Strong businesses will have a strong balance sheet and a solid business plan. They also need to devise a well thought out strategy for accessing capital.
In doing so, business owners have many points to consider, including whether it is better to ‘self-fund’ so that they are in control, who are the most supportive lenders, and whether or not to engage third party professional brokers.
In the new funding landscape, business is complex and so are the options for funding. It is important to make sure you cultivate several lender relationships so that you keep as many eggs in your basket as possible.
Non-traditional lenders are more willing to lend for larger periods than banks, or they may provide trade capital that doesn’t amortise upon maturity.
They demand higher rates of return, but in return have less rigid terms, and place more emphasis on cashflow and future payments.
Here are some other types of lenders to consider:
– Asset based lenders look at the capital locked in your business
– Finance companies go beyond the senior debt
– Mezzanine Funds – usually the investor will want some involvement in the business
– Private equity is used to fund an acquisition or new technologies for the longer term
– Vendor and Customer funding when there are synergies between the two.
– Crowd Funding – obtaining capital from a disparate group of small lenders.
Generating enough profit and having sufficient working capital to fund growth is a real battle for today’s SME’s. 53% of them feel the current business environment is riskier than this time last year, and 13% have considered closing their business in the last year, according to a quarterly SME Risk Index from Zurich.
It’s best to anticipate your funding needs early and to make sure that your business succeeds, you can use the 5 C’s of credit – a method used by lenders to determine the credit worthiness of potential borrowers:
– Current capital structure – what is the level of current debt?
– Cash flow for the past few years and next few years, based on reasonable assumptions
– Collateral in the business
– Conditions of the industry and business environment
– Character of the borrower – they will look at management strength, customer base and supplier base.
In this economic climate businesses are at great risk of underperformance. Lenders who believe in the management will back a request. However, lender fatigue can set in if they lose confidence, and they will do for any of the reasons mentioned below:
– Late filing of accounts
– Late management accounts
– Lack of meaningful information
– Poor stock and ledger control
– Under capitalized
– No headroom in the facility
– Industry in decline
– Lifestyle business which can no longer afford to finance lifestyles
– Lack of communication.
The best time to access capital is when you don’t need it – So think ahead!