Let’s say you have a fantastic business idea that you know will make money for you. You have made your calculations, you have studied the market, you have found the perfect location and you have a good idea how you will operate and make the business happen. The product you have is unique. How to make the product will be unique. You have found the people who will help you make the product. You have emptied your wallet, gathered all your money from your savings, sold your car, you now some of the cash you need to start it all up. You are thinking “I will go to the bank and tell them my plan”. Then I will get a loan, and start fast and get down to business. The following day you go there in your neatly pressed suit and make your case. The bank says no. Suddenly gravity takes over. You fall down and hard. What do you do next?
This question has crossed the minds of many lately, especially those men and women that have entrepreneurial drive who are trying to pursue their dreams or visions despite the trying economic times. Sadly business ideas, like that itch that must be scratched would not got away, no matter how the economy shapes up. In fact the economic landscape is so difficult, that according to Vistage (2013) an online business management group, about 60% of businesses in the United Kingdom had been refused credit by in 2012 by banks that they have approached to secure business loans. The UK government is trying to stop this from happening by helping banks to lend more to the public to stop, what Vistage reports is a fall out of about 57% of all the business loans made last year. As a result, some entrepreneurs counter business loan refusals by using their credits cards to It also appears that the UK banking industry is not making good on its claims of helping companies that need financing. IS4Profit.com, an online finance advisory group noted that commercial lending has been decreasing in the UK, by a total of 60% since 2008. This is a bad situation since the economy will continue to slump if financing is not made available to small producers. Thus the difficulty small companies face in raising finance stems from the difficulty of the banking industry as a whole to contend with the economy. With the economy down, what were once dependable revenue streams for banks such as mortgage loans and credit card payments is giving banks less. Banks have experienced significant reductions in their profits. The fluctuation of the currency in the UK and the Euro for the region adds a separate layer of complication.
However, despite the economic turn down and the seeming difficulty in raising capital, entrepreneurs are presented with a different set of opportunities for growth and development instead. According to the Pacific Venture Club (2013), in instances of economic recession, an entrepreneur seeking financing benefits from the reduced financial competition. The slowdown in the real estate industry for example, has driven the money available in the market from that investment segment into other investment instruments and opportunities. Previously, banks and investors would cram up to real estate and other speculative investments but that is not the case now. Investors would always want their money used and make profit for them as much as possible. Sitting on money does not do that therefore the money will go where the good ideas are. If the entrepreneurial ideas make sense then there is a great chance of it receiving money to start it.
Entrepreneurs are receiving help from social media such as Facebook and Twitter as well. Through various contacts networked today, an entrepreneur can easily present an idea, identify groups that may take serious interest, provide additional material and proof and ultimately get a deal for funding. Recent rise in business-related social media indicates that the entrepreneurial spirit is increased by the power of social connectivity and technology.
So where is the money?
There are a certain number of sources available for entrepreneurs to get money for business. The sources ranges in financial size, from stop-gaps to continue operations, some cash for business expansion, and serious money for new business establishment. Small businesses can raise money from:
- Family, friends, associates - Entrepreneurs tap the capital they can get from family, friends and associates for business ideas. Usually, these people will act favourably to requests for assistance, if and when they are able. The money received is cheap and the repayment is highly flexible. Raising capital from your immediate circle can be used for keeping the business afloat or for starting up something small. However despite all these benefits, raising capital from family and friends will always be limited to what they can afford.
- Release funds from unpaid invoices - Needing capital for operations is a function of how well the business attends to its suppliers, creditors and clients. Sometimes, mismanagement of the collectible funds from clients and funds liable to be paid to suppliers causes short-term cash deficit. In an economic slowdown where this situation becomes aggravated, small businesses can opt to acquire capital from lenders that lend funds based on collectibles or unpaid invoices. In the UK, a company with a turnover of about 50,000 pounds per year is eligible for unpaid invoice funding, and can usually receive money within 24 hours of application. The loan is repaid by assigning the payments of unpaid invoices to the lender.
- Enterprise finance guarantees - Small companies often do not have the physical assets that can be used for collateral required for acquiring bank loans. The UK government’s solution is to provide financial assistance through Enterprise Finance Guarantees. The UK government will commit to back up 75% of the loan made by an eligible economic entity, payable in 3 to 10 years. All the entrepreneur needs is a sound business plan and a detailed budget. Banks normally assist entrepreneurs and small businesses to access EFGs.
- Bank overdraft - Some companies utilize bank overdrafts to finance operations. IS4Profit defines how bank overdrafts work. Banks will set up an overdraft account to the borrower, in this case the entrepreneur. The entrepreneur will have access to funds and will only be charged for the amount that he withdraws from the account. This financing source is simple and flexible but it also bears flexible interest rates, setting up charges as well as constant renegotiation with the bank. While it is an interesting way of acquiring funds, it is one of the most inflexible ways of doing so.
- Refinanced properties - If you have properties, you can mortgage these properties and use the cash for operations and repayment of your mortgage. This is one of the traditional ways of acquiring finance but with the recent unattractiveness of the real estate market, refinancing properties may not be the best source for finding capital.
