Critical maths: a young business will tend to encounter funding problems at certain key stages of its growth. Mike Brooks offers his guide to raising enough finance to get through these make-or-break situations intact.

AuthorBrooks, Mike
PositionHow To Raise Finance

There are two myths that all start-up entrepreneurs believe in implicitly without a moment's hesitation. The first is that no one should be allowed to repress the natural exuberance of the nascent businessman with their petulant misgivings about the need to find enough finance for what's clearly the best business idea since the internet--or at least paperclips. The other is that, even if the miserable money-men are right, the world is full of far-sighted investors who are simply bursting to thrust their money at the best business idea since etc, etc.

The seriously fortunate starter-up of a business never understands that both beliefs are completely unjustified. Such a person may glide effortlessly from having the idea to overseeing a billion-pound business without ever facing a shortage of money. But the rest will one day find out that what their mothers told them is true: life isn't fair.

The typical small business that wants to get bigger will suffer financing crises at regular intervals--possibly from the time it first changes from an idea into a physical reality. As with many business issues, an understanding of what might happen and what solutions are available may help to control the pain.

Right at the beginning, working capital is the bit of the business plan that no one wants to know about apart from the accountants. The common misconception here is that the creditors will automatically finance stock and debtors from the outset. Some potential suppliers will even encourage this false belief to gain your business but then quickly restrict credit once the first orders have been taken and the deliveries start.

The real problem here is knowing the safety margin required. Few entrepreneurs want to delay getting the business up and running while this is being determined. The best way to handle the situation is to win the support of your bank from the beginning. But let's be honest: bankers are not risk-takers, despite what they say. They want all sorts of personal guarantees and other collateral before they will lend you a penny. But it is vitally important to get the bank on-side before you really need it, even if this means paying commitment fees for an overdraft you don't yet need. If you go back to the bank under pressure, it will charge you more--if it will help you at all.

Banks usually like doing business in formats they already know, so talk to them about trade financing and leasing before you request a corporate overdraft. Once...

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