Credibility, Viability and Reliability: How to Successfully Raise Finance

To successfully raise finance you must be credible, viable and reliable in the eyes of lenders and investors. Based on our own recent fundraising experiences, we outline the steps you need to take, the questions you must answer, and the importance of robust financial modelling to help you achieve these aims.

In the last year, The Uncommon Practice have successfully raised funding for our business from two different lenders.

As our Mission is to lift the blindfold on professional services, in this article we use our own experiences of raising finance to guide you with your future fundraising efforts.

We outline the three essential steps you need to take before raising finance and we reproduce the key questions lenders and investors wanted to see answered in our business plan once we had made our initial approach. And we show why clear financial modelling is a critical element of successful fundraising.

Credibility, Viability and Reliability

Above all, to successfully raise funding you need to be perceived by lenders or investors as:

1. Credible: You have assembled a solid, experienced team and have a clear business plan;

2. Viable: You’re on top of all the financial elements of your business and your growth plan is realistic; and,

3. Reliable: You are trustworthy. You will be able to pay back any loan on time or give an investor a return on their investment.

Here’s how we went about achieving these three objectives, and how you can too:

1. Be absolutely clear on your finances – your current position and financial projections

In our view, having a clear understanding of your current financial situation, along with clear financial modelling and forecasting, is the most important element to successfully raising funds and proving your viability, credibility, and reliability to potential lenders.

Crucially, you shouldn’t wait until you are just about to raise finance to get your accounts and financial models in order. This is something you should be on top of all the time, with regularly updated spreadsheets and dashboards. So that when the time comes to seek business funding, you are already well prepared.

Prepare your financial statements

When you do decide to embark on your fundraising initiative, you must ensure that your accounts are up to date, and your financial statements are in order. These are critical when seeking funding for your business.

You will likely have to produce a financial summary, a profit and loss account and/or a balance sheet to any potential lenders or investors.

Cashflow Forecast

You will also need to produce some financial projections, especially a cashflow forecast.

Your financial projection will guide the development of your business. It will tell investors and lenders if your plan for growth is realistic, if your project is viable and it should give them confidence that you are a safe option for their loan or investment. It will also give you a much clearer idea about how much money you need to raise.

It’s vital that your financial modelling is robust. If it isn’t, not only will you struggle to work out how much money you need to raise, but your funding request will have little chance of success, whether you choose to approach an individual investor or a corporate lender.

Poor financial modelling can seriously hinder your fundraising ambitions.

For your cashflow forecast, you need to be clear on all your income and your outgoings, usually for the next 18 – 24 months. Although you can use specialist planning software, a well-constructed spreadsheet can be just as effective to put together a cashflow forecast.

Importantly, you must be realistic – and honest – about your figures.

Lenders and investors will be able to tell very quickly if your numbers are not viable and it can seriously affect your credibility.

However, most lenders recognise that your cashflow forecast is your best estimate and so it will not always be accurate to the penny, particularly once your figures start to go further into the future, but you should still aim to be as accurate as possible.

How do you put together a cashflow forecast? For your income, you should include all your sales income but also non-sales income including (but not limited to): tax refunds, royalties, licence fees, investment from owners or shareholders, and grants.

For outgoings, you need to include all the money you’ll be spending, including (but not limited to): salaries, rent, assets, tax bills, raw materials, banks loans (fees and charges), and marketing spend.

Then for each period, typically per month, you simply take away your net outgoings from your net income to get a positive or a negative cash flow figure.

Prepare for different scenarios and contingencies

When preparing your cashflow forecast, you should prepare for several potential scenarios, making different forecasts based on different assumptions. Your investors or lenders will want to see that you have thought through various scenarios.

They will also want to see that you have identified contingency funding in case you do not achieve the income figures you predict or if your outgoings suddenly increase.

Your cashflow forecast should also help you to identify any seasonal variations in cashflow. It should give you the confidence to stay resilient and positive during those periods when cashflow is not so strong.

Preparing a cashflow forecast before investment or a loan will also enable you to check whether you are asking for enough money or even if you are asking for too much.

Before seeking investment, you should regularly return to your cashflow forecast to check that your figures and assumptions are still accurate and your best estimate.

