Family, friends and fools
With access to finance seemingly tougher than ever, what in reality can early stage businesses expect from the banks and what can they do to reduce their need for funding and attract help from investors, NSBL asks.
Peter McCarthy is an Angel Investor, serial entrepreneur and business mentor.
He runs the Radius Enterprise Centre in Clevedon and his approach is about focusing on how owners of early stage businesses can de-risk them, potentially reduce their need for funding and increase the chance of creating successful businesses and obtaining finance when they need it.
Banks and funding
His view on the level of support young businesses can expect from the banks is simple: “Early stage businesses are normally inherently risky but many have false expectations about the level of support they can expect from the banks.
“Unless you are prepared to give a personal guarantee based on, for example, your house, it will be difficult to raise cash from the banks. Cynics often say the people who usually fund early stage businesses are family, friends and fools.”
According to Peter you will be in a much better place if you minimise the need for finance and increase the chances of obtaining funding, which is where de-risking comes in.
How de-risking helps
On de-risking he says: “It helps to have a clear customer focus, a strong proposition and highly motivated sales team.
While keeping costs low seems obvious, you would be surprised at the number of people who do not keep a tight control of their finances.
“It also helps to have successful business people, preferably ones with a stake in the business, on board. Pricing is absolutely critical too and often neglected.
Take time to get this right as under-pricing your product will reduce profitability and increase the need for working capital, resulting in a greater funding requirement.”
Regarding working capital this is traditionally where many business owners feel the banks can come in.
Peter comments: “Banks may be able to help in this area but they expect the basics to be done correctly; simple actions such as invoicing and collecting in a thirty-day period rather than a longer period can make a big difference to cash flow.
“It sounds obvious but it’s also important to have contracts and undertake a credit check on your clients, even if it is just through trade references.”
For early stage businesses the time will eventually come when significant investment is required.
But Peter says: “It is often difficult for people to grasp that they will have to share part of their company in return for funding but the focus needs to be on improving the chances of success rather than retaining total control.
“Better to have a share of something big than 100% of something small and releasing equity early on and having experienced people on board will reduce the risk in the business and boost your chances of obtaining further investment with less equity.”
For any large investment, Peter explains that an investor will be looking for specific market, product and operating information to justify that investment.
“If you can satisfy those demands, your business is said to be ‘investment ready’, shorthand for ‘a good investment opportunity’ with appropriate risk.”