loans-uk.org.uk
The A-Z of UK Loan companies online

Presenting your Case for Raising Money for your business

There are many reasons why you may want to raise capital or take out a business loan.
If your business is just starting up, or has not been going for very long, then you will need to make a presentation for venture capital, possibly to private investors known to you, or to institutional investors who are actively interested in helping to finance the very small business which needs an injection of equity and long-term capital. Or we might be talking about development capital, project capital, or a geared package of equity and loan capital to help in the acquisition of an existing successful business. We could be talking about negotiating a management buy-out, or about exploiting the Unlisted Securities Market or the Over-the-Counter Market. Finally, we might be presenting a carefully argued case for UK government or EEC finance. In all these examples we are talking about making a presentation either oin person, on paper or online over the Internet. Whatever your specific case, the general principles you need for making a presentation about your company are covered here.

How Much Capital or Business loan is required?
A healthy profit forecast does not necessarily mean that little capital will be required. Some of the biggest demands on capital are:
Launching and other preliminary exercises
The cost of equipment and premises (sometimes including a premium on leasehold premises)
The cost of financing stock, work-in progress and debtors, after allowing for credit granted by suppliers (‘working capital’)
Sales falling significantly short of expectations, and other deviations from the original plan

A word of warning when preparing the budget: There is always the risk that sales will be slow to reach expectations, or even will not reach them at all. It is therefore important to make sure that adequate capital is available to cover any reasonable shortfall in profits, and it is strongly recommended that profit and cash projections are prepared to reflect the worst envisaged sales income as well as the most likely sales income. An increase in your sales also has to be financed as it means, for example, that you will have to purchase more raw material, you will also have an increased wage bill, as well as other extra costs.
In your cash forecast you should be prepared to include items where sums for goods are actually received or paid for in cash. These forecasts should be over a two- or three-year period, including contingencies, and should show monthly movements, profit/loss and a balance sheet. ‘Capital’ items such as equipment and leases as well as pre-trading expenditure must also be included. Listed below are items which have a significant impact on cash forecasts and should therefore be borne in mind.

• The proportion of sales expected to be settled in cash rather than by credit;
• The terms of credit, affecting both purchases and sales;
• Staffing levels and the timing of changes;
• Upgrading of accommodation or equipment as the business expands;
• The nature of timing of capital injections.

The cash forecast should cover the same period as the profit projection, showing projected monthly movements for the first year. It will give you an indication of:

• The maximum capital requirement (before allowing for interest, which will be dictated by the type of financing deal eventually negotiated);
• The month in which the maximum requirement will arise;
• The pattern of the capital requirement (useful to establish the timing of injections and repayments of capital, and the form of finance most suitable);
• The impact on the capital requirement of slower than expected sales progress.

What is the capital or business loan required for?
If the evidence gained from you forecasts suggests that much of the capital will be invested in assets on a medium- to long-term basis (say, for at least two years), then short-term sources of capital such as bank overdraft or a temporary loan should not be considered. The components of the capital requirement should be analysed to establish what the fund will be used for and therefore the timescale of the financing required. As a general rule it is best to consider longer-term capital unless dealing with, for example, a business requiring virtually no investment in fixed assets (i.e. equipment and premises), and only reasonable finance for working capital.

Your end objective – a bankable proposition
Most businesses ultimately survive, or not, on the strength of the continuing confidence of their bankers. All other financial dealings must result in a bankable balance sheet. If you insist on proceeding against the better judgement of your bank manager, you will edge your business that much closer to the appointment of a Receiver.
The funding of the business should be sufficient and stable enough to enable it to survive a conceivable period of misfortune. Until that position is reached the business will be fragile. And investors and bankers are likely to take a cautious view. Expansion will certainly require finance for more working capital; so will misfortune. Without an adequate equity base you may have no room for manoeuvre.

