Financing In Tough Times

Where cash is king, being able to ensure adequate financing separates those who thrive from those who struggle and fail. With the current caution being shown by increasing risk adverse lenders and the challenges with regards to collecting from customers, organisations need to ensure they have a robust approach to managing their finances.

WORDS: GAVIN MAXWELL

So, what are the options available for raising finance, and what factors need to be considered?

The answer to that question is anything but straightforward, varying depending on the underlying business situation. Some of the key sources of funding include:

Financial institution loans and credit agreements
The mainstay of the lending world and undoubtedly familiar to all. With interest rates falling to record lows there are real opportunities for relatively low cost funding. In addition there are a number of support services offered by most institutions to help organisations to think through and challenge their financial planning which can be a real benefit for a small to medium size enterprise.
As these institutions do not typically share in the gains of a successful company their risk appetite may make it difficult to secure funding for some organisations, particularly specialist and start up companies.

Venture capital (VC) support
VC firms specialise in investing in businesses with significant growth potential, typically with a short to medium plan of floatation on a stock market. Financial support is given in exchange for a stake in the business with a set percentage of revenue or profits being collected on a regular basis. An exit strategy is usually put in place as part of the investment to ensure an out for the venture capital company at a point in time.
VC companies may provide business support leveraging their experience in understanding how value is created in a business, how it is tracked and how companies successfully use the stock market to grow their business.
The nature of the transactions dictate the standard VC approach to funding with a bias towards companies that have realistic but significant growth plans who use the ‘seed money’ to dramatically change their business model.

Business Angel
The Business Angel is an individual who invests personal funds in a business that he/she has a natural link with. In exchange for a percentage of the company the business angel would provide experience as well as a relevant network that could be leveraged. This role is similar to that of a VC firm however there is typically a longer investment horizon and the individual will inevitably have strong ties with the relevant industry. A good example of Business Angels in action is the Dragon’s Den television programme.
Whilst this investment avenue brings significant benefit it can be seen as similar to taking on a business partner. Individual personalities and the limit of the Angel’s funds can influence how successful the relationship will be over time.

Read more about Financing In Tough Times in March 2009 issue of WMB, on newstands now!