Keeping it in the family – it’s that well known phrase that you’ll know only too well if you have the joy of running your own family business. So, when faced with thinking about accessing finance, it’s understandable if the sheer concept makes you shudder.

Commonly unplanned, sourcing external funding often comes with a sense of urgency – you have invoices to pay off, the next salary run is looming or your equipment needs repair – possibly even replacement.

Cashflow is one of the single greatest challenges facing family businesses. It not only stifles the day-to-day operation, but can also can create growth hurdles such as the inability to:

• Fund new orders due to debtors paying late
• Pay VAT or PAYE on time
• Introduce new products and services
• Keep acceptable credit terms with suppliers
• Buy new technology
• Increase stock on a seasonal basis
• Acquire a new business

Although the prospect of borrowing money to keep your business afloat can be a daunting one, it needn’t be the big hairy monster in the closet. If you are serious about growing your business in the long-term, raising finance needs to be a nurtured process, not a quick win solution.

While the opportunities to access finance may be aplenty, how do you know what the best solution is for your business?  And how do you ensure you are matching your business’ needs to those of an investor?

One of the first and most critical factors is in understanding where you are in your business’ growth cycle. Not only does it give you an idea of the most appropriate types of funding, it allows investors to understand the true potential – and risk – of investing in it.

For example, if you are seeking external finance for the purpose of taking your business to market, the finance options available will be entirely different than if you were looking to secure funding to purchase new machinery to increase production and satisfy existing orders.

There unfortunately isn’t a one-size-fits-all solution when it comes to raising finance as businesses’ needs differ and finance providers will often lend against a strict criterion. But there are things you can do to prepare and be armed with enough knowledge to make the most informed decision. 

Know the marketplace

Understanding the financial landscape is key. Before approaching possible lenders, you need to know what funding solutions will be the most appropriate. List what the funding will be used for and how much is likely to be required. This will give you an indication of the type of finance you may wish to apply for.

Once identified, research the market place. Take an in-depth look at lenders, both high-street banks and alternative funding providers. Research the businesses they have previously funded and their current areas of interest. It is important to match the needs of your business with those of an investor – consider them an extended family member. Use personal connections or reputable companies as a source of advice and information.

Understand what investors are looking for

After identifying potential investors, you will need to plan your application. This isn’t a case of walking into a local bank and asking for £100k, it is a planned and strategic process which you need to be prepared for in order to satisfy lenders that your proposition stacks up. The more prep you do in the short term, the less time (and money) you will lose in the long run.

Firstly, you will need to know the right questions to ask. How much will it cost with monthly interest rates? How long does it take to receive the funds? What is the maximum length of time you can borrow for? What are the terms and conditions? Are there any early repayment penalties? These are just some questions to ask to ensure you are receiving the right loan for your business.

Even if you think you know the lender inside-out, they will still challenge your application. They are not just going to hand over the money, they want you to prove that you are serious about the business they are willing to invest in. If you know the tricks the funders get up to, you will not be caught off guard.

Make sure you don’t settle with the first offer either – make the funders compete for your business, just like any other supplier that you deal with. Although high-street banks tend to be cheaper, they may not be the ideal solution for your family-run business.

Preparation is key

The key to successful funding is being prepared. Treat it like a job interview – if you show you have done your research and are the right fit, then they are more likely to be willing to invest. On the other hand, if you look like you haven’t put the time and effort in, then neither will they.

The importance of monthly management accounts should not be underestimated either. Ensure you have copies of audited accounts, debtor and creditor reports, and a business plan to enable funders to review your repayment capabilities.

The management team of your family business might know your company inside out, but they are likely to have limited experience of what is required to prepare your business for investment. Remember – it doesn’t have to be a daunting prospect! Pegasus Funding can guide you through your options and help prepare you for making that all important finance application. Give us a call on 0203 327 0567 or email [email protected]