With an established business it’s often easier as you already have a track record that you can show to potential funders. However as a start-up you won’t necessarily have any previous accounts to draw upon, so it’s even more important that you prepare fully before applying; you need to convince them that you will be able to repay any loans, or offer a genuine return on investment or, if you are going for a grant, that you will fulfil the conditions of the funding.
So here are some tips to get you started:
1) Accounts should be both a factual document – prepared in accordance with the relevant legislation e.g. if a company then the relevant Companies Acts – and a sales document. They should be clear and factual, explaining in detail how the company has operated so far (if it has) and its plans for the future. If the accounts show a poor result so far or you haven’t yet started trading – explain this.
2) Finance providers need to understand why you need the money, how it is going to be spent, what contribution you and the company are making and most importantly how they will be paid back and over what period.
The key issues you need to address are:
- What do you need the money for? how will it benefit the company?
- Can you afford the interest payments each month?
- Can you afford the capital repayments?
- What security is available?
- What other sources of finance are available?
3) Decide what is the most appropriate form of finance for your business so you don’t waste time chasing inappropriate avenues. Consider the following:
- If it is to buy a piece of equipment that is going to be used in the business then consider a medium term loan or hire purchase (a hire purchase agreement involves making monthly payments in order to lease an item of equipment and the equipment will only be “owned” once the full amount of the contract is paid)
- If it is to fund a growing business, to buy stock, etc. then an overdraft or even invoice discounting (generally aimed at larger businesses and allows the business to use its unpaid sales invoices as collateral, i.e the business will be able receive funds for its sales invoices before they have been paid) or factoring (the business sells its “future sales” invoices to a third party at a discount and the third party/factor collects the full amount from the customer paying over a proportion of the invoice to the business minus costs and commission) might be the most suitable
- If it is to develop a building project then project finance that can be drawn down at key stages of the project should be considered
- If you are undercapitalised then maybe a medium term investor e.g. loan notes
4) You will need to write a business plan when applying for funding, and it should include the following:
- What does the company do
- Who owns the company and what are their expectations
- Who runs the company and what is their experience and loyalty
- Who are the company’s main competitors – why are you better/how will you become better/get a larger share of the market
- What are the historical financial results of the company (if any)
- What are the projected financial results of the company
- How are you going to get there (to the projected results)
- What could go wrong and what would be the effect if it did and how are you planning to minimise this risk?
You must do this yourself – it is a hard soul searching exercise but by the end of it you will know your business in more detail and, in particular, you’ll understand its strengths, its weaknesses and their trigger points. This will help you when applying for funding and prepare you for the tough questions that funders so often ask.
[box type=”info”]Carol Cheesman is Principal of Cheesmans Accountants based in Islington, North London[/box]
