Accessing funding for business growth


BACK

Accessing funding for business growth

SME MASTER PLAN SERIES – PART 3 OF 4

We hope you have enjoyed the first two articles of this series:  setting up the right business structure click here for part 1 and how to obtain growth through acquisition click here for part 2.

This is the third of our four-part series aimed to help SMEs leverage opportunities to boost their business in these distressing times.  It outlines “what you need to know when considering funding for growth”.

Most business owners are constantly looking for ways to improve their business, whether it’s to increase turnover, purchase new equipment, expand into new premises or to take advantage of growth opportunities.  However, when doing this, it often brings with it the challenge of accessing the required funds.

This is why some business owners sometimes turn to their friends or family for funding, but this option is often not available or may not be the ideal option as it can sometimes result in the situation becoming difficult or unpleasant in the future.

First step of funding

The good news is that the costs of obtaining funds have never been lower.

However, in order to increase your chances of obtaining funding, it is crucial to be prepared by:

  1. Ensuring the business is structured correctly;
  2. Having good information systems;
  3. Understanding your financial position;
  4. Determining what assets you have and their value;  and
  5. Carrying out the appropriate research to understand what options are available.

This article helps with that preparation by providing some information outlining the different options to help determine the best way to fund for your needs.

Types of funding available

In general, there are a number of factors that will influence the type of finance that is suitable for a particular business.  These include the amount of funding needed, the reason why the funding is required and whether it is a short or long-term need.

Listed below are some of the different types of funding available:

  • Self-Equity Financing:  This is the cheapest source of funding with the least amount of preparation.  However, it is often the hardest to obtain.  If you have spare cash, you can get the returns by investing in your growth.  This obviously increases risk, but you are in control.
  • Existing Financier:  Approaching your existing financier is the next easiest option and may also be the next cheapest form of financing.  They know your business and your trading history but will still require the usual information including up-to-date financials, cash flows, business plans and use of funds.  Essentially, you need to present a strong business case to secure this funding.  It often pays to seek external advice to help you get all of this information prepared and presented properly.
  • Leveraging your P & L and Balance Sheet:  Another source of finance is to look at what can be unlocked from your existing assets.
    1. Plant and equipment: The simplest and quickest method is the sale and leaseback of existing plant and equipment.  Not all plant and equipment will be suitable for this process, but if you can unlock some cash, you will get a better return by putting it into growth rather than just leaving the equipment sitting on the balance sheet.  You will need to ensure that your cash flow can meet the increase in repayments.
    2. Debtors: A quick way to unlock cash is to unlock debtors.  These can be “cashed” in quickly by way of invoice discounting or debtor factoring.  With the increased number of financiers in this sector, the fee structure and charges have become more reasonable.   It is still more expensive than traditional financing, but often this method does not require a second mortgage on the family home.
    3. Cash flow loans: Finally, cash flow loans are gaining more traction in Australia.  This presents an opportunity to leverage free cash to obtain financing for your growth strategy, as the amount that can be borrowed is based on the revenue that you anticipate you will receive in the future, after investing this money.  Again, this type of finance may be more expensive than other forms of finance but may help cover a temporary capital requirement.

What other options are available if you cannot access any of the above forms of financing, but still want to finance growth?

  • Vendor finance: If buying a business, see if you can negotiate some vendor finance.  Remembering again, that acquiring a business should provide better cash flow, allowing for some of these funds to pay off the vendor over time.  If you cannot obtain full vendor finance, look at a hybrid of vendor finance and the above financing options.
  • External equity financing: Selling a portion of your business is another option to obtain the funds you need to provide growth capital that can be used to invest in the other part of your business.  However, seeking equity injections from others dilutes your holding and control in the business, but can prove a good strategic option as sometimes having a smaller share of a bigger pie can have its advantages.  This must be weighed up as to how much you might want to give away and at what price for your future growth.  This option is not for everyone, but the disciplines it brings can enhance future value.  Some specialist investors are always looking to purchase small businesses.  Of course, this would benefit from a professional to examine and value your business to determine the best way forward.  It may also provide you with a viable exit strategy when you are ready.
  • Management buy-in/buy-out:  Another option very close to home is to look to suitable senior management employees or a group of employees to purchase part of the business.  This option may provide the funding required, as well as raising the employees to work at the same level, sharing the same firm objectives.  Other benefits of this option include a smoother transition, better transparency and accountability, all of which help to provide better long-term outcomes for the business.  This could also lead to a seamless management buyout, giving you another viable exit strategy.

Preparation is key

Regardless of which option is used, obtaining funding can be a complex and lengthy process. We again stress that knowing what you need to prepare and planning ahead is key to being successful and to speed up the approval process.

While different loans and lenders will have varied requirements, there are three key items that you will need to have prepared before you seek any form of funding:

  • Historical Financials: these are important for comparative and analysis purposes.  Financiers like to see that what you are projecting has some basis in fact and can be achieved.  Having good historical financial information is a must.
  • Business Plan – it is crucial to have a comprehensive business plan that outlines your strategic growth plan. It includes SWOT analysis, merger and implementation strategy, sales and marketing strategy and management reporting.  As the acquisition is bedded down and you show a track record, you can revisit your financing needs to reflect your existing circumstances better.
  • Financial Information & Cash Flow projections – detailed and accurate financial forecasting is essential to help you understand how much money you actually need to fund your growth, based on your projections.  This should include a detailed 3-way cash flow, profit and loss and balance sheet.  Your assumptions should be noted, and likely variations detailed.  Cash flow projections are essential, particularly in the first 12 months of trading.  They are also required to meet the important liquidity test being, a company must have sufficient cash to pay its debts as they become due in the normal course of business.  Small business is heavily cash flow dependent.  Knowing your cash flow requirements will assist you in successfully implementing your business plan.

These key items are not only essential tools needed for managing a business but are requirements for obtaining the funding you need to grow your business.  They are living documents and need to be continually updated to remain relevant.

Whatever your reason for seeking finance, it’s wise to seek professional advice before committing yourself to any of the options.

Whilst obtaining funding for business sounds quite daunting, it is not impossible, it’s just more challenging than it used to be.

dVT Group can offer the knowledge and experience to help with specific advice and the required preparation, and we can even assist with some of the challenges and frustrations you may face during the process.

Next month our article will be on “selling your legacy to achieve financial freedom”.

Author profile – Riad Tayeh:

Riad is a partner at dVT Group. He has over 30 years insolvency and accounting experience and enjoys a reputation as a tough-minded and astute practitioner, offering clients an energetic and practical approach to business solutions. He is a registered liquidator and specialises in insolvency, corporate restructuring, financial investigation and turnaround strategy.

dVT Group has a proactive, practical and pragmatic approach in the way we collaborate and provide advice.  We can efficiently distil the issues and provide sound, common-sense solutions, sometimes fitting square pegs into round holes!

If you would like to work with us or need help with any of the above, please contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support. 

October 2020