Shortly after the 2008 financial crisis, a £25m turnover plant hire business found itself with lower margins, short of working capital and in serious arrears on many of its hire purchase agreements.
Its bank of many years decided enough was enough and requested that the business move its invoice discounting facility elsewhere.
The various Hire Purchase providers were also looking to be re-financed.
It took time to find a solution. The solution came when a UK subsidiary of a Belgian bank saw the potential of the business and decided to back it because there was a credible plan and management team.
Six months later the Belgian bank had created an entirely new product to meet the needs of the business. The business was successfully refinanced and is now a profitable thriving business with a turnover of over £100m.
This example illustrates that it is possible to secure finance in challenging economic times.
Funding: Being Credible
A fundamental requirement for successfully raising money for your business is that you and your proposition are credible. Investors and lenders will not back something they do not believe is deliverable.
There are 5 factors that impact the overall credibility of a business case
- the track record of the management team
- a clear understanding of the market;
- the competition;
- achievable milestones; and
- “skin in the game”
The Management Team
The credibility of a management team is based on trust, drive to succeed, cohesiveness of the team and depth of thought as much as, if not more than, the length of their experience in the business. It is not enough to rely on having run a business for twenty years as being the reason an investor, or lender, should let you have their money.
Do not forget that while you know yourself and your team, the underwriter sitting in the back office of the investor/lender almost certainly does not. You do not have to set out your CVs in the body of your proposal, but the words and tone you choose are part of the way you establish your credibility.
Understand the market
Credibility is not simply derived from having been in the market for a long period of time and understanding in detail how the market was. Of course, it helps to have experience, but in the uncertain post-lockdown economy, a failure to address the current and future shape of the market seriously undermines the credibility of your proposal.
It is true that knowing the size of the market and how big a share of it you are aiming for is important at any time; it is even more important, in challenging times, to show that you have thought it through.
It is very unlikely that you have no competition. If there is a market for your products and/or services, there will be competition.
When you are selling to your customers you focus on the unique selling points of your offering. This carries the risk that you will convince yourself that there is no competition. Investors and lenders want to know that you understand the alternatives your customers have and the relative merits of each.
If you use the phrase “we have no competition” you will probably be undermining the credibility of your plan.
Servicing the funding that you raise requires success in the future. Whether the money is needed to secure the future of the business or to deliver further growth it is being raised to deliver improvement.
If you have not thought through the key measures of success and the key factors in determining the financial return required to service the new funding, the credibility of your plan is diminished.
Supporting your case with a well-structured and tested financial model supported by historic evidence will significantly improve your credibility. It will also make it much easier for you plan alternative routes if milestones are missed along the way.
Skin in the Game
If you do not believe in your plan enough to risk losing something if it fails, why should an investor or lender believe in your plan?
To increase your credibility, you need to be willing to share the pain of failure. If all you have to offer is a personal guarantee, that might be enough, but the price of the money will be higher than if you offer a valuable asset as security. The key is being prepared to be worse-off than you are now if you fail.
You do not need to be perfect and some asset backed deals do not require the full “credibility” package but the more effort you make to demonstrate your credibility, the higher your chances of success.
David Callé FCA is a Commercial Finance expert having refinanced businesses both from within the business and as a consultant. David has worked with businesses ranging in size from £1m to £300m turnover.
As Finance Director of Quattro Plant Ltd, David refinanced the business and was CEO of a Quattro Plant Ltd was listed as 29th in the 2014 BDO/Sunday Times Profit Track 100 list of private UK companies with the fastest growing profits.