Raising Finance – Getting the money to pay for starting a business or developing it
To remember what raising finance means use the following mnemonic:
The farmer was raising fine ants (raising finance) but wanted to get some money to develop the business.
For a business to start up, you will need a premises to work in, new equipment and advertising, and enough money to pay wages and supplies. For an ongoing business, you may want to operate in a new, bigger factory or open another branch.
If you haven’t got the money sitting in savings, then the company will need extra money. This will require raising finance, also known as raising capital.
If you need money there are many ways to go about it, however, most involve working out a break-even analysis for your business and a cash flow forecast. This information is then used to convince someone to lend you the money.
For example, if you were opening a new burger restaurant, in its simplest format a break-even analysis tells you how many burgers you would need to sell per week in order to pay for your costs. You will have to predict how many burgers you are likely to sell from the start of the project, every month for at least two years. You can then work out what the level of debt will be for each month (note: start-up businesses rarely make a profit in the first two years).
Some of the various ways to raise finance are as follows:
‘Bank of Mum and Dad’
It is said that one-third, yes, one-third of business start-ups use money borrowed from Mum and Dad to help pay for setting up. Bill Gates (Microsoft), Jeff Bezos (Amazon), Elon Musk (Tesla), Mark Zuckerberg (Facebook) and Phil Knight (Nike), all of them had financial help from their parents in order to get their businesses started.
A bank will lend you money, but if you are an 18-year-old wanting to start a business with no history of repaying a monthly bank credit card then this is very unlikely. Most banks will only lend larger sums if you own something of value already, such as a house. Even then, the house must have a significant portion of the mortgage paid off. A person needs a credit history which shows when you have borrowed smaller amounts and paid it off. Companies will for example borrow from a bank to finance a bigger factory or new store. Banks will lend up to 75% of any valuation of properties the business already owns (called 75% loan to value).
This is when a person uses an online platform to raise money by asking people to contribute money. In exchange, they might get regular updates, a discount when the project is finished, or, depending on the success of the business, a pledge that their money will be returned plus some extra. Some give money altruistically, while others expect a shareholding of the business’ equity.
A grant is a sum of money given by the government or another organization for a particular purpose. If you are a new start-up company there is usually a grant fund that the government will give to you once you put forward a valid business plan. It is more difficult however for a larger company with a track record of profitability to receive grants that could result in guaranteed employment opportunities.
Many businesses rely on stock. If you are a retailer of shirts and had ten of each shirt on display, you could reduce that to five of each shirt. Statistically, you will be more likely to run out of stock and lose some sales, but you will however see an increase in cash in the bank, as the money isn’t tied up in the stock. If you are a manufacturing company, you could ask a supplier to deliver the parts you need just before you need them (Just In Time), resulting in less stock being held and therefore more money in the bank. However, you must have superb supplier relationships for this to work, otherwise, the whole factory could have production stopped while waiting for one component.
Sometimes when some urgent money is needed, an owner of a company may lend the money to the company either for free, for a set fee, or at an agreed interest rate.
Sell off some properties
A company that has some unused land or empty property could sell off these assets to raise finance. However, it can take many months to finally get the money into the bank.
Companies can agree on an overdraft facility with a bank. An overdraft lets you borrow money through your current account by taking out more money than you have in the account. You will not be allowed to exceed an agreed amount (an overdraft limit), and you will need to have a very high credit score to have a large overdraft.
Delay paying suppliers
Normally a supplier of goods to your company will require payment within 60 days. Many governments are trying to require companies to agree to this standard, but there is no legal requirement yet. Raising funds can be achieved by extending how long it takes to pay your suppliers to 90 days instead. If you do this, you can retain cash in the bank for longer but are also putting all future supplies of materials in jeopardy if suppliers will no longer deal with you due to late payment.