Those of a similar age to me will almost certainly remember the ground-breaking satire of Not The Nine-o-Clock News.
In particular I recall one sketch called Gramophone
, where the hapless Mel Smith enters a Hi-Fi shop to buy a ‘gramophone’, only to be tested and mercilessly teased by the clued-up shop staff for his obvious ignorance (you will find it in You Tube).
The point of satire is that there is an underlying message – and I can’t help wondering how many business owners feel a bit like Mel when they start seeking finance.
The good news is that most providers won’t tease you, but it certainly helps to have a little understanding of the market before you go shopping.
Before you start:
There are 3 questions that – in varying order – any type of funder will want you to answer, those questions are:
- What do you want the money for?
- What are you putting in yourself?
- What’s in it for me? ‘WIIFM’
Of course, they almost certainly won’t ask the last one out loud but it is the question that underpins almost any business transaction, hence it is a good starting point when considering your options.
To start narrowing things down there are 4 broad funding categories to consider:
- Social crowd-funding
It is a wonderful feeling to get something for nothing, particularly if that involves getting some of your hard-earned tax money back from the Government. Grant money for the most part really is just that – tax-payers money put into your business.
Having used the word ‘Government’ you will already have recognised that there will be a lot of form-filling and red tape. Frequently conditions will relate to ‘match funding’ (ie you have to put in a sum equal to their investment), or you will have to make the investment prior to any reimbursement.
For a broker, grants are a difficult topic as they are mostly regional and very specific in their targeting – there are professional grant brokers who will often charge a small fee to seek available funds in your area.
Alternatively local searches might well yield results.
WIIFM? Grants predominantly come from Government – as such you will know that there is a political agenda.
That agenda might relate to job-creation, minority groups, tourism, R & D, exporting, regional development etc.
Understanding the underlying agenda is the starting point for creating your proposal.
We all know everything there is to know about equity, because we have all watched Dragons’ Den.
Except of course that DD is more about entertainment than business. Equity finance is incredibly tough but can also be highly rewarding.
Broadly, equity finance can take the form of angel capital or venture capital, the key differentiators relating to deal size & investor aspirations.
The common factors are that the investors will want to take a slice of your business and will typically want a degree of input – possibly even control in the running of the business.
Many critics talk about ‘giving away part of your business’, perhaps true but the flip side is that, used wisely you are effectively exchanging a biscuit for a large slice of cake.
Equity finance is at it’s most effective in businesses which have high growth potential, normally with delayed returns (this particularly applies to R & D based businesses). It tends to fall over where the business owner resents interference – rather than embracing the skills and contacts they can bring, or where the terms of the arrangement are not properly agreed or defined.
WIIFM? First and foremost, established and professional equity investors are literally flooded with proposals – most of which are ‘no brainers’ or the ‘next big thing’ – they need to be impressed quickly with you & your business.
Whilst they would like to see dividends and fees, their real value lies in the exit strategy – which they mostly hope to achieve in 3 – 5 years. This means that your plan needs to look at the ‘in and out’, not handing the business down to your kids.
And finally – to dispel the myth – equity investors seldom invest in ideas – they invest in people & businesses. Evolve your idea into a working business (even if a very small one) and show them that you are the person to grow it!
Debt finance is what might be seen as mainstream funding. It comes in many varieties which I parodied in this blog some time ago.
Since this is my core business, we will be covering this in far more depth as we progress
The core components of debt finance are interest and repayment – hence the lender will take a far shorter view than an equity investor.
WIIFM? Debt finance is all about repayment, not growth or ‘opportunity’. Whilst a lender might take passing interest in growth potential they are predominantly interested in the here and now.
In fact you can boil it down to 2 questions:
- How is the business going to repay?
- What happens if they can’t?
Getting the right debt product will help to address these questions.
4. CROWD FUNDING (REAL/SOCIAL):
Crowd funding as a term has become over used and largely misunderstood. In reality ‘the crowd’ is simply you and me putting money into a fund – the vehicle for the fund could be pretty much any debt or equity product.
As a stand-alone product the term is often used to define ‘real’ or social’ crowd funding. This doesn’t require giving away equity or repaying a debt, – the investors seek their payback in the form of rewards, which could be a free supply of your products, recognition in – for example – a book, or even in a truly social sense – third party charitable work.
WIIFM? As the name suggests, there is a strong social element to this form of funding. It might be sufficient that investors can see an outcome for others in needs, or they might be teased by an annual supply of olive oil.
This has been a skip through a complex subject, but hopefully you will feel less like Mel Smith in Gramophone when the search for funding begins!
Mark Jones has spent his working life in the field of debt finance, both within the banking sector and as an independent broker for the last 25 years.
He is passionate about owner managed business, and acts as a mentor, trainer and loan assessor under various Government start-up schemes.
He co-owns Business Funding Portal, and is always happy to talk a proposition through.
Tel: 07932 075 754