- Asset-based lenders - Small businesses can also utilize its own assets such as its equipment, buildings and other physical assets as collateral in raising capital. For start-ups, banks would require that the assets be assigned to the bank in case the company defaults on its loan. Like mortgages, the likelihood of using assets to fund a business has decreased in attractiveness. However, a company that is in good economic and operating standing
- Angel investors – are groups or individuals that act as venture capitalists for good ideas. If a good idea is to be found, an investor can come in and fund the project, assuming the originator of the idea agrees to give up some ownership of the project.
Angel investors are available for entrepreneurs and small business owners now in a more formal way. For example, Shell LiveWire an online group providing support for 16 to 30 year old entrepreneurs provide assistance for putting together compelling business plans that can be used for acquiring financing. Shell LiveWire then directs the entrepreneur through a list of possible funders including grants, funds and non-bank loans. A good idea will attract smart money and this venue of unconventional access for investor funding has reaped its rewards. Kate Hillpern (2006) reports that the number of entrepreneurs going through the tough system of putting together a business proposal and then competing for financing this way has increased significantly.
In approaching investors, it is important that the entrepreneur is well prepared. Aside from the required technical and operating soundness of the business idea, an entrepreneur should be able to demonstrate the financial viability and long-term sustainability of the project. The most successful approach is the presentation of key financial information. Most traditional sources of financing require standard financial information but many non-traditional sources require other information as well. It is up to the entrepreneur to put the information together well.
- The projected income statement
According to Tim Berry (2011) the most important financial information to be presented to possible lenders is the projected income statement. The projected income statement will show what the project will make in terms of revenues, what it will cost to produce and how much is left after deducting taxes and other incidental expenses. The projected income statement will show that for a given time period, the project will be profitable from an operational standpoint.
- The projected balance sheet
The projected balance sheet, according to Tim Berry (2011) shows the financial position of the company or project at a specific moment in time by highlighting what the assets and liabilities are and how the assets were funded.
- The projected cash flow
Completing the trio of required information is the projected cash flow statement. This document shows the revenues and costs from operations shown in the projected income statement with what assets were used to perform those actions from the balance sheet. The cash flow statement summarizes all of these as investing, operating and financing activities. This is important because the cash flow statement truly gives an idea where the money is coming from and where it is going.
- Will the project grow?
Growth is important for any business and a lender will require a certain growth target for the business to be sustainable. The financial statements will indicate where growth can come from, how sustainable it is or how risky the proposition is based on how the entrepreneur projects his growth targets.
- Can the entrepreneur do the business?
The financial information will indicate the size, scale and involvement required from the entrepreneur. If the project is too large, the entrepreneur may get overwhelmed and fail. If the project is too complex, the entrepreneur may not be ready and fail. These situations must be managed and the financial information will provide an idea of what type of operation is involved and how the entrepreneur plans to manage these activities.
- What is my exit?
Investors are interested in growing their money and in diversifying their investments. Angel investors see their participation as interim meaning they require an exit strategy once the business is established. The exit of funds is how the angel investor will make his profits and a clear understanding of how he could exit the business, when he could do so, and how much he would get in the process is the third most critical question that is addressed by the financial statements.
How hard can it be?
It is going to be very hard. But consider this quote from an anonymous source (retrieved from Glidedesign.com) “Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.” That in essence is what entrepreneurship is, a lot of hard work. A lot of struggles and challenges. A lot of blood, sweat and tears, sleepless nights, long days, cold calls, hot heads. Starting a business is tough and is made tougher when the aspect of raising capital is included. But the benefits of doing so, personally and economically are such that entrepreneurship won’t ever go away. Even if funding is not clearly in sight.
Berry, T. (2011) Three Financial Guesstimates Every Business Plan Needs. Retrieved from http://www.entrepreneur.com/article/220653 Retrieved on January 11, 2013
Berry, T. (2011) The 3 Essential Questions You Have to Answer for Angel Investors. Retrieved from http://gust.com/angel-investing/startup-blogs/2011/11/01/3-questions-you-answer-for-angel-investors/ Retrieved on January 11, 2013
Is4Profit. (2013) 7 Ways to raise £100,000 in Today's Economy. Retrieved from http://www.is4profit.com/business-advice/finance-and-money/7-ways-to-raise-100000.html Retrieved on January 11, 2013
Is4Profit. (2013) Overdrafts and Bank Loans. Retrieved from http://www.is4profit.com/business-advice/finance-and-money/overdrafts-and-bank-loans/overdraft-facilities.html Retrieved on January 11, 2013
McAshan, T. (2011) 50 Great Entrepreneurship Quotes. Retrieved from http://www.glidedesign.com/50-great-entrepreneurial-quotes/ Retrieved on January 11, 2013
Pacific Venture Club (2013) Raising Venture Capital in a Difficult Economy. Retrieved from http://www.pacificventureclub.com/business-financing/48-article-raising-venture-capital-in-a-difficult-economy.html Retrieved on January 11, 2013