Seeing it from the other side
This is all about seeing ourselves as others see us, such as bankers and investors. It is often extremely difficult for the smaller businessman to do that; he is sure he is right – and very often he is – but he is not going to convince anyone by assertions. This is where your accountant comes in. He can help you get an objective view of yourself and your business ad should be the man who understands what you are currently engaged in. The first point is: never mind how you see it; present your business as others want to see it. To do that you are going to have to anticipate your needs: anticipation and control are the two themes of the presentation. What any banker appreciates is an application which anticipates what might happen, both the worst and the best, and what you would do about it. Your anticipation and contingency planning means that your management ability will be reflected in the financial picture of the report. A potential backer will also need full details of the business, from machinery to personnel to sales potential. Make sure it is in a readable form.

Have you got a balanced management structure?
Before we discuss the finance of your prospective business in detail, we need to take a look at the management, i.e. you and your partners. The question to ask yourself is whether you and/or your partners or fellow directors have the necessary management expertise for running a business of the kind you hope to start. Take a good look at the experience you can offer between you, and ask yourself whether it is suited to your proposal. Remember, others will ask these questions about you.
Many small businesses fall into the trap of doing their own projections which turn out to be wildly optimistic and indeed dangerous nonsense, leading them to raise too little money for too short a term

Making an Effective Proposal
The picture you must present is of the whole business, warts and all. The points which need to be included in any proposal are listed below:

• Description: physical factors, a broad picture of its operation, factors which might strain, limit or influence operations (e.g. space, plant and machinery, trained personnel);
• Its market and its place in that market, even for a corner shop;
• Its base maintainable performance: the level of activity above which you hope to rise but below which there is a very limited danger that you will fail;
• Its track record: trading, not statutory, accounts;
• What factors affect trading, and how;
• Management’s ability and credentials

Put the detail in schedules or appendices so that the opening is brief, and simply portrays the present business. Always remember to set out just the important factors at the beginning. There are two maxims worth remembering: first, attention starts to wander after four pages, and secondly, you may not be there in person to add your explanation. You proposal may have to live and fight alone at some are office or bank committee meeting. If you discover that your bank manager will be passing on your proposal for someone else to deal with, find out who it will go to and send it to him yourself.

Sound Business
Your banker is going to want to know some very simple things, such as – is the business sound. Thus it is important that you really substantiate your base maintainable profit.
Present your case as other will want to see it, and unless you have financial training and are skilled at financial presentations, turn to your accountant to present an objective case. Take a critical look at your business and its future, just as the banker will do. How much? How long? How do I get it back? These are the questions he will want answered. Your presentation should be lucid, logical and frank.

Making Assumptions for the Future
You should follow your description of the proposition with a careful analysis of the assumptions for the future. Your case is made or broken on the validity of your assumptions and their root in practical business probability. It is vital to get a grip on the essential assumptions about your business, and then put the essence of them across succinctly to your bankers. If they do not understand from your presentation what it is that is crucial to the success or failure of your proposal, and why or how that success or failure comes about, then you will have failed. ‘When in doubt, do nought’ is a banker’s motto. Do not blame them – blame your presentation.
One can say, cynically, that your crucial assumptions will be all those reasons which you will give as excuses when the project collapses; continuing economic recession, poor market launch, high rates of interest, high wage inflation, lack of skilled labour, cheap imports. All the things which made it not your fault that the project collapsed are the things which should have been properly tackled in your initial assumptions. Some areas for assumptions are:
• The economy of the country
• Volume of trade: your market
• Seasonality
• Personnel
• Fixed assets and capacity
• Inflation
• The Competition
• Pricing
• Conclusions from market research
• Interest rates

Volume of trade is very important. It is almost impossible if you want to start a corner shop to know how many people are going to come in and buy Mars bars. It is very difficult if you are setting up a new factory to say what the volume of business going through that factory is going to be. But in both cases you can make a reasonable attempt. You need not go for full-blown market research but you can ask your professional advisors to take a few perspectives and you can look up some government statistics. Bankers are all too familiar with volume predictions of the type that say ‘one item will be sold in the first month, two in the second’ and so on. Be realistic; you understand your business and you must convey that confidence and knowledge to the bank.

Your Forecasts
The working schedules at the back of your presentation are its engine room. Here you will have to set out three essential schedules with supporting working papers, which stretch forward over the duration (recommended two-to three-year period) of the required finance:

• Profit and loss: split between the composition of trading gross profit and overheads;
• Cash flow: showing the contribution from trading before finance, and capital items separately;
• Balance sheets: including leased assets and leasing liabilities.

