Raising money for your company needs much thought:

• What is the money for?
• How much do you need and how long do you want it for?
• Where can you get it from?
• What guarantee can you give that it will be spent wisely?
• What security have you got?

You also have to convince serious people that you really need the money and excite them into giving, investing or lending it to you. Be prepared to spend some time on this project. It may be the most important ‘SALE’ you ever make. So you must get it right.

This chapter covers the raising of money from a variety of sources and explains how to go about it. It contains details of:

• preparing your business plan
• dealing with your bank
• finding your sources
• borrowing money
• issuing more shares.

PREPARING YOUR BUSINESS PLAN

You cannot expect to persuade people to invest in the future of your business unless you have a clear idea of where it is going. You must have a prepared plan which you can explain to anyone interested in helping you. You often hear stories about people who start enterprises without planning them but in reality it does not happen. Whatever your idea is it will need to be thought about and that is the first stage of your plan. You must then go into more detail. Each step must be considered together with any alternatives until you are sure it will achieve the objective you are seeking.

So what is a business plan?

A business plan can be prepared at any time. It projects your business into the future and tries to forecast what will happen. But you must have firm objectives first. It is a financial model of the future as far as your company or business is concerned.

What will it contain?

Your plan should contain the following:

• your ultimate goal
• the products or services you intend to sell
• what you will charge for the products or services
• how you will promote the business
• where you think your market is
• who your competitors are
• how you intend to manage the finances
• calculation of your break even point, ie the smallest amount of sales which in theory produce neither a profit nor a loss
• details of premises, equipment, vehicles, etc
• staff details
• personal details
• a cash flow forecast of the expected movements in cash over the next one or two years.

You should write up this plan as logically as you can and then re-read it to see if you can improve it. The idea is to give the potential reader a realistic summary of the current position and an optimistic view of the future without being too over confident. Over confidence may lead to some scepticism by the recipient. When you are satisfied that the plan tells the story as you see it you must check that your cash flow figures are in accordance.

Make sure you are totally familiar with all the aspects of the plan. You must expect to be questioned in depth about its contents.

Now you are armed with a reliable business plan you can face possible lenders of money with confidence.

Case study: Hannah prepares a business plan

Hannah and Usha are getting very busy and realise that they will soon be working more hours than there are available. They agree to take somebody on to teach their trade to, but this will take time and therefore money. Hannah remembers from her studies that businesses should have a plan so she volunteers to prepare a plan of where the business is going and what funds will be needed to achieve it. She contacts the bank manager who sends her an outline plan which she works through, answering all the questions on the form. When this is complete Usha puts the finished product on the computer so that any adjustments that might have to be made can easily be done and for reproducing it when it is needed. A very useful job done.

DEALING WITH YOUR BANK

Your bank manager is only human. If you are a responsible businessman your bank manager will look upon your request for money with sympathy. Conversely if you upset your bank manager you will be treated accordingly. In business everyone is your friend whether you like them or not. You never know when your paths will cross again.

Anyone starting in business is naturally optimistic, but be careful when raising money not to ask for too much. You may overdo it. On the other hand if you ask for too little your business may not be viable. Try and be firm that the money your plan suggests is correct. Your bank manager may try to persuade you that you can manage on less but if you have done your homework properly you will be able to argue for the deal you want.

Financing your set-up plans

Your plan and forecasts will indicate how much money you want and when. If you are starting your business from scratch you will need money initially for setting up. This may include expenditure in two main areas:

• 1.The initial expense of buying equipment, premises, marketing costs and legal and professional charges.
• 2.Working capital which is the money you need to pay for your goods or stock prior to selling them and receiving payment. A number of factors affect the amount of working capital a business needs, including the amount of credit you give your customers and the amount your suppliers give you. You will need more if you hold large stocks.

Your bank manager has two main ways of funding your business: overdraft and loan.

Overdraft

Firstly you may be granted an overdraft facility if your need for money is likely to be short term. This means you will be able to draw more money out of your account than is in there up to a certain limit. The account is run as if it were your money and a charge for the interest you have incurred is debited to your account periodically. These interest rates may vary as interest rates have a habit of doing. It will be assumed that you will repay the outstanding sum fairly quickly.

Loan

Alternatively you may be lent money by way of a formal loan for a given period with regular repayments of both capital and interest. This may be used where larger sums are involved or where the money is required over a longer period. The rate of interest can be a fixed percentage or a variable one which will fluctuate with the movement of interest rates generally. There are a number of other variations of repayment and interest which can be negotiated.

Small Firms Loan Guarantee Scheme

This is a government scheme to help small businesses with no track record or security. The government guarantees a substantial part of your loan for up to £100,000 or £250,000 in the case of established businesses with two years’ trading experience. There can be a holiday of up to two years before you repay any capital and the loan is repayable in full over a period of two to ten years. You can choose a fixed or variable rate of interest. The cost of this is that you pay a premium to the government on top of the interest set by the bank. There may be a charge from the bank for setting up your facility and you must remember that this amount will be charged to you at the time. It will effectively increase your borrowing. You may also be required to take out an insurance policy covering the amount of your loan should anything drastic stop you from fulfilling your obligations.

One other important consideration is that of security. A bank may well require, with certain types of loan, security which will give them the right over, for example, an asset of yours should you fail to repay your loan in accordance with the predetermined agreement. If it is the company which is doing the borrowing it may have no assets and the bank may require a personal guarantee from you that you will make the repayment should the company fail to do so. In each case this defeats your limited liability as you take on the debt personally under this agreement. You should consult your family before taking this step as they have a stake in your personal assets.

To summarise, the first impression you give may be vital. Make your plan readable but concise. Practise delivering your plan and remember you are normally dealing with fairly conservative bank managers. Don’t be too outrageous yourself. If you are asked for more information get it organised quickly. Above all be yourself.

