Who we all are; assess general financial knowledge level of participants; assure them that they must just ask if any ‘jargon’ gets confusing. The seminar is entitled ‘Access to Finance’ - we are talking about raising finance – where to find it and how to get it – hopefully faster and cheaper, if you follow our guidance. It is important to emphasise that they should seek a finance PACKAGE that is tailored to their needs – i.e. there may well be a mix of solutions for their funding requirement.
Run through the timetable
Investment in a company is essential for growth, and without growth it will not survive in the long term. However, you need funding to grow. You can of course use the cash generated by the business, i.e. profit. However that’s not always possible, particularly if you’re growing fast, or need to spend a lot on capital equipment or premises. The good news is that there are countless sources of external finance. The point is that the money is out there, and you just have to work hard at putting a convincing case for your company to get it - at the best possible rate and terms. You need to determine the best structure for your funding requirement, and get your business in a fit state so you have the best chance of obtaining the finance, and faster. When you are faced with funding your business, be open-minded and think laterally about the sources of finance you consider. Generally speaking, the overall structure should be designed so that you can pay the monthly debt repayments and interest without difficulty, or if you’re selling shares in your company, that you give up the minimum possible amount of equity. This seminar assumes that you want to find external finance. If you can use internally generated cash, that’s good so long as you don’t stretch the business’s cash flows or you upset suppliers by paying them late. Explain the concept of equity i.e. the shares in a company, providing ownership of a distinct entity, which has a legal existence entirely separate from the owners of the shares. If the company takes on debt, e.g. loan or overdraft, it does not affect the ownership. However, the shareholders and directors may be required to give personal guarantees to funders. If any shares are sold by current owners in exchange for new funding, their holding will be ‘diluted’ (explain). This will not happen if the company borrows money. However, any debt repayments and interest will adversely affect the company’s cash flow, and this can put strains on the cash position. Therefore debt does carry some additional ‘risk’. We will cover pros and cons of debt and equity later. This also means you need good planning, so that you know when you will need finance, and give yourself plenty of time to find it. Finance requirements should be planned as part of the overall company strategy. The intended use of the finance is important and will help to determine the best source. Again, this will be covered later.
Description of the main types of borrowing; explain what security, collateral, fixed and floating charges, personal guarantees mean, and that except for small overdrafts and SFLGs, a bank will always want some security cover Overdrafts - For working capital requirements i.e. day-to-day cash flow support; its use should vary according to short term working capital demands; repayable on demand; usually renewable annually but is a ‘rolling’ or evergreen facility; often secured at least by a personal guarantee, possibly by collateral; source = banks; cost = interest plus arrangement fees Factoring and ID - Similar to overdraft; the provider generally advances up to 80% of the invoice value immediately, with the balance paid when the debt is collected; a ‘rolling’ or evergreen facility; invoice discounting is ‘confidential’, whereas with factoring the provider collects the debts so it’s more obvious; the old stigma has now gone – this method is now mainstream and increasingly popular; source – banks and various finance houses e.g. Bibby, Cattles, Venture Finance; cost = interest on amount advanced, ongoing admin fees plus set up cost Loans and commercial mortgages - aimed at longer term financing requirements such as property, plant and equipment, company acquisition etc; repayments are contracted and the loan can not be called in unless there is a default or breach of a ‘covenant’; security is usually required; cost = interest plus arrangement fees. Small Firms Loan Guarantee (SFLG) - Government backed guarantees for 'regular' loans up to £250,000 for SMEs with a turnover of up to £5.6 million, available up to 5 years after incorporation. Very much aimed at promising, early stage companies. Payment holidays may be negotiated to help cash flow. The guarantees cover up to 75% of the loan amount and the advantage is that the borrower does not have to provide security . However all available security must have been utilised before any guarantee can be considered. Businesses apply to an approved lender, which includes all the main banks. As with any debt, the lender must be convinced that the loan is serviceable, although the bank may allow some flexibility for an early stage enterprise. Cost – interest plus 2% Government premium, plus fees Leasing etc - A type of loan where the money is secured on the item purchased; all sorts of assets, even software, can be financed; choice of whether you own the