Make it clear how the forecasts were arrived at. The assumptions should flow naturally into the profit projections. Some further analysis will help your lender with the answer to ‘What if?’ Any reader of your presentation should be able to import an assumption of his own and form a view of the impact of that on your business – where, how and with what consequence.

Knowing your Business
It is worth pausing here to see what it is that the banker or investor is expecting from the presentation that you have prepared so far. He wants to understand your business but he also wants to see that you understand your business. Most small businesses are too busy running their concerns and pursuing new ideas either to notice what is happening or to explain objectively what it is they have done and what it is they are really going to do. Your lender will also be looking for evidence of competent financial control – evidence that you are where you are knowingly. Many firms believe that any form of planning is a waste of time, but cash forecasting and the discipline of matching plans to resources do not have to be elaborate and are never really wasted. Finally, your lender will be interested in three particular banking concepts: matching finance to its use, gearing and security. All three should be considered together.

Matching Finance
It is very important when putting together a presentation not to be tempted to leave the business that you know about and start playing in the business of money. The obvious mistake is to attempt to finance long-term assets with short-term money, and to argue that increasing property values are going to make an otherwise not very sensible level of borrowing turn into a suitable venture for you.
Any accountant worth his salt keeps in touch with the banks and the lending institutions and has a feel for the way they are thinking. One of the things that your accountant should do, apart from converting your ‘back of an envelope’ ideas into an effective presentation, is to hammer home to you that your presentation must bring out the financial stability which follows from your proposals. Broadly speaking, this means that long-term investment should be funded with long-term money, and readily leasable assets can often be leased at attractive interest rates and over most of their useful lives. Finance for a particular project or asset should be repaid out of the proceeds generated by the business on that project or asset. Do not try to finance one project by the proceeds of another; the road to hell is paved with plans for cross-funding. Overdrafts should be limited to working capital requirements, and should be self-liquidating as part of the trading cycle. The cash-flow and profitability projection should be carried forward so that it can be demonstrated that debt finance is repaid out of cash generated by the project. If that cannot be done, then you probably ought to look for longer term institutional money.

Gearing
The banker will be interested in two forms of gearing. First, he is concerned about the gearing that emerges from your balance sheet. In the past a banker’s norm has been one-to-one capital gearing; in other words, he puts in a pound for every pound you either put in originally or have retained in the business. (Bankers will often say that they prefer this 1:1 gearing ratio; a climb past a 2:1 is often indicative of a banker’s concern, in direct proportion to the extent of the climb.) The ideal approach is to demonstrate that even a higher level of gearing initially will correct itself back to a comfortable norm, without relying on crocks of gold.
Secondly, he is interested in income gearing. It shows to what extent the cash flow of the business (generally, profits plus depreciation, that is, cash from trading) covers the repayment of finance, interest and leasing costs.

Security
The banker is also interested in security, but he is much more interested in minimising the risk than realising his security. Trying to realise a second charge or second mortgage is fraught with problems. No banker wants this type of situation to arise. He is much more interested in the proposition that indicates to him that there is very little risk; after all, bankers do not like putting Receivers in or ending up with fleets of tankers or corner shops.

Forecasting for the Future
Here you have a choice: you can forecast in ‘current year’ pounds, or you can forecast in ‘inflated’ pounds. If you use the former method – which is preferred by some people working on very large projects – you have a series of inflation differentials that are shown in a curious way, since they are real rate differences expressed in today’s money. If you chose the latter method, you take inflation as one of your assumptions and take a view of wage increases and cost increases, and set all these out quite clearly.
A more complex matter is how you predict interest rates. Nobody understands the future, so perhaps you should work in inflated pounds and take a cautious view of declining interest rates.
Finally, it is amazing how many people put forward projections in which they have wholly overlooked some physical bottleneck or some manual or executive difficulty in actually getting that volume of activity to that time scale. Negotiations either with labour forces or with central or local government are in the forefront of such problems.

