External finance…can we really afford this?
So, you have made the decision to seek external finance for your growing business. This may be part of a projected business plan or it may be accelerated following an increase in demand. Either way, the conundrum is no longer whether you should or shouldn’t take external investment. Instead the questions focus on the best source of funding and, more importantly, the route you’re going to choose and whether it will be affordable to sustain the business in the long-term.
These questions are further compounded following the Government’s announcement last week of the first interest rate rise in a decade. Although small, the rise from 0.25 per cent to 0.5 per cent, will have a knock-on effect to both your business and those doing business with you. And even more so for small businesses who largely depend on credit to help finance their day-to-day operations; even a simple overdraft will be impacted by the higher rate of interest.
However, the wider risk is that the rate increase, coupled with the prediction of more to come, will heighten the belief that external funding is just too expensive. A knock to the confidence of many small businesses.
Very few entrepreneurs succeed without some sort of funding. And those that do, have often made sacrifices of their own. Growth without funding is difficult and the reasons to avoid funding are still generally outweighed by the reasons to access funding.
And the requirements for funding vary greatly – from start-up capital through to servicing surges in demand, prime opportunities for hiring that much needed talent or protecting yourself from a short-term funding gap, the secret is in planning ahead. Those that forecast the need for cash injections are usually more successful in accessing finance than those that react and make an urgent demand/application.
This is because borrowing against a planned forecast is likely to be consistent with a growing turnover. And this can be an indicator of many things, including an improved market position, winning more contracts and that your product or service is gaining more traction.
There is no doubt that businesses that are already finding trading conditions difficult, could now find it even tougher – especially with the threat of more interest rate rises to come. The combination of higher borrowing costs, coupled with increased daily operating pressures, is a difficult combination. That’s why now, more than ever, it is vital that you properly assess the right funding solutions for your business.
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.
Of course alternative funding, such as equity crowdfunding, is also increasingly popular. But whilst there’s no capital sum to repay and no concern about interest rates and additional rises, you are giving away a percentage of your company. You will need to weigh up the true cost of this, versus the cost of borrowing, to ensure that you are not paying over the odds in addition to potentially losing an element of control.
At the end of the day, the external funding scene is a complex one and one best tackled with expert advice and input. This will ensure that you are privy to all of the options available to you and that the most appropriate one for your business, at this time, can be found and negotiated on your behalf.
For more information on the range of available funding options and advice on the most cost-effective route for your business, contact Pegasus Funding Resources on 0203 327 0567.