Funding Start up Businesses

Start-up businesses are the most difficult to get funding for since there is no track record for an investor to evaluate. Most Business Angels believe that past performance = future performance; if an entrepreneur has invested his life savings and borrowed from friends and family to get over the first year and there is a tiny profit this is an excellent indication for the future. Asking for funding for an unproven idea, no matter how good, is asking for a very cold shoulder.

Getting any kind of funding can take years and those are years where the entrepreneur is actively presenting to angels; not trying to ‘find’ angels. For the entrepreneur finding an angel that is actively investing in the SME market is the equivalent of finding a gold nugget in the middle of the Sahara Desert. Using a solicitor or accountant with contacts reduces the odds but they are still highly stacked against the searcher. Going down this route the entrepreneur can easily make a dozen meetings in a year with a single angel and still end up rejected.

Most business angels are highly protective of their contact information. If they make themselves too accessible they can receive thousands of business plans each year. Far too many for an individual to critically evaluate. Beer and Partners, an angel network, receive around one thousand business plans per year and put forward just one hundred.

Investors with money have trusted advisors who bring evaluated business propositions to them. Much the same as book publishers have book agents. The entrepreneur with a sound project, who is lucky enough to find an investor in the public domain, will usually find that the investor he has found is a member of several networks. Investors talk among themselves. If one of them rejects a project then that rejection can have a domino effect by eliminating many other angel investors perhaps all the members of an entire network.

In the UK most angels now belong to angel networks.  Beer and Partners are one such group with 1800 active investors and some 400 investing institutions in their database. The advantage to an entrepreneur of a professional broker or associate presenting to appropriate members of a network like this one is obvious.

Going it alone is extremely difficult, expensive and time consuming and that is if the entrepreneur is actively presenting. Anyone who maintains money can be found using Internet sites unregistered with the FSA is not telling the truth.

Start-up businesses need three things to succeed when looking for funding:

1) Money

2) A sound Business Plan

3) A professional broker or angel network associate that can present the proposition of the start-up

Notice that ‘money’ is head of the list. Networks need to be paid for their services which are not trivial so the entrepreneur needs to budget for an engagement fee which can be anything from £1,700 to £6,000 depending on the project. All networks also take a percentage for successfully finding funds.

The competition for start-up funding is intense and trying to find it outside an angel network and without skilled help will cost many times more than a network will charge. In the USA it is estimated that at least $50,000 can be spent in this pursuit of angel funding without professional help and that without any guarantee of success.

A sound business plan is essential. Templates downloaded from the Internet stand out a mile and are usually too large and cumbersome to be read. A good broker will edit a report and groom the start-up entrepreneur to present the best case.

Since start-up businesses are the most difficult to get funded – take the uncertainty out of the process, save time and more importantly money, by using experts like Capital Brokers

Seeking angel funding?

Any SME looking for finance should consider angel funding in today’s lack of banking co-operation. Modwena Rees-Mogg of VCRDirectory wrote an article that every SME considering angel funding should read.  Modwena interviewed Simon and Michael Blakey of Avonmore Developments; an organisation which is one of the more successful angel investors in the UK.

The article can be found by following this link. The interview describes what they as angel investors look for in businesses and where they find problems; not surprisingly perhaps, one of the major areas was with people relationships. The biggest people issues, they found, involved shareholders through their interaction with one another together with their individual and collective relationship with the management team. The day may not be far away when directors and stakeholders may have to submit to a personality assessment before receiving funding, however this has no part in their evaluations at the moment.

In the interview she discussed the issues of follow on funding and how this is dealt with together with the types of businesses that Simon and Michael Blakey prefer. Both are very important considerations and demonstrate the importance of knowing what will interest an investor before asking for investment.

For anyone considering approaching the angel market place this is not just a compulsive read but an invaluable one.

BUSINESS WITH TRADING PROBLEMS?

Businesses in trouble need professional support to guide them through their financial crisis. If you’re facing financial pressures it doesn’t always mean the end of the road.

The answer is don’t delay. Look for an advisor that will provide a full range of services to effect a successful restructuring or turnaround.

Whether a business needs to redress underperformance, enhance stakeholder value or resolve a crisis, the professionals you chose must have a proactive and innovative approach to problem solving and be able to effectively negotiate with suppliers and customers. This can include re-negotiating terms with the bank and other major creditors; replacing existing financial arrangements like factoring, confidential invoice discounting or leasing with more appropriate arrangements.

It is vital that you choose your adviser wisely; a full assessment of your business will be required that will lead to the rapid production of a new business plan. Only then can approaches be made to financiers with a view to refunding the business and ensure your continued survival as a business.

