Access To Finance for SMEs

Posted by Chris Hooper on 05.05.14 in Featured, Services


Access To Finance

Access to finance is commonly identified as the key factor holding SMEs back from growing at their full potential. Regular press articles such as this one in the FT frequently criticise both finance providers and the government for failing to tackle this issue effectively.

As a direct consequence of the global recession (a debt crisis) all finance providers now demand a much stricter level of due diligence before investing. Many would argue that this is a good thing, particularly with regards to some of the ludicrous mortgage and consolidated debt products that were identified as the trigger for the recession in the first place. After all, no one wants a repeat of 2007-8 meltdown we are still recovering from. Within this context the SME community feel particularly aggrieved because they are the growth engine of the economy but are being hampered due to a lack of funding. So…what to do ?

3 key facts

  1. Banks, venture capitalists and business angels must invest in SMEs to make money.
  2. There are more business angels and crowd funding options than ever before.
  3. Many SMEs do access finance so it is possible.

Why it is hard to access finance

In short, the rules of the game have changed. I meet regularly with bank managers, angels and venture capitalists and they all say the same thing: “It’s not like the old days where we could lend money on the strength of a decent business plan.”

In short, investors are no longer willing to take a punt on an SME that does not have sufficient information for them to make an informed decision. So, if your business is serious about obtaining funding then it’s time to get serious about your management information.

Understanding Your Investors

There are many different ways to access finance. Broadly these fall into the main categories of grants, equity and debt. Within each of these categories are a huge number of finance providers. Each finance provider has specific objectives and is looking for a particular type of investment. Unless you are targeting the appropriate source of finance your chances of obtaining investment money are slim. The key is to understand your needs and match them to the right type of finance provider. I won’t be exploring the corporate finance market in this article but my advice is to work with a finance professional who has a wide and independent network across the market.

Investment decisions are made on the basis of perceived risk and reward. The greater the risk, the greater the reward demanded by the investor. The investor is purely interested in making a Return On Investment (ROI) that exceeds the other options available to them on the open market. For the SME owner who requires access to finance the goal is to present a high growth and low risk investment so the investor will provide finance at a low rate of interest (or for a reasonable equity stake).

So how is this achieved in practice ?

Personal relationships are important. But even more important is data. Lots of compelling and credible data that proves beyond any doubt that your SME business is a stable money making machine that will make even more money if it can access finance to fund its growth strategy. And this is often where the problem lies. In my experience SMEs are reluctant to invest time and money capturing management information about their business or their market. Decisions are often made on the hoof without a structured approach to financial management.

While this may be an effective way of managing the business in an agile and dynamic environment it means that SMEs often lack the information required to show investors how their business is performing. Without the data it is difficult to build trust and credibility. The perception of risk increases to the point where the investors are not prepared to invest at an affordable rate of interest. The end result is that the business does not obtain any finance and no doubt blames the bank for failing to support them.

How to access finance

All SMEs can increase their chances of accessing a loan or equity investment by:

  • Preparing regular management accounts
  • Implementing a structured forecasting cycle
  • Compiling industry data metrics

An SME that adopts a rigorous approach to financial management has a far greater chance of obtaining a loan or equity investment. The goal is to prove to investors that the business prepares realistic financial forecasts and achieves or exceeds them. This is common sense. If a business issues wildly optimistic forecasts and falls short then they will have zero financial credibility. For the investor, this translates to an investment that will never live up to the promises of the business owner. In contrast, a business that can show plenty of historic data and a realistic forecast gives itself a huge advantage. If the business has been profitable throughout the last few years and can justify how the investment will help them scale the business then they will almost certainly get the finance they want.

Benefits of Management Information

Building trust and credibility in the information you provide potential investors is critical. This takes time but is essential if your business requires funding in the current finance market. The good news is that your business will also benefit in lots of other ways by having better management information. The management team will have more data available to analyse the business and help them make better decisions. Your cash-flow forecasting will improve and the business will be better controlled. A budget is an essential form of cost control and will motivate managers to think ahead about what expenditure items they need. In fact, regular forecasting helps to create a culture of looking forward rather than firefighting from day to day.

Help is at hand

As an expert in financial management I help clients implement a successful framework for forecasting and financial control. With regular reporting this means the business owner is well armed with plenty of data to give a credible picture of business performance. If the numbers are healthy then the focus moves onto the investment plan. How will the investment help the business grow? What is the return on investment within the business case? Is it sufficient to enable the business to repay the interest?

After all, investors will not put their money behind a business that is losing money and seeking cash for reasons of survival alone. Investors invest for a return on their investment so the data must indicate that they will get sufficient reward for the risk they are taking.

Sometimes preparing lots of data about the business simply quantifies the challenges that the management team are well aware of. Do not give up at this point! This is a key stimulus to revisit the strategy and set the goals that will transform the financial numbers as well as the business. If the management team can prove they are capable of implementing a successful turnaround plan then that is another reason for potential investors to be impressed.

Of course every SME business is unique and will appeal to different types of investor for different reasons. Once your business is ready for investment we can help you access finance by matching you with the right financial partner and making the introductions.