Whether you are operating a wholesale merchandise business, retail store or online business, every business needs finance but too many businesses end up undercapitalised, with an inappropriate financial structure and short of finance to implement their strategy. Some run out of money to pay the bills and end up insolvent. This can be avoided by following the five stage process for raising finance.

Step one: Identify strategy and objectives

Many businesses fail to attract finance because they haven’t properly identified their niche in the market, they don’t know enough about what their competitors are doing, or they lack a clear business vision and strategy. Think about it; would you be more willing to follow a leader who inspires you to a realistic vision or one who wants to make a ‘quick buck’ at your expense? This is often the choice faced by investors. Otherwise sound business proposals are rejected by investors because the fail to excite and inspire.But of greater importance is the need for a fully developed and researched strategy. Don’t make the mistake of seeking investment without a robust and supportable strategy.

Step two: Business plan & financial projections

Next is the all important business plan, most of which are prepared in support of a proposal to raise finance. There are five characteristics of a good business plans:

• Keep it simple and clear (and that means short!)
• Demonstrate your depth of understanding of the market.
• Explain the value growth opportunities.
• Be clear about a realistic investor exit strategy.
• Be open about risks.

Think about how you recruit staff. You have got fifty applications for a job. How many are you going to interview – perhaps four or five? How do you get fifty down to five? Most investors are busy and see lots of business plans so you need to stand out from the crowd. This doesn’t mean flashy, in your face, with lots of data: it means adhering to the five principles.As important are the financial projections which should be:Prepared with data for at least the next three years;Backed up by detailed assumptions which are realistic and based on historical results; Integrated, with profit and loss, cash flow and balance sheet projections;Summarised on one page; Subjected to sensitivity analysis.

Once the projections have been prepared there is an essential step often overlooked by most businesses. This is to run a ‘funding model’, which determines the most effective financial structure for your business. The funding model determines the appropriate amounts of equity and debt the business needs. Each is required but the requirements (of the business) for each are very different. If your business needs both types of finance – equity and debt – it is important to understand the differences and ‘pitch’ appropriately.

Once you have a business plan the next step is to decide to who and where to send it. What to send is also important because at this stage it is a ‘selling’ document. So keep it brief, concise, clear and compelling.Most businesses will need a combination of grants or ‘soft’ loans, bank borrowing and equity. The relevant agencies and institutions should be approached in this order to maximise the grant and debt elements of the funding at the outset, whilst being aware of the dangers of over-gearing the business.

Stage three: Approaching banks and other debt providers

Banks have straightforward criteria for lending money: they charge relatively little and so they want to know how and when they will get their money back. Their principal concerns will therefore be about the quality of the proposal and strength of the management team (as it will be for investors) and the cash flow and security available to repay the loan (unlike investors). They lend based on criteria like ‘loan to value ratios’, ‘interest cover’ and ‘free cash flow’. Make sure you, and you advisers, understand how your bank will evaluate these criteria for your proposal. An initial meeting just to ‘run through’ the financial projections is advisable before finalising the business plan.Once you have an ‘in principle’ offer of bank debt you are ready to approach investors. Unlike banks, investors differ greatly from one another. The first choice is who to introduce your proposal to. You should ask:

• Do I want an individual (business angel), institution or a fund manager?
• Do I want an active or passive investor (hands on/hands off)?
• What is their exit strategy?

Ask these questions and they will rule out 80% of potential investors leaving you with the 20% you want. You are now ready to draw up your list of potential investors. Don’t cold call them. Pre-arrange a mailing/appointment, using your financial adviser, and get someone waiting for your business plan. Too many plans hit cold desks.

It is also important to have a preliminary valuation of you business. Be realistic. Neither overvalue, nor accept too low an offer. It is vital to know the value of your business as your potential investors will try to cut the best deal they can. Always have a valuation you can support which your advisers will substantiate.

You are now ready to start a round of meetings. How much thought do you give to the meeting with potential investors? The first meeting is probably the most important because it is the first time the investors have met the management team. How to you prepare for this meeting to give the right impression? And how professional is your actual presentation? PowerPoint’s, handouts, rehearsed presentations all need to be perfect. You will only get one chance, so rehearse just one more time! And always enter negotiations with something the other party wants.

You now have ‘in principle’ offers from both investors of your choice and your bank. What can go wrong? The answer is, far more than you can imagine!

Anyone who thinks it is all over after stage three is in for a surprise; managing due diligence and the legal completion process are key, particularly as they are the stages with which management will be least familiar and seem to add the least value. They are critical, however, as a number of things can go wrong.The first thing to do is read the ‘in principles’ in detail: would you accept these terms? If not go back and negotiate now. Do not let a deal go to legals with terms that you will not accept with the hope of changing the terms later.

Stage four: Due diligence

Managing the due diligence process is key to successfully raising finance. You must understand what due diligence is (and is not) and what investors and banks are seeking to get out of the process. Investors will be concerned if they see gaps in the business plan, in the financials, the market background, the management team or forecasts. Banks will have concerns over the security available, any contracts and cash flow.Everything you say and have said that is critical to the success of the business must be capable of verification during the due diligence process. Do not make assertions you cannot back up with facts. And as important if there are gaps in your plan - what you do not say - expect these areas to be subject to scrutiny too. If you have any doubts subject the business to a pre-due diligence review. At the very least get the ‘terms of reference’ issued to the investor’s and bank’s investigating accountants and go through them with your adviser to identify any weak areas before allowing access to your books.

Stage five: Legal agreements and completion

If you get to this stage it is easy to believe the deal is done – far from it. Do not under-estimate what can go wrong at the legal stage. Although in theory everything is agreed, many deals still fall over at this stage. By now you will have appointed solicitors who have experience of institutional investor and bank loan agreements. It is important to let them, and your corporate finance adviser, deal with all the legal documentation on your behalf. This does not mean you will not be involved, quite the opposite, but just that ‘lawyerspeak’ is its own language which you don’t need to learn.

With a sigh of relief the cheques hit the bank account and you can get back to running the business; until, that is, you decide to float the company….but that is for another day!