THINKING ABOUT OPTIONS FOR FINANCEApril 2016 | Growth Guides | News
Almost every business owner is used to finding and managing suppliers: funding is in many ways just another supply to be procured, says BGF CEO Stephen Welton. Growing businesses are often unnerved by the idea of accepting external funding, particularly if it is the first time that they have done it outside of a trusted community of friends and family. They’re not only anxious about whether they’ll be actually be able to secure capital, but also what sort of funding to look for, and from which sources.
While this nervousness is understandable, there is a way to look at the search for finance that should make the process feel less daunting. Almost every business owner is used to finding and managing suppliers, and funding is, in many ways, just another supply to be procured. In other words, a business owner is most likely to already have the skills and experience needed to make the right decisions for their business.
A good place to start is to draw up a detailed specification of the type of finance required – just as you would for any other good or service that you need supplied. Are you looking for short-term finance or a more long-term commitment? How much funding do you need? Do you want a business partner, or a much more hands-off relationship with the supplier? What is it for? How do you intend to pay for it?
Answering these questions will help to narrow down the potential funding options. Debt, for example, may suit businesses that need smaller sums, funding for a shorter period or those with low risk or asset-backed projects in mind. However, equity might be a better option for businesses looking for a flexible and longer-term commitment, and particularly those with seasonal, lumpy or cyclical cash flows that would find a monthly repayment schedule restrictive.
Different funding options come with different characteristics that are respectively suited to different sorts of businesses. The important point here is that until you think carefully about the nature of the funding you need, you can’t make sensible decisions about what exactly to look for. And armed with a better picture of your requirements, you can have much more productive conversations with potential suppliers. Moreover, those conversations are not very different from those that you might expect to have with other types of supplier.
A typical procurement process focuses on four issues and this one should be no different:
- Price. The cost of funding will be an important issue. What will you be required to pay in order to secure finance – and when will you need to do so? That might be the headline interest rate to be repaid monthly over a fixed term in the case of debt finance; or the stake in the business that you offer to an equity investor and the dividends that are paid to them once cash exceeds the capital needs of the business. Bear in mind that the cheapest option will not necessarily be the best one for your business.
- Service. Are you looking for a no-frills arrangement or something that is more sophisticated? One important aspect of funding for many growing businesses is the additional support investors can provide – financial and operational advice, access to new networks of potential customers and suppliers, or possibly introduction to a highly experienced independent non-executive director. This proactive contribution is typical of the equity investor but won’t be available with all funding options.
- Alignment. Relationships with suppliers work best when their interests are aligned with your own and finance is no different. Think carefully about this as you talk to potential investors. For example, if you don’t want to cede control or exit the business in a three to five year time frame, a private equity backed management buyout is probably not for you. If you need long-term support through the ups and downs of the business cycle, a bank loan with restrictive covenants is likely to be the wrong choice too. Equity investors are taking a calculated risk on the future success of your company and as such are focused on its growth potential. The relationship between management and equity investors is one of partnership.
- Quality. This is ultimately determined by the extent to which the supply on offer, in this case finance, matches your particular needs. Like any good or service, you need to feel confident that is it of the right quality and in reliable supply. Don’t be afraid to take up references and be wary of a supplier that doesn’t readily offer them. Putting the right capital structure in place is critical to the long-term success of your business.
- Businesses that consider these options as they think about funding for future growth won’t go too far wrong. And a business owner, who already knows how to source and manage the best suppliers for their business, should be well prepared for procuring finance.