FINDING YOUR SOURCES

Banks are not the only providers of funds for new or small businesses by any means. There are many other sources. It is as well to investigate all these before you make any decisions.

Potential sources

• your own family
• your shareholders (this will be dealt with later in this chapter)
• venture capital companies
• hire purchase, leasing and finance companies
• individuals with capital they wish to invest
• local authority grants or premises
• Training and Enterprise Councils
• government loan guarantee scheme
• charities like the Prince’s Youth Business Trust
• competitions, such as Livewire, for young people
• newspapers advertising competitions run by accountants, banks, etc.

Get in touch with as many of these as you can and show them you are interested. If you don’t ask you don’t get!

Most of these funders will require your business plan so have copies available. Their individual requirements may be different but your plan will be the basis for all of them. All the criteria for impressing your bank manager will apply to any of these funders so you must humour them. Imagine what you would be like if it was your money you were lending to someone else.

Case study: Harry doesn’t worry

Harry has no cash worries in his little company as he can fund it from his own resources if necessary. It is a nice position to be in but he may well have to lend money to the company to tide it over until there is a full complement of shareholders. He will not charge any interest.

BORROWING MONEY

Borrowing money is never easy. Although you know what you want it for you will find the prospective lender sceptical, especially if you are just starting in business and you have a small company. The better your track record, the greater the chance of obtaining funds.

You will also find that lenders always like to see you put your own money into your enterprise. This gives them confidence that you are confident. Banks will often match the money you put in but are reluctant to put theirs in without some security.

Should you ask for more or less than you need?

Some people suggest that when borrowing money you should always ask for more than you need so that you can do a deal at the figure you really want when your lender beats you down. Others suggest you should be conservative. There are drawbacks in both of these approaches. The prime one is that your plan will have to be adjusted to agree with your request and this might throw your projections out. Of course if you ask for too little and get it you are going to run into difficulties when the money runs out and you are forced to go back for more.

The sensible course is to be realistic, have confidence in your figures and be firm in your negotiations. You know more about your business proposition than your lender so use the knowledge to your advantage. You will be respected all the more for it.

In the event of failure

If you fail to convince anyone to lend you money do not despair.

• 1.Look at your plan again.
• 2.See if you can adjust it.
• 3.Do you need all the equipment at once?
• 4.Can the purchases be staggered?
• 5.Are there alternative premises?
• 6.Are your sales too optimistic?

It is important to keep improving your plan until your lender can see it will work. Go through the whole exercise again until you are sure you are on the right lines. You will be learning all the time and there is no substitute for experience. If you have a good product there must be a combination that will work.

Case study: Dean runs short

Dean is having difficulty paying his creditors. He contemplates a visit to the bank to explain his predicament. He has a second thought. His father has some money and he asks him for a loan. His father is reluctant to take his money out of the building society as it is earning interest so Dean agrees to pay the interest as well at the same rate. However, there is a tax implication with this. Chapman Security Ltd will have to deduct tax at the basic rate (20 per cent in 1996) before paying over the interest. This will be shown on a certificate (form R185) to be given to his father at the time of payment. The company will subsequently have to account for the tax to the Inland Revenue on a form CT61 which is normally sent in quarterly.

ISSUING MORE SHARES

Mention was made earlier of raising money from your shareholders. This is always a possibility provided there are enough shareholders and that they have the resources.

Firstly you must make sure that there is sufficient un-issued nominal capital. If not, steps must be taken to increase it. Unless the Articles of Association say otherwise a resolution must be passed by the company in general meeting.

Example

‘It was resolved that the capital of the company be and is hereby increased from £1,000 to £10,000 by the creation of an additional 9,000 ordinary shares of £1 each.’

A printed copy of this resolution authorising the increase must be filed with the Registrar of Companies within 15 days of the passing of the resolution. Also, as this is effectively amending the original Memorandum and Articles of Association, an amended copy of those must be filed.

Once there are sufficient shares to issue care must be taken to allot any new shares fairly. Consider this simple example.

Shareholders
	A	B
Shares already issued	600	400
Increase by 9,000 shares enabling £9,000 to be raised
Allotted	3,000	6,000
New holdings	3,600	6,400

Shareholder A had 60 per cent of the original shares and therefore 60 per cent of the control. After the allotment of the new shares he only has 40 per cent and has lost control of the company to B. It is therefore important to allot these shares in the same proportions in which the holdings were originally held if a change in the control of the company is to be avoided. This may be difficult if the principal shareholder A has no money and B has. It would be better to try and negotiate a loan from B and leave the shareholdings as they are.

You must realise, therefore, that if you are willing to sell some shares to a third party you must first get the agreement of the other existing shareholders so that everyone knows the implications. You must relinquish some of the potential gains you might get as the value of the shares increases as your business grows. This after all is what any potential investor is looking for. And you will now have an additional person owning part of your company who may wish to exercise his or her power if events do not go the way expected.

Most small companies have a clause in their Memorandum and Articles which precludes shareholders selling their shares to anyone other than existing shareholders. So the market for shares is small and the value is restricted.

It may be better to pursue other ways of raising money first.

ACTION POINTS AND REMINDERS

• 1.Have you got a cash problem? If so try to identify it.
• 2.Have you got a future plan for your business?
• 3.Make sure your plan is written down.
• 4.Do you need some extra capital? If so when?
• 5.Approach your bank first and discuss the problem with them.
• 6.What are your alternatives?
• 7.Make sure you know your business well enough financially to give a good case to a lender.
• 8.What is your nominal and issued capital?
• 9.Will you need to issue more shares?
• 10.Who will buy them? And remember to watch the effect on the control of your business.