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Fresh capital could help you buy more stock, invest in equipment, open a new office or branch, or take on more staff. But borrowing money or seeking equity investment tends to be easier for established firms than for newer businesses.
“Start-ups are still very difficult to get funding for,” says Rob Donaldson, head of corporate finance at accountant Baker Tilly. “Bank finance for new firms is virtually impossible and equity funding is very difficult because the risks are very high. Most institutions much prefer lending to businesses that have got themselves off the ground.”
The best time to look for new money is when your business has started generating revenues and profits.
“Even if you have been established for a while, it is hard to get funding if you are still consuming cash or making a loss,” Donaldson adds. “Ironically, the less you need money, the more you can raise.”
Potential backers will be more interested if you need the finance to help you meet demand.
“Investors will always prefer to fund a business that wants to take advantage of opportunities to grow: if you have people clamouring for your product and just need help delivering it, that’s a less risky proposition,” Donaldson says. “But if you need money to go out and create a market, for example to spend on marketing and attracting customers, the perception is that’s slightly riskier.”
The key to successfully raising funds is convincing potential backers that you offer a worthwhile investment or lending opportunity.
“You can almost never be over-prepared,” Donaldson says. “Very often fundraising fails because applicants aren’t especially well prepared for the questions that are going to be thrown at them.”
Donaldson says that it’s not enough for businesses to present a spreadsheet or two and expect backers to be impressed. “It is important to help lenders or investors understand how you are going to deliver the numbers you are forecasting.”
“You need a plan that describes what your business does, what opportunities are available and how you are going to capitalise on those opportunities.”
Find out more about alternative funding options with our guide.
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