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The key considerations before seeking external finance

Contrary to popular belief, the opportunities to access finance for the UK’s small businesses are aplenty; and increasing all the time.  However, many SMEs do not consider all the options available to them when pursuing the finance they need.

It is true that an uncertain economy – such as following a global pandemic – can lead to a more risk-averse culture among the small business community. The sheer prospect of borrowing money and accumulating debt can be a daunting one for those who have not experienced it before.

But less borrowing simply means less cash flow and this only results in slower growth and limited job creation opportunities amongst the small businesses that make up 99.9% of all companies in the UK.

Making the decision to seek external funding in the first place is a big one, but it’s only the beginning of what can be a long and detailed process. The increase in funding options has inevitably created a savvier lending market, and those in it to lend money are often only there to make more out of it. As such, it is essential to prepare yourself for seeking finance.

In this blog, we have detailed the critical consideration you should make before you commit to any form of funding so you can make sure you pick the right solution for you and make sure you’re the right candidate for the lender.

Ask the important questions

The first step on your external finance journey needs to be understanding what requirements you are looking to fulfil with funding and what will be suitable to the unique context of your business.

In order to determine this, you should ask these questions:

Answering the questions above will help you to understand what it is you need out of any finance you secure, as well as pinpoint which solution would suit you best.

Another essential point to consider is what external finance you can afford. In the case of debt finance, any funding you secure will need to be paid back over time, with interest. So, you need to account for this.

The obvious starting point is to investigate loan or debt funding, typically from your existing bank.  This may be more favourable to many small business owners as they are not sharing their business potential with other lenders or even investors. However, this is not putting the incumbent into competition for your business.  And the likelihood is that repayments could carry higher interest rates and are subject to a strict repayment schedule.

Today, more flexible solutions come in the form of packaged funding deals and putting lenders into competition with each other. Not beholden to any one lender, you can usually negotiate better terms and lower interest rates, thanks to the lenders’ reduced exposure. There are also equity options, which do not typically require repayment.

By examining your affordability, as well as other limitations and needs, you will be better placed to pursue only the solutions that work for you rather than those who may exacerbate any financial issues you have.

Understand the options available to you

Once you have determined your bespoke needs and preferences when it comes to funding, it is time to review the options available. These days, the lending market is more diverse than ever, offering a wide selection for suit businesses. This includes equity and debt, sourced from both traditional and alternative providers.

Equity funding is focused on investment in your business in exchange for shares. Examples of equity options include:

Due to the nature of equity, you need to provide value to any investors. This usually means having a high-growth potential and an attractive pitch that highlights your worth. It also doesn’t require repayment, but it does require you to relinquish some control to shareholders.

Debt funding, on the other hand, is focused on a repayment plan, where you make regular instalments as per an agreement with the lender. There are often short-term (for cash flow issues and emergencies) and long-term options (for growth plans). Examples of debt finance include:

Dependent on the source of your loan, you may have to fit select criteria and undergo a lengthy application process.

There are other options available, some of which may even blend debt and equity. Due to the extensive range of financial solutions, it is essential to do your research beforehand to determine the best option for you. Speaking to an external advisor may also help, as they can talk you through the funding types available and the details of each.

When researching, be sure to understand the small print of each type and make sure you are aware of the implications on your business – and that they make sense in line with your goals and existing position. 

Make yourself attractive to external funders

When you have identified the funding route you hope to go down, it is vital to do what you can to guarantee the success of your application. Depending on the funding type you utilise, the process may vary but can consist of paper documents, digital forms and pitches. Regardless, you need to find ways to demonstrate the value of your business to the lender you are targeting.

If searching for equity investment, you should ask yourself the following questions:

If searching for debt finance, you should ask yourself the following questions:

Each of these questions will no doubt require research of their own and, if nothing else, will provide some food for thought as you prepare for funding. Further, it will enable you to identify the strengths and opportunities for your company, which you can then translate into your pitches and applications. Doing so will increase your chances of success.

Refine your business plan

For all enterprises, the business plan is an essential document. It’s likely to be the bible that maps out your proposed business journey. It includes your growth plan and sales strategy, as well as financial results and projections. In a nutshell, it demonstrates the stability of your business for the long-term.

And the more stability you are able to showcase to an investor, the more appealing you’ll be. It’s at this point that you’ll need to think carefully about the types of funding that will best suit your business’ needs. And, more importantly, what you are prepared to offer (or sacrifice) in return for the finance. Are monthly repayments, with interest, a better option than giving up shares in your business? You shouldn’t answer this to satisfy your current position but think about the long-term impact on your business.

Seek external advice

With so many considerations to take on board, external input could add value in the form of expert knowledge and advice.

Independent advisors can offer an impartial perspective on your business and its financial needs. This includes helping you to understand the support available and identifying the best solutions.

At Pegasus Funding, our team of experts are on hand to assist in your funding journey.

We can assist by evaluating the viability of your routes to market and help you in your application and plan creation. There is a noticeable difference between a business plan to satisfy internal milestones and a winning business plan to secure funding. We can steer you in the right direction to produce a well-structured plan and, more importantly, one that contains the right content.

As well as this, we have a variety of contacts in the industry, allowing us to put you in touch with lenders who will work with you.

Get in touch today to find out more.

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