Wednesday, 28 December 2011

How to write a winning Funding Business Plan

Part 1:  10 common Mistakes

Writing a winning funding business plan is not that difficult as long as you understand what an investor or is expecting to see. There are 10 common mistakes that management teams make when writing a funding business plan.
Mistake No 1: Not understanding that  milestone business plans that you have great experience in writing is a different document to a funding business plan. The funding plan is an external sales document with different content. (See Part 2 next month)
Mistake No 2: Not understanding that the investor is only interested in what he/she wants to know and not what you want to say. So understanding what they are expecting to read is the most important element of writing a success plan.
Mistake No 3: Not understand how a business plan is read. It is not read all the way through from page 1 to 30. The first part that will be read is the executive summary and if they like that they will then turn to the section of the plan that they have most knowledge about. If their experience is in sales they will read the sales plan in great detail and they will judge the opportunity on that basis. This means that every part of a plan must be first class as you can never tell what experience the investor might have. You must also make it easy for the reader to find the sections that he/she wants to read, so a detailed table of contents is essential.
Mistake No 4: Not understanding the importance of the first page and a half, the executive summary. After reading the executive summary approximately 90% of all investors will through the plan away. The executive summary is the most important part of the plan and must have the mandatory 8 points that an investor wants to understand. (See part 2 next month)
Mistake No 5: Most management teams understand their product and marketplace and often these two sections make up the majority of their plan. These two sections are very important, but not as important as detailed sales, marketing and operations plans as well as a thorough explanation of all the assumptions made. These are the sections that explain how the business works and that is what the investor is interested in.
Mistake No 6: Many plans only provide a short summary of the financial model. It is imperative that full three year, monthly profit and loss and cash flow forecasts are included and a balance sheet.  Make certain that the financial model is formatted well so that it prints out correctly. It is also important that a written section explaining the financial model is provided for those who will not read the spreadsheets.
Mistake No 7: A very important part of an investment decision is how  the investor is going to get his/her money back and how quickly, so a well explained exit strategy is important but so often left out.
Mistake No 8: This is a serious mistake; there must be a legal disclaimer at the beginning of the plan explaining the workings of the Financial Services and Markets Act 2000. Without it you could be in trouble. Likewise you must make certain that each eventual investor has signed a form stating that they are either a High Net Worth Individual or a Sophisticated Investor.
Mistake No 9: Another serious mistake is not understanding the implications of the EIS scheme and how important the scheme is to an investor. The scheme helps protect the investors from losing all their money.
Mistake No 10: Believe it or not some plans that I read have no contact details on the front page so I have to search for a phone number if I want to make contact.
If you understand these 10 points then writing a funding business plan is not difficult. For more ideas about writing a winning funding business plan see my blog next month.
Peter Kelly: 01932 244810

Friday, 16 December 2011

Invoice Finance versus a Bank Overdraft

Regardless of this however, logistics faces major problems and will continue to do so for the foreseeable future. With the price of fuel now reaching record levels, and debtors taking longer and longer to pay, it is no wonder that ambitious hauliers can suffer from major cashflow problems.
Meeting weekly payroll obligations, paying creditors and the repair bills of various forms of vehicles are also additional factors which can result in very unpredictable and inconsistent cashflow cycles.

Banks don’t help either

Over the last few years there has been a marked change in the stance of banks and their lending criteria, particularly for overdrafts, and this has been driven by both the economic climate but also changes in legislation which has eroded elements of the security value of the traditional mortgage debenture.
This has allowed the invoice finance market to step in and fill some of the vacuum.
In order to compare the two we need to understand how an overdraft is viewed these days from both the banks perspective as well as the clients.

The problem with bank overdrafts…

The main problem with a bank overdraft is that your provider can write to you demanding the immediate repayment of your overdrawn balance along with accrued interest, fees and any charges.
The limit is also fixed and should more be required you generally have to go through the whole application process again resulting in more time and cost. Arrangement fees will be charged each time you renegotiate your overdraft meaning that it’s inflexible and rigid. More charges will also occur every time you exceed your business overdraft limit, even if this is only by one pound. Some banks may consider that you have exceeded your overdraft limit even if you have transferred in funds that have not yet cleared.
From the bank’s point of view, the recent changes in legislation also mean that the banks are increasingly looking for higher levels of personal security. The granting of an overdraft is primarily dictated by the historic financial performance of the client. With the current economic crisis most businesses have seen some weakening of their balance sheet and losses which makes it more difficult for the bank to agree to an overdraft