Got an offer? Revisit your cashflow forecast

And once you have approached lenders or investors, it’s critical to revisit your cashflow forecast.

Once you have an idea of a repayment schedule, you can include any capital or interest repayments in your cashflow model to check that you’ll be able to cover repayments, as interest repayments during leaner financial periods could increase your risk of defaulting on a loan.

Breakeven Analysis

You should also create a breakeven analysis for investors.

This is especially important for Start-up businesses. It tells you when your business will be able to cover all its expenses to make a profit and most importantly for investors, at what point they will start to realise any investment gains. Remember that interest on loans is a fixed cost that will raise your business’s break-even point.

2. Match your source of finance to your growth ambitions and the level of control you want

Next, you need to be clear about what your growth plans are and what the funding is for.

Your source of finance needs to match your needs and ambitions.

Are you looking to finance a specific project – for example to purchase some equipment – or is the investment needed to support growth of the business over a longer period?

Often, but not always, short-term finance is needed for short-term capital requirements and longer-term finance is needed for long-term investment.

You also need to decide how much control you want. Do you want to finance the business through debt (a loan), equity (shares in your company) or a mixture of both?

“Equity” is when you raise money by selling shares in your company, and “Debt” is when you borrow money to be repaid plus interest.

Are you willing you give up some control in your business to raise finance?

You should consider whether you want a secured loan or an unsecured loan. Are you willing to take a charge on assets? Or are you willing to take a personal guarantee for the loan?

There are many sources of funding for businesses. This excellent guide by Entrepreneurs Handbook outlines 15 sources of business finance for companies & sole traders and outlines the advantages and disadvantages of each.

3. Research and target specific lenders and investors

Finally, you should research potential investors and funders and then target those you think are the best match for your company, your needs, and your growth ambitions.

You don’t want to waste your valuable time and resources approaching investors or lenders who would never invest in your type of business, your size of business or in your geographic location.

For our recent fundraising exercises, we were very clear about who we wanted to speak to. Unfortunately, on one occasion we did get far down the line with a lender, only to discover that our business was ineligible. You must try to clarify your business’s eligibility as soon as possible.

Found a potential lender of investor? Present your business plan:

Once you have found a potential investor or lender, you will be asked to present a business plan. The form this takes depends on the funder’s requirements.

In our experience, these are the key questions lenders and will ask you, and you should make sure you can answer.

Remember, it’s all about demonstrating credibility, reliability and viability:

• What is your business? What is your previous trading history?

• Is your management team credible and trustworthy? Have you put together a good team? Do they have the necessary experience, knowledge and resilience? If you’re a sole trader, can you illustrate your knowledge and credibility?

• Does your team have a clear and shared vision for the future of the company? Are you all positive, committed, and ambitious?

• Here’s why your financial models and updated accounts are vital: Are you clear about all financial aspects of your business? Are you absolutely clear about your current financial position? Have you undertaken robust financial modelling? Have you prepared an accurate and realistic cashflow forecast? Do you know your break-even point?

• Again! Here’s why your financial projections are vital: Is there a clear rationale for the funding? Are you clear about what the money is for and what it will be spent on? Do you know how much you want to borrow? Do you know over what period you want to borrow money? What other sources of finance do you already have? What securities are you willing to offer to the lender?

• Have you set clear objectives and milestones for your project or your business growth? Are you clear on your key performance indicators?

• Have you carried out a good market analysis? How big is your market and how well do you understand it? What is the competition in your chosen market? What are your strengths, weaknesses? What opportunities are you taking advantage of, and have you mitigated against any threats and risks?

• Do you have a clear sales and marketing plan? Do you know how you will bring in income to meet your borrowing obligations?

Don’t wait! Get your financials in order now

When you are raising finance for your business, you need to prove to investors and lenders that you are viable, credible, and trustworthy. That you are a safe bet for their money.

In our view, and from our own experiences, the most important factor in achieving these three elements is to demonstrate to a lender or investor that you are on top of your numbers, that you have carried out realistic and robust financial modelling and forecasting – considering many different scenarios – and that you are very clear on your current accounting position.

Remember, you shouldn’t wait until the point that you are seeking investment to get this financial clarity or to carry out your financial projections.

You should prepare well in advance and continually refresh your models, so that when the time comes to raise finance, you have the best chance of success.