Many commentators continue to say that funding, whether bank, equity or grant, is hard to obtain. If this is the case (and there remains an on-going debate as to whether this is due to lack of demand rather than supply) how do you ensure that you maximise your chances of obtaining funding?

Those that ‘Bank-Bash’ seem to think that there is an automatic right to obtain funding – there isn’t; funding needs to be viewed as any other resource, especially when it is in short supply. The key is to ensure that the right type of funding is sought for the specific proposal, and that it is presented in the right way.

Perhaps surprisingly, free or ‘low-cost’ funding options are rarely considered by many businesses with the vast majority of funding requests going direct to a Bank. Yet there are still a wide range of grants and financial incentives available. We have assisted clients in obtaining more than £7 million of grant funding in recent months for different projects which demonstrates that this is still a good source of funding for those that meet the criteria. 

The first step when considering any funding proposition is to recognise its nature and risk so that it can be directed at the most appropriate source. Too often proposals with an equity risk and reward profile are presented to Banks / Debt providers with the resultant frustration of rejection. 

Debt providers will be concerned about ‘what could go wrong’, whereas equity investors will also be looking at the upside potential and exit routes, and this may enable them to take a balanced view of the downside risks. The key aspects for consideration will be different and this should be reflected in the Business Plan.

Once the most appropriate source or package of funding has been identified, the next step is to ensure that your proposition matches the Funders’ criteria. Most providers of finance will set out their ideal requirements and it is time well spent considering these factors and self-assessing your proposal against them.

The 2011 SME Finance Monitor revealed that just 20% of those seeking a bank loan sought external advice before approaching their bank. However, the input from an experienced Advisor will be invaluable at this stage to ensure that time and effort is focused on the right key areas and to provide a view independent from the day to day business perspective.

The third step is presentation. As any job applicant in today’s market will know, it’s not just about having the right skills, but how they are presented. In a similar way, any funding proposal should have sufficient time spent on it to help achieve the objective of obtaining the money. It never fails to amaze us how this critical step is often delegated to those that aren’t sufficiently positioned to prepare. A good well run business will have accumulated similar information for their own assessment of the project that seeks funding – the only matter left to do is to consider it from a debt or equity perspective and position it accordingly.

In many cases the Business Plan and related projections start with a spreadsheet and the numbers.  When the plan is reviewed by others and questions are raised, often the justification for the numbers drives the story behind the business and during this process some of the support breaks down or gaps occur in the logic. This will not help establish credibility for the future business with the Funders. 

A more robust approach is to start with the business growth story and evaluate and develop this fully in discussion. Once the story has been firmly developed and stands up to challenge, the projections can be prepared that merely translate the thoughts and words into numbers. This ensures that there is a natural flow through the Business Plan and that there is support for the numbers during the Due Diligence process and external evaluation.

One of the significant side-effects of the ‘Bank-Bashing’ is that many entrepreneurs repeatedly receive the message that funding is not available; the effect of the perception means that many businesses don’t try to raise funds. The more creative of them use alternative deal structures or joint venture arrangements to progress their plans without ‘traditional’ financing. Not surprisingly, in the meantime Funders are still saying that they are not receiving many quality proposals – even to the extent that the Taxpayer-backed Banks say that they are struggling to meet the targets for lending set by the Government.

In the recent Autumn Statement, the Chancellor proposed yet more initiatives to help kick start funding to the SME Sector – itself a sign of the ineffectiveness of previous initiatives. It might be, just might be, that those who put the blame on a lack of demand and, more specifically, on a lack of well thought out and presented applications, are correct and that if businesses were to take notice of the steps we set out above, we might begin to see some movement in the funding market.

For further information:
 
Andrew Killick, Corporate Finance Partner, Francis Clark LLP.
Telephone:  01392 667000 

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre