even forecast, you can work out your total working capital requirement by multiplying your monthly costs by the number of months it will take you to break even.
Use your own funds first
Lenders and investors will be reluctant to advance money until they're certain you have committed some of your money. It is important to demonstrate that you have faith in your venture and yourself.
The usual primary sources of start-up funding are:
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Owner's equity (for example, personal savings or a mortgage against your home)
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Money from family or friends
Detail your investment in your business as well as other sources of funding you have tapped.
Your investment in your business
Reducing your start-up needs
Minimise the amount you need to raise. Be creative. For example:
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Can you lease equipment, vehicles and other assets rather than buying them?
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Can you sub-contract or license your manufacturing requirements?
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If you own patents or other intellectual property, can you sidestep the need for development capital by licensing your ideas to others?
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Can you use a distributor with well-established channels, rather than having to build your own channels to market?
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Can you form a joint venture or strategic alliances? By sharing resources (and customers) with complementary businesses you may be able to leverage your own resources without the need for extra finance.
Add items to your Action Plan.
Grants and other funding sources
If your business meets the necessary criteria, you may be able to access grants, interest-free loans and other funding sources available to small businesses in the UK. Be advised: grants are few and far between. Many require match funding, which means you have to stump up half of the total amount of investment you request.
Contact your local Enterprise Agency for details of suitable grants available locally, or for a more extensive search, look at Business Link's extensive Grants and Funding directory.
If you apply for a grant, check for the date of closure for applications. Some grants are only awarded annually so research and plan well in advance.
Expert tip
Contact the organisation awarding the grant, because many offer advice on how to apply.
If your application is declined, contact the organisation and ask for feedback. Knowing the reasons why you were declined could help with future applications.
Be prepared
Before advancing funds, lenders and investors will want to see a realistic business plan and supporting financial statements and forecasts. The business plan should show:
A sound business plan provides reassurance that you have thought through such issues.
This download will help:
Template
HSBC Business Plan template
Use this HSBC Business Plan template to help get you started.
For more information, read through HSBC's tips on How to write a business plan.
Add item to your Action Plan.
Consider the 7 points on the following pages for special attention.
1. Credibility
Lenders will want to know you have the skills and experience to make your business succeed. Include in your business plan a brief profile of your professional background.
What relevant skills and business experience do you have?
If you employ well-qualified, skilled or experienced staff, include their details in your plan.
Add item to your Action Plan.
2. Collateral
Lenders will expect you to put in some cash or security of your own. The most common form of security for a loan is the family home. If you have nothing to offer in the way of cash assets or security, you may qualify for the Government funded Small Firms Loan Guarantee scheme.
Which marketable assets can you pledge as collateral?
Add item to your Action Plan.
3. A clear purpose
You are more likely to build a credible case if you can clearly explain why you need a loan and how you will generate more cash as a result.
Think about how you will 'sell' your business case to the bank. Consider the outcome and what you are trying to achieve in the short- and long-term.
How will you 'sell' your business case to the bank?
4. The amount
Be realistic about the sum you ask for. Any experienced lender will be able to tell if you are likely to generate the returns you claim from the funds you borrow.
If you ask for too much or too little, it may indicate that you have failed to plan thoroughly. This will reduce your credibility and make you seem an unattractive proposition. A break-even analysis can help to show that you have thought realistically about what you need to achieve your goals.
Template
Break-even analysis
Use this template to prepare a simple break-even analysis to include in your business plan.
Add item to your Action Plan.
5. Effective strategies
Lenders will seek assurance that you can repay your debt, as well as survive downturns and market upsets.
Consider all eventualities that may arise during the term of your loan and prepare contingency plans and alternative strategies in your business plan should things not go the way you had anticipated.
Expert tip
Make sure your have adequate business insurance. Lenders like to know their investment will be protected, since an uninsured loss could mean the end of your business.
6. Effective systems
Can you give assurances that you have effective accounting and financial reporting systems in place?
7. Financial forecasts
Provide the lender with realistic cashflow and profit forecasts, as well as evidence of any trading success you have enjoyed. Have you made any sales already or secured any contracts?
Expert tip
If someone else (eg an accountant) is preparing financial information for you, ask them to talk you through what the figures mean before you go to the bank. You will be asked questions.
Template
Cashflow
Use this template to help you prepare your cashflow forecast.
Add items to your Action Plan.
Equity funding
At some point, you may not be able to access more debt financing without exceeding the capacity of your business to repay the debt.
You may need to consider equity funding – a capital injection into your business by investors. But in return, you must be prepared to surrender some ownership and control of your business. This is often a sticking point for many small-business owners.
Professional investors are hard negotiators. They are experienced business people who know what they want and will be very clear on what they expect from you and your business in return. Before you pitch to an investor, consider how much control of your business you are prepared to trade.
How much of a stake in your business are you prepared to give up?
Expert tip
Realise that working with the right investor could transform your business more quickly than you could.
Finding investors
Venture capitalists are unlikely to be interested in start-up firms. They prefer established businesses with a successful track record. However, 'business angels' (high net-worth individuals) might be interested in you.
Often successful business people themselves, business angels generally invest in high-growth companies. To limit their risk, most prefer to invest in an industry they know.
They are interested in good returns, but can also be attracted to the energy of a young company - sometimes backing people they like as much as the business itself.
Being prepared
Any type of investor will ask you hard questions about your business concept. They will expect you to arrive with a well-prepared business plan and a full set of financial forecasts. They will expect you to understand and explain clearly your business plan and your financial projections. Be prepared to answer these key questions:
1. What is different about your business?
Why will customers buy from you and not others?
2. How many sales will you make/have you made?
Explain your market research, sales, contracts secured and any other hard evidence of market demand.
Evidence of market demand
Expert tip
Investors are never impressed by 'if-only guesstimates'. They'll be more impressed by solid market research.
Barriers to entry
3. What are the barriers to entry for others?
You may have a brilliant business idea, but is it easy to copy? Explain how you can protect it.
How the idea can be protected
Add items to your Action Plan.
Summary
Creativity, good planning and preparation are the key to raising money for your business.
Lenders and investors will want to see that you meet the 'CAMPARI' challenge:
Character - to make your plans a reality
Ability - appropriate skills and experience
Means - business and personal assets to use as security
Purpose - a sound, money-generating reason for the funds
Amount - realistic for want you want to achieve
Repayment - a realistic cash flow forecast
Insurance - cover for everybody's investment
Remember – make HSBC your first port of call for all your lending requirements.