Getting in shape
While some of us emerged from full lockdown needing to shed a few pounds, businesses looking to attract lenders also need to step up their fitness regimes.
The message from the funding experts is that now is the time for companies to get in shape as they look to emerge from the Covid-19 pandemic and put the focus back on growth.
Chris Brown, principal at Lancashire accountancy firm Brown & Co, says businesses need ensure they are ready for the journey when they set off on their funding quest. He singles out three main areas lenders are particularly interested in: profitability, affordability and net assets.
He says: “Profitability is a positive sign to lenders as it shows the business is making more than it is spending. Currently lenders are checking to see if the business was profitable pre Covid-19.
“The business should be able to show it can confidently afford the loan. Ideally an EBITDA of 1.5 times the debt service cost. Some lenders will deduct dividends from the profit after tax when considering affordability.”
“A positive net asset position gives lenders comfort that the business has assets they can liquidate into cash in case of default.” He adds: “The higher the net assets; the better.”
Funders also like “a good story”, says Amin Kamaluddin of SK Growth. He says: “By that I mean they like businesses that have a journey to share, which more than often involves an obstacle or challenge.
“The obstacle or challenge can be overcome with funding. This might relate to funding for a new improved IT system, manufacturing line or a new site for expansion.
A positive net asset position gives lenders comfort that the business has assets they can liquidate into cash in case of default
“Regardless, funders like to understand your journey and so be sure to paint a picture and tell a story that will capture their senses. Funders like a good story as they believe it can result in a win/win for both them and your business.”
Having a “robust business plan” has to be at the centre of proposition. Amin says: “The plan must outline not only the intended purpose of use for the funding but also what the end game is - what are you targeting to achieve as a business?”
What turns funders off? “Simple, it’s poor preparation,” Amin says. “Not taking the time out to understand the need for the funding and what impact it can have on your business.”
Andy Traynor, Lancashire-based senior investment executive at FW Capital, believes the ‘sales pitch’ is vital and adds: “It’s important to get it right before you do anything else.
“Investors often have a lot of plans on their desks, so it’s important to present a compelling investment opportunity both clearly and concisely. “Make sure you get across what’s in it for the investor quickly. Remember, they may not be a specialist in what you do, so ensure you explain the proposition in simple terms.
“Also, be prepared. Due diligence is a necessary evil. The more you do to prove your track record and have supporting evidence to justify your assumptions in your plan, the smoother and quicker the process will be.”
He adds: “As an investor, we’ve seen a lot of people coming in without an exit strategy. You need to have a clear plan to ensure the investor can get on board with the whole journey.”
Padiham-based Coolkit is a specialist manufacturer of temperature controlled vehicles and has accessed funding to support it along its growth journey, including
finance from Rosebud, which focuses on businesses based in the county.
Coolkit, which today employs 95 people and has a £12m turnover, has used funding to help it relocated to larger premises and to invest in more efficient machinery.
Managing director Rupert Gatty says: “You have to set your stall out in terms of being able to present clearly what the vision of your business is and its aspirations.
“You are going to be asked how you will benefit from the funding and exactly what you are going to do with it.”
Andy Traynor says businesses should give themselves plenty of time in their search for a suitable investor. “It’s not a decision that needs to be made quickly, nor is it one you should make just based on the fact you need money.
“The relationship with the investor is equally important and you’ll want a funding partner whose interests align with yours. If you’re looking for a longer-term growth story, you need to make sure you find an investor that has enough cash to follow through.”
Paul Spencer, director at Haworths Chartered Accountants, says businesses looking at possible funding should carry out a financial health check – reviewing its and its directors’ credit ratings.
He adds: “Up to date financials and projections are equally important. Monthly or quarterly management accounts are essential, combined with projections of at least a minimum of 12 months but ideally, three years. Any projections must be constructed based on credible assumptions.
“Many companies seeking funding will also benefit from appointing a commercially savvy non-executive director to the board to supplement their experience and skillset cost-effectively.”
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