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Times still tough for small firms, with access to finance the main cause

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Thursday June 28, 2012 at 10:00am
The Federation of Small Businesses (FSB) quarterly survey ‘Voice of Small Business' Index suggests small firms are still having it tough.

Confidence amongst Britain's small businesses and entrepreneurs has fallen in every industry sector except those working in health and motor services. The property and financial services sectors see the biggest decline in confidence.

Results include the fact that 41% of small firms applying for credit are refused finance from high street banks. And one in 5 of the 3,000 firms surveyed said that access to finance was the main barrier to growth.

This set me thinking. In spite of the announcements from George Osborne’s Mansion House Speech the other week I suspect small firms will still struggle to raise finance from the traditional sources, so what can firms do to increase their chances of success?

  1. Get your numbers right
    Be organised and have the figures you need to show you are a safe bet. Whether you are looking for bank finance, want an angel investor or are considering applying for some kind of Government grant funding you need to be able to demonstrate that you are in control of your businesses' finance and that any growth projections you produce are realistic and well researched.  

    The bank won’t be particularly interested in the story you want to tell, they will want to examine your latest profit and loss statements and balance sheets. Make sure you get the help of your accountant to put together a pack of information that’s convincing and accept their advice when they suggest you need more robust data. 

  2. Consider the type of finance you need
    When business is booming, and a few years ago when the banks were lending merrily, the temptation is there to go for whatever source of finance you can lay your hands on. Loans, overdraft facilities, commercial mortgages were all made available to small firms. The situation now is different and sometimes it’s a case of needing to pick your battles. If cash is tight you may be able to factor invoices, change your terms of payment or offer incentives for early settlement of invoices rather than relying on an overdraft facility. By demonstrating you’ve done all of these things before appealing to the bank for support you show you’re in control. 
    Do your research, know what options are out there and talk to a number of banks, not just the one you currently bank with. If you lack security for a loan you may be able to benefit from the Enterprise Finance Guarantee backed by the Government.

    Sometimes there are grants available to support growth, especially in hi-tech business sectors or businesses located in areas of economic deprivation. 

  3. Identify and talk to investors
    Banks aren’t the only people who can make money available for businesses wanting to grow or entrepreneurs with great ideas. Equity and angel investors may be interested in taking a stake in your business.

    You’ll need a sound business plan, so if you haven’t got one that’s the first step. Potential investors will want to see that you are organised, committed and well informed – and they’ll want to see in your business plan projected growth figures and the reasons the investment is needed. Select potential investors who have an interest in your sector or experience in the area of business you operate in. Look for a connection. And of course something like the Seed Enterprise Investment Scheme (SEIS) offers significant tax saving advantages for investors, so it’s not only you who might benefit. 
    Friends and family might be a source of finance but as I mentioned last week (What to do before you fall out with your business partner) if you are going into business with a friend or family member, or indeed if you appeal to them to help your finance growth, make sure you have a proper agreement in place. Don’t rely on a hand shake, believe me, that’s never a good idea.

One of the most interesting things for me about the FSB survey was the fact that the motor industry was one of the sectors showing increased confidence. Who would have predicted that two or three years ago? So, maybe all is not lost, if the motor industry can come back from the ashes other sectors must be able to flourish too.

Andy Parker
Chartered Accountant Birmingham

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