Keeping Informed
Although not strictly part of any discussion about raising capital, installing and regularly reviewing your financial and management information system is not only important for running a business competently, but it is also an important aspect of raising capital. Any banker will be delighted to find that you have a management information system which will regularly produce monthly accounts comparing your actual performance with your budgeted performance. Your bank manager will be very interested in a simple monthly package for management and for him. This can readily be handled on a micro-computer; but shop around for a good computer package. Accountants have made much more money sorting our off-the-shelf systems which do not work properly than in selling their own.

Cash Crises
It is relatively rare that one can be relaxed about cash crises, and these crises can happen whenever a business is thinly capitalised and expanding quickly. There is only a thin line between expansion and overtrading, and overtrading in a business with narrow margins during a time of high interest rates can sometimes tip the scales on a thinly capitalised operation towards a crisis situation.
It is important to realise that cash crises often have nothing to do with profitability. It is a not uncommon mistake for entrepreneurs to wave their internal accounts demonstrating that production is profitable, while simultaneously failing to see that a lot o the profit is going into stock and that the business is not generating cash.
There is, of course, no substitute for anticipation, so your management information system must be cash-sensitive. That should, in turn, imply that your operations are analysed by product, or outlet, or whatever other flow makes up your business, so that you can identify where the money is made or lost and what it is that contributes most to your costs. It is surprising how few businesses know which decisions involving allocation of resources generate cash and which lose cash. It is, however, a medium-term problem to get decision-making right. The short-term solutions are usually to restrict stocks, to work vigorously on debtors, and to defer maintenance and asset purchase either by leasing or renting, or just by ceasing to buy plant and vehicles. Such an organised reduction in the level of activity needs to be handled very carefully. With skill, it can sometimes be achieved with judicious pricing-up. A slightly expensive but perhaps effective proposition might be to factor debts.
Whatever you do, do not tackle the problem of a cash crisis in a piecemeal fashion/ It is just as important to present to yourself, to your fellow managers and, perhaps inevitably, to your existing and new financial backers, a well-reasoned plan, another presentation if you like, of the agreed action that you intend to take and of the expected results, and then to monitor its achievement.
Some of the most rewarding work for accountants (and for managers and bankers) arises from ‘intensive care work’ where, through sitting with the company’s management, sometimes over a long period, the accountants regain for them the trust and confidence of their bankers, help them pull the company round and nurse it back to health.

Fudged Accounts
All too often accountants investigating a company for a client or an investigating organisation come across the statement: ‘Of course, we are much more profitable than our accounts show us to be. The directors take out £X000,000 in ways other than remuneration. There are lots of assets worth more than is stated in the accounts.’
With today’s tax reliefs and opportunities for tax planning, it is quite unnecessary to resort to misleading, if not downright false, accounts in order to fudge your way along. When you do need money you will have to rebuild that credibility and trust.

Quotation
Finally, you may have long-term plans for the Unlisted Securities Market (USM), for placing shares with institutions, or even for a Stock Exchange listing. You cannot prepare too early if your proposed course includes anything like a prospectus. Your presentation will then start with an accountant’s investigation known as a ‘long-form report’. This will include a profit forecast and an examination of working capital needs. These investigations are rigorous, and your sponsors will rely on them. Any broker or issuing house which tells you that they are not needed, or that they can be curtailed, is not a sponsor worth having.

Conclusion
Make sure that you have a brief synopsis of the age, education and experience of you and your partners to prove that you are capable or running the business – remember that in most cases you will not be present when the final decision is made. Make sure too that the assets you and your partner are putting up are shown. Give brief details of your business, the product, its market, the competition; if you are already in business then show the latest accounts with up-to-date profit and loss as well as borrowing history. Give details of your key personnel, their functions and qualifications, and supply a list of the principal shareholders. Do explain fully the purpose of the business and the marketplace in which its products are competing; you presentation will not be complete with just the financial information. Profit projections must be broken down to show costings, project sales, orders held, legal and audit fees. Be factual and state precisely the amount of finance required and what it will be used for, and make sure that your projections include repayments in the cash flow. Lastly, make sure that assets can be held as security – this is your way of saying ‘I know what I am doing and to prove it I am putting up my own money.’

Back to business loans