Exactly what is invoice finance…

Invoice finance is an umbrella term for types of finance that allows businesses the opportunity to release the cash tied up in unpaid invoices. An invoice finance company can advance you up to 100% of the value of unpaid invoices, typically within 24 hours of the invoice being issued.
Where invoice finance wins hands down in comparison to a traditional banking overdraft is that:
  • It generates more cash than an overdraft – usually twice as much
  • Less personal security is required so there’s no need to give a charge over the family home!
  • It is based on the sales you create, therefore grows with the business, meaning you don’t have to keep going back to the bank with cap in hand
  • You can have access to capital almost instantly
  • It’s not based on historic balance sheet performance and is therefore suitable for businesses in turnaround or highly geared.
Having access to working capital based on the sales you have already made means that you no longer have to wait 30, 60 or even 90 days until your customer pays your invoice. That means you can pay your drivers up front, fuel bills, HP on trucks and the VAT on top of that!
It is therefore apparent that, in the current climate, invoice finance provides a much safer and more flexible funding solution for many businesses in the logistics and transport sector by providing certainty of contract (i.e. not repayable on demand) and increased funding linked to sales.
Whilst there is an argument that invoice finance can be more expensive than a traditional overdraft, most business owners appreciate it is worth paying that little bit extra for greater flexibility and peace of mind. Some even use it to obtain supplier discounts by paying them earlier with the increased cashflow, thus covering the cost of the facility.

What more could you ask for?

  • Invoice Finance will typically provide you with a twice as much cash as an overdraft
  • The facility is linked to your sales (not your historic balance sheet) and will therefore grow with your business
  • Financial stability is more certain, as agreements are for a fixed period and are not repayable on demand
  • There is no need to put up your home as security
  • With Factoring, you can outsource management of your entire sales ledger (should you so wish) saving you both time and costs

Friday, 9 December 2011

Increased funding to British and Irish businesses using invoice finance - but firms remain cautious

The Asset Based Finance Association (ABFA) has today announced new quarterly (Q3) figures showing this important form of business finance has grown more than all other forms of lending, with total advances up 9% compared to this time last year. Total funding by the ABFA's members to businesses this quarter has now reached £16bn. Notably, this increase in advances is taking place whilst client numbers remain relatively static, suggesting good growth amongst existing clients and a trend towards larger businesses using invoice finance. The average industry client size has increased by 15% over the past year.
However, in the face of the current economic difficulties, the new figures also indicate that British SMEs and larger companies are continuing to be cautious. Not all of the available finance which is open to firms is being accessed, with £7.2bn of available funds not being utilised by clients. Turnover from British and Irish companies using invoice finance has risen though, exceeding £60bn for first time, standing at £62.3bn for this quarter suggesting that firms which use invoice finance are growing their sales and continuing to trade successfully.
The uncertain outlook also appears to be making SMEs more prudent, with non recourse business (where the funder takes on the risk of a potential bad debt) growing ahead of trend at 18%. Credit protection payments have also shot up 43% this quarter, rising from £4.9m last quarter to £7.0m. giving credence to the views expressed of an imminent further period of recession.
In Ireland, the market also grew by 9% in advances, with an increase of 2% in the number of businesses using invoice finance.

Tuesday, 6 December 2011

Internet financing sites – are they taking over?