The dynamics of finance vary depending on the profile of the business and the type of funding being sought.  The adviser will have a key role to play between the business owner and the potential lender. The role of the advisor is important to achieving mutual understanding between borrower and lender and especially so when requesting further funding from the existing lender.

Companies in a distressed state can take comfort in the knowledge that many investors take a pragmatic view of restructured businesses and regard them as new starts. Surprisingly this often applies when an existing CVA or pre packaged administration is in place.

However, the best laid plans often go adrift. What if, despite everyone’s best efforts, a rescue solution cannot be achieved? In that case it is important for you and your creditors to have the right formal insolvency option that will preserve the value of the business. If formal insolvency becomes inevitable the advisor must recommend the most appropriate procedure for that specific business which may include one of the following:

personal insolvency;

informal moratorium;

company voluntary arrangement; or

administration.

Selecting the right one is not a case of chance but of assessing your needs and the needs of stakeholders and can be the difference from having sufficient funds to start again or bring totally penniless. The choice is with the individual but getting the right adviser who has the right support will be pivotal in rescuing a defunct business

1939 Banks or 2009 Angels

Whilst there are glimmerings of a recovery the economic environment and financial thinking is much the same as in the Slump of the 1930s.

Finding funding for businesses is becoming a major problem for SMEs. Capital has never been so scarce, with bank lending to businesses remaining extremely difficult or only available to the privileged few but even then only at punitive terms. For sound businesses ready to move into their next stage of growth, or for those applying for increased working capital; survival can be a major issue.

Many firms failed at the end of the 1930s just as the recovery began for this very reason.

Banks will continue to be reluctant to lend into the foreseeable future and because of this businesses will be unable to adapt and exploit new opportunities. It follows that when the recovery occurs and the banks are willing to lend again, many businesses will be in such a run down state that they will not qualify for loans.

Sources that have always been available and are not governed by non-entrepreneurial thinking are business angels who will invest in companies in return for equity. Angels can not only provide much needed funds but also offer invaluable expertise, experience and contacts.

Business Angels expect to leave their investment with the company for a minimum of three years, after which they usually want to exit and take their profit on the shares they hold. This means that not only will the SME remain in control during that period but he or she will get his or her shares back at the end of the period.

SMEs who have been declined by the clearing banks are now seeing the advantage of finding the right angel investor, whether to finance marketing plans, boost working capital or fund acquisitions.

When the economy recovers it would be a disaster if SMEs fell into the same trap that took so many businesses to the liquidator in 1938. Then the winners and losers were determined not by the quality of their product or service but by whether they had planned funding required to take them to the top of the list.

Capital Brokers advice is to ensure, through the business angel sector, that your business is properly capitalised, rather than going cap in hand to an unwilling bank and finding your business impotent through lack of finance when the good times come back.

Recession or Slump?

Business in need of funding

Could we be starting another Great Depression? By any measure, our current economic suffering does not approach what this and other nations endured from 1929 through to1939 and the war.

In the depths of the Depression, 25% of the population was out of work. Stock indexes had fallen 89%. For those who had homes and mortgages foreclosures soared. During the Depression, savers watched their money evaporate in bank failures, because then deposits weren’t insured and governments did not intervene. Things were so bad and bankers so unpopular that bank robbers, such as Bonnie and Clyde, became folk heroes in the States.

Few people would deny, that the current economic climate bears disturbing similarities to the start of the Slump

The banking system was crippled in the slump by bad loans and speculation. In 1929, the bad loans were made to stock-market speculators; most recently, the bad loans were made to homeowners and investors in mortgage-backed securities. In 1929 and 1930, the Fed actually raised interest rates, draining liquidity from the USA system, deciding that that was best way to stamp out speculation. In contrast in this recession the central banks have dropped interest rates to their lowest levels in most histories.

Banks stopped lending in 1929 to prudently (they said) avoid further losses, which slowed the economy even further. By the mid-1930s, more than 5,000 banks, world wide, had collapsed. Today, central governments have pumped money into the banking system under the condition that they carry on lending. However, banks have slowed lending to avoid losses, and because of this the credit markets have nearly ground to a halt.

The $700 billion bailout bill in the USA and the UK Government taking massive holdings in the clearing banks to the rate of £3,000 per household  early this year, show that the First World governments are willing to intervene in the financial system to keep it afloat.

Despite these swift unique steps to correct matters the amounts are small compared with the costs to get the west out of the 1929 -1939 slump and peanuts compared with the expenditure on the war. Perhaps we still have a long way to go. The key lies with the banking system, which perhaps rightly, is not filled with entrepreneurial flair but unless they start to take risks a 1929 repeat is not a possibility but a certainty.

For those that are not confident in writing reports why not look at Raise Business Finance a site offering free guidance?