Dominic Buch, co-founder and managing partner of Caple, explains three common fund-raising mistakes entrepreneurs do
For SME leaders, securing finance is a critical but often complex task. Faced with a plethora of options and often little direct experience, it’s easy for business owners to make mistakes. But with the right advice and support company directors can avoid the most-costly mistakes and access the finance that best suits their business.
What are the three biggest mistakes and how can business owners avoid them?
(1) Trying to go it alone
From banks to specialist debt funds and alternative financiers, SMEs can be confronted with a confusing range of providers when looking for capital. In such a situation, it has never been more important for SMEs to seek the advice and support of an accountant or business advisor.
An accountant or advisor will help clarify what the firm is trying to achieve and the purpose of the funding. With this understanding, the advisor will be able to assess potential sources of capital, as well as the cost and suitability of that capital for the business.
Business advisors are also well placed to take account of SME leaders’ appetite to risk and their approach to lending. For instance, many directors do not want to agree to onerous personal guarantees that many high street lenders now require.
Once the accountant has recommended an appropriate source of finance, they can then help develop the business plans and forecasts that make the case for funding.
Often accountants and advisors make the difference between an SME accessing funds and not.
(2) Seeking funding from just one provider
Some SME owners may think that they should access all their finance from just one funder. But it doesn’t always make sense to borrow from only one provider.
Different types of finance are suited to different purposes. For instance, working capital, replacing old equipment and funding growth are very different activities. It wouldn’t always make sense to use just one form of finance to cover all of them.
Using just one service is inefficient. It fails to make the most of business’s assets and capital and does not always help the SME meet its financial goals. It is also often more expensive.
Instead, a business might use lower cost receivables or invoice financing from one provider to cover working capital requirements. It might then use complementary unsecured lending from another provider to fund growth.
Blending financing in this way reduces the overall cost while enhancing long-term growth potential.
(3) Giving away ownership and control when you don’t have to
Growing SMEs often need between £500,000 and £5m in funding for their next phase of growth. Too often the lack of additional assets to offer to lenders as security prevents SMEs from raising further bank financing to develop their business.
While banks can fund an amount that reflects the assets in a business, they can’t help if a business has no further assets to put up as security.
Unable to access additional secured funding, business owners are often obliged to agree to personal guarantees or to consider giving up equity to raise funds. We call this the “equity dilemma” and too many business owners face it. They must consider the difficult choice of scaling back their plans or agreeing to personal guarantees or diluting their ownership to fund growth.
This is often a critical barrier to growth among SMEs.