It has been difficult to avoid the impression recently that the internet is becoming a major player in the funding of businesses. So firstly, what do I mean by internet financing sites? I am not referring to existing funders who are making more use of the internet to provide information on their products or with online applications. Rather, I am referring to those that are getting access to a new set of online investors, typically based on crowd funding. Crowd funding (as the name suggests) relies on a co-operating group of investors pooling together smaller amounts to produce the larger amount required for funding.
Crowd funding originated in the charity sector, but the model has now been adopted for both debt and equity solutions. Typically hundreds or even thousands of small investors can make investments ranging from £10 up to £1000s. The loan or equity agreement is carefully constructed so that these investors are not required to self-certificate as high net worth or sophisticated investors which would be the case for more traditional business angel investments.
So what is the practical impact on companies like yours? The first point to make is that crowd funding currently makes up only a tiny fraction of both the debt finance and the equity finance solutions available. However they do have their place in the market and can be an invaluable option in the right situation.
Pegasus work with a number of these crowd funders, but this discussion only considers two such companies, one is a company that only provides debt and the other that provides equity, who have both been successful in gaining recent exposure. The debt one appear at the top of most internet searches and the equity one has been making headlines following their recently financed £1,000,000 deal.
The debt crowd funder’s applications require a business proposal that describes the business, the purpose of the loan and an explanation of why the business is safe to make a loan to. The proposal also requires latest management accounts and at least two years filed accounts. They will undertake a credit check and rate the companies risk profile.
Pegasus has had a number of successes in raising debt through this means. A recent example is an internet retail company who raised £40,000 for development capital. They have an excellent relationship with their bank that provide a £10,000 overdraft and a £245,000 trade finance line but were not prepared to fund development capital. The terms are 36 months at 9.5% annual interest. Note the 9.5% was an aggregated rate from over 500 smaller loans which ranged from 8% to 9.9%, although this is transparent to the applicant. Interestingly there are no penalties on early repayment and there is a setup fee of 3%.
In our view Crowd Funding Equity company can also be a useful resource, but it may not be suitable for all companies. One issue relates to the amount of exposure that your business plan will receive, with applications accessible to 1,000s of potential investors. Whilst they will have signed confidentiality agreements, it is not possible to place practical controls over so many people. These investors may be competitors, or people who like your idea and want to replicate it. Inexperienced investors are also unlikely to know “the rules of the game”.

Another issue might be where companies are looking to go on to raise future rounds of funding. In this instance, some future funders and especially VCs might well be put off by a large number of perceived investors. The large number of small investors can however also be an advantage, particularly if you are seeking public exposure. One of the more notable Dragon’s Den successes such as Reggae Reggae sauce would have been an obvious contender for this approach. Also the recent £1M fund raising success by  a Group who are planning to build a new venue in Soho is an ideal candidate. It’s “bricks and mortar”, it’s not massively innovative and it can only gain from a set of enthusiastic advocates who are also stakeholders.
Like any other equity opportunity, a comprehensive business plan needs to be in place. At Pegasus we have a strong understanding of what Investors  investors will find attractive. We also know how to help a company become investment ready and the level of due diligence material that they will need to have prepared. Furthermore, we understand the nature of the shareholder agreement and can discuss implications with companies upfront.
In summary, we believe that crowd funding resources such as these two will become more significant over time, but will only be alternatives to be considered in the overall funding mix.
We are confident that we can continue to add value to the process and increase your chances of obtaining funding through these routes.
Bruce Colley: 07730 029594

Thursday, 1 December 2011

Bank Funding, the Real Situation!

“SMEs find banks ready to lend, the majority of businesses seeking loans or overdrafts had their applications approved” source SME Finance Monitor
Apparently all is well in the SME lending arena, according to SME Finance Monitor. This is not the message that Pegasus Funding Resources are hearing from the funding community. A recent Bank advert says they accept 80% of applications (4 out of 5) for lending to SME’s. However the fact appears that of the 4 successful applications 3 are renewals of existing facilities! 

Also a member of the NACFB (National Association of Corporate Finance Brokers) has discovered that perhaps 14 out of 15 cases don't get to the stage where they have the opportunity of being formally accepted or rejected, because if an application isn't likely to be approved, it just isn't put into the system. So some simple maths indicate that the true result of 75 “new” applications received by banks is that only one ever gets approved. 

Apparently another high street bank had a delicious term known as “constructive decline”, in that they issued offer letters that are so onerous that the borrower would never agree the terms. Still a notch on the lending bedpost as far as Project Merlin, the Government’s SME funding initiative is concerned!

But it is not all bad news! Although raising funding from a High Street Bank is difficult Pegasus Funding Resources have many more finance sources in our tool bag! As specialists we can access finance from Business Angels and VCs, Invoice Finance, Asset Finance, Trade Finance, Credit/Debit Card Future Sales Finance, Turnaround Finance, Non High Street Banks and many other sources. So please get in touch if you or your clients need funds.

Alan Cottle 
Pegasus Funding Resources 

Station Road
BA14 6RD
01225 782934
07791 349429
Pegasus Funding Resources is a Member of the National Association of Commercial Finance Brokers