By Mary Erb of Heatons LLP
There are times in the lives of most business people when a compelling opportunity presents itself, often in circumstances where you least expect it.
But often, taking advantage of these opportunities is contingent on raising small-business finance.
Perhaps an important customer asks you to quote for an order that wildly exceeds capacity or a synergistic competitor's business comes up for sale.
Maybe a business that has clearly proved its viability in one area demonstrates the potential to be replicated in a half a dozen demographically similar regions or countries.
Years of work that has gone into an agency or franchise might be rewarded by the offer of a major expansion opportunity from the prime manufacturer.
It may be that an invention or technical development within your business shows unmistakable promise, if only you had the small-business funds to develop and expose it to a wider national or international market.
It may simply be that you find yourself in a situation where natural succession, a change in ownership or shift in the parent company's management focus opens up an opportunity for you to mount a management buy-out.
"What heights I might reach", you ask yourself, "if only I knew where to find the capital for my small business".
A business operating in a recognised format such as a limited liability company is more likely to be taken seriously when it comes to raising finance for a small business
The first point to dwell upon is that a business operating in a recognised format such as a limited liability company is more likely to be taken seriously when it comes to raising finance for a small business.
Ideas, plans and ambitions are all very well but start-ups do not usually fare well unless proposed by someone with a recognised track record of success and a formal structure on which to build.
How much?
If, by funds, you mean sums measured in hundreds of thousands of pounds, it's possible that you (or your colleagues, family or partners) will have sufficient personal or business assets to act as security for a conventional loan arrangement with your bank.
The assets of a corporate acquisition you wish to make may themselves constitute part of the collateral base for the small-business finance, rather like taking out a mortgage on a house you wish to buy.
Ask your bank if there are existing financial products available that would release sufficient funds from your business to make outside funding unnecessary from gearing up on assets or cashflow.
If, on the other hand, your plan needs small-business capital measured in millions, beyond the reach of your available security, what you’ll need is an injection of equity alongside the bank funding. Suddenly, you'll find yourself thrust into the heady realms of corporate finance.
For many business people this is uncharted territory. Unless you have a background in accountancy, law or business administration it may well be that you have no experience of this subject.
Many directors of small to medium-sized businesses have achieved their positions by virtue of years of hard work in the sales, technical or general management arena and they have neither the in-depth knowledge of the workings of corporate finance nor the connections with those who do.
It's not in the least unusual for family concerns to flourish without the services of a dedicated professional financial director. So, when you need to raise equity (otherwise referred to as ‘risk capital’) to whom do you turn?
Although there are exceptions, the provision of risk capital is by and large the province of institutions specifically geared to this market.
The people who provide this type of backing are known variously as private equity houses, venture capitalists or institutional investors.
Alternatively, if risk capital is provided by privately-owned companies or private individuals, usually successful business people in their own right with a keen eye and deep pockets, they may be known as business angels.
You can usually contact them through your circle of business connections or perhaps under advice from a firm of accountants.
If you elect to move outside the recognised boundaries of the small-business finance market in this way, it is advisable to take professional advice before committing yourself to any arrangement.