asset or not at the end of the term; quite flexible in structure, and may have tax advantages; some funders will finance assets such as plant and stock already owned; cost = monthly payments plus some fees Trade finance and L/Cs - Outline these forms of financing; source – banks and finance houses; cost – higher than overdrafts, plus fees Mezzanine - Called mezzanine because this form of loan sits between debt and equity, and fills a gap. Favoured by firms such as Finance Cornwall and Finance SW. Mezzanine loans are usually unsecured (like equity), quite flexible in when they are repaid, and usually carry equity options (i.e. the funder gets an option to but a small % of shares, as part of their overall return). The advantage is that the money will not be as dilutive as straight equity, for the same amount of capital. C ost = interest, monitoring fees, plus arrangement fees
These points underline the general risk averse nature of banks and other lenders
Sources - much more detailed info in the seminar pack – note there are specialist lenders such as Prince’s Trust, PRIME Security - the main points here are that debt funding accessibility is determined largely by the security available and by the company’s performance. A banker may be unwilling to lend against good security if the business is not performing well – banks hate having to enforce their security e.g. forcing the sale of someone’s house. Also make the point that the general rules are that banks will lend up to 50-80% of collateral value, and that they are reluctant that total debt is more than 50% of the total funding of a company (i.e. a max 50% gearing). Jargon - more detailed info in the seminar pack – but ask if there are any queries!
fundamentally, a company exists as a pile of legal documents. a share certificate and the share register entry is really the only proof of a person’s ownership of a company’s equity. most company owners are understandably reluctant to sell any part of their shareholding because it will reduce their eventual capital return on their shareholding, and reduce their right to dividend income. many companies will prefer to fund growth through borrowings so that equity dilution can be avoided. however, in some circumstances it may be impossible to raise enough or indeed any debt, due to high risk levels as discussed earlier, for example where the company is early stage. in this case, equity will be the only option if the company needs funding to grow. the owners must therefore be prepared to suffer some dilution. the extent of dilution will depend on the funding required and the attractiveness of the business. sources - we won’t go into much detail on this – see seminar pack for more info vc - note that very few vcs now invest less than £2 million, however the regional funds including finance cornwall, finance south west and yfm south west ventures will invest £75k upwards (but ‘terminate’ on 31 december 2008) angels- dragon’s den is not a good example! mention swain how to find them - see pack other - but take care, and be aware of the fsma rules on financial promotion – criminal penalties outline the enterprise investment scheme (eis)
GAUGE THE INTEREST IN THE AUDIENCE FOR EQUITY TO ASCERTAIN HOW MUCH DETAIL IS NEEDED Statistics! Introduce this section with a few numbers illustrating the challenges of raising equity finance
Equity investors are more focused on the capital return at exit – which could be 3+ years from the date of investment. This is very different from lenders who are looking at monthly payments from day one. Exit - explain briefly. Valuation - explain briefly – more detail in pack. Affect on dilution. Returns - discussed in session 1 EIS - discussed earlier.
Leveraging - i.e. more equity enables more debt without increasing the gearing too much – a bank may often match equity investment £ for £ Raising equity can take MUCH longer than debt
Lead time: Debt – a couple of weeks to several months Equity – a minimum of six months Business plans are always recommended and will always help to secure funding; detail depends on amount needed, and the stage and complexity of the business; for a straightforward overdraft – perhaps 3 pages plus a one year forecast; for several hundred thousand pounds equity, probably 20+ pages and a five year forecast; the management must write the plan but your accountant could help with modelling the forecasts. Negotiation and legals - you may need a professional adviser – see pack DD - explain what due diligence entails; you may need a professional adviser – see pack
The ability of a company to plan out its strategy and to provide sound arguments for the probable success of its business will be a key factor in establishing credibility with bankers and investors. Above all, the business plan must demonstrate the viability of the business, and be realistic. Preparing a good plan can be time-consuming. Considerable care should go into its preparation. However, it is time worth spending, as a well-presented plan will immediately create the right impression. Inform them that there is a detailed template in the pack Max 20-25 pages plus appendices Think about the audience and what to give emphasis to - growth and exit OR predictable cash flows and stability
Business Finance Options – The Choices Simplified Business Link
Introduction Mike Stutter Business Finance Adviser