Brian Henderson, head of PwC’s fast growth companies programme and private business specialist, answers your questions on strategies and investment.
• Q: What more innovative funding options are available to me to grow my business?
Over the course of the last few years it’s true that many SMEs have struggled to get access to the capital they need to grow.
There have been recent moves to ease the plight of SMEs from government in this respect with the shift of the Funding for Lending scheme away from mortgages to supporting business growth. But if traditional routes to funding are not bearing fruit, there are emerging sources of finance which can be explored.
Crowdfunding is a process where groups of individuals network and pool their money. It can also refer to the sale of small amounts of equity to many individual investors.
The practice first gained a profile when it was used by artists to gain financial support from fans outside traditional record contracts, or as an alternative to traditional film finance but it has since helped several higher profile companies get off the ground or expand.
Peer to peer lending is a variation of the above principle, but is run through an intermediary in a more focused and coordinated manner. There are businesses that work with different segments of the market, but some (Funding Circle, for example) lend specifically to businesses.
The third option, and one which all businesses should explore, is capitalising on what’s available in terms of government grants, schemes and reliefs. Several Tech businesses I’ve worked with have managed to eke out their capital over a longer period by making use of cashback options on R&D spend, for example.
• Q: Once I have found the potential funding provider, how do I convince them to support me or invest?
When you’re talking to a bank or any other lender or investor, you’ve got to convince them you’ve thought things through in detail. If you go to them with an idea and no business plan or supportable projections, they’ll turn you down. And so they should.
Courting investors and lenders means convincing them of a vision that’s grounded facts and figures. There are many things to think about, but here are just three of the basic components.
Cash flow forecasts based on tangible data that go beyond the next twelve months are essential. Ensure that these are integrated with a robust profit and loss account and balance sheet and this will demonstrate that you understand how management information interacts and can be best used to run a business properly.
Costs should be easy to forecast in most businesses, so failure to do this properly will be off-putting to lenders. Show how and when your cost base will increase due to investment for growth, but keep it flexible so that components within the machine (your business model) can work with each other if timings shift or things change.
Successfully earning revenues is what will ultimately decide whether the businesses succeeds or fails. Revenue forecasts need to be backed up with hard data – what you have experienced to date; how this benchmarks with peers; whether growth projections are realistic and what’s really driving them.
Demonstrate you understand the need for having up to date forecasts by planning for three scenarios.
First, an aspirational scenario or target which imagines getting the most out of your customers and business and can be used to incentivise staff to over-achieve.
Next, a most-likely case based on reasonable but supportable assumptions with only modest stretch. This is the scenario you’ll be tested on in detail and is typically the one on which the investment decision would be made.
And finally, a worst-case-scenario which outlines what happens if it all goes wrong and you need to take the business back to its bare bones and run it in survival mode to ensure you don’t run out of cash.
Whilst you’ll still be challenged and your forecasts will evolve, this advance preparation will give a prospective lender or investor confidence, which will increase your chances of getting the funding you need. Remember, lenders need to know they’re lending to people who can run businesses, rather than just those who have great ideas.
• For more information go to pwc.co.uk/fastgrowth and follow Brian Henderson on Twitter @bh_growth
SME Surgery is a new digital service exclusive to subscribers of The Times. If you are a small business owner or entrepreneur with a dilemma, experts are here to help.
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