Before you go out looking for funding, you must have a business plan. You need to know what your company is going to do, how and where you’re going to do it, who your competitors are – and who they may be in the future, and how you plan to grow your business, including key milestones.
Lenders and investors will want to see proof that enough customers are willing to pay the right price for your product or service to enable you to make a profit and give them a return on their investment.
There are lots of free business planning resources available on the internet and the UK government has helpfully pulled a few of them together here .
Bplans , a free resource from Palo Alto Software to help entrepreneurs start and run better businesses, also offers example business plans from a range of industries to use as a helpful guide when building your own.
One of Dragon's Den's most celebrated successes can also be considered one of its greatest anomalies. In the programme, Reggae Reggae Sauce founder Levi Roots proved more than shaky on his financials, believing an order for 2,500kg was in fact an order for 2.5 million litres of the sauce. Despite that, he was offered £50,000 for a 40 per cent stake in his business by dragons Peter Jones and Richard Farleigh. Reggae Reggae Sauce products are now stocked in all the major UK supermarkets and Roots is worth an estimated £30m.
That sort of mix-up with numbers would signal the end of most discussions in the real world (and Dragons' Den, for that matter). What you don't see on TV is the detailed financial and legal discussions that take place away from the camera before a deal is completed, and that's the type of interrogation most entrepreneurs will face.
Your business plan should outline what size financial injection you need, what the money will be used for, and how you intend to service the debt. If you don't know the figures inside out – including how you would handle a drop in demand or an increase in costs – potential investors won't have the confidence to hand over their cash.
Remember to calculate the affordability of any financing you take on, in addition to your running costs. Don't borrow more than you need as that will simply add to your top line, but remember that short term borrowing in a crisis will cost you more than a pre-planned arrangement.
According to Business Money.com , British businesses are shunning the ever-increasing restrictions placed on them by high street banks in favour of cash and alternative forms of finance. They say that only 13 per cent of UK small businesses relied on the standard high street bank to finance their business in the 12 months to April 2015, with almost one in four SMEs (23 per cent) moving to asset finance, operating or finance lease.
Funding Circle is a major player in the alternative finance industry, and they’ve published a helpful article on the difference between crowd funding and peer-to-peer lending, and when each type may be best for a business.
The UK government is also once again a helpful source when considering different types of funding, offering a guide to the different types available and the eligibility criteria for them.
There are also commercial finance brokers available who can support you in both finding and applying for funding for your business. The National Association of Commercial Finance Brokers offers information about the different types of funding available through its members, as well as an online database to help small companies find a local accredited broker.
Of course you can still work with the banks as well – the rise of alternative funding hasn’t ruled them out as an option.
As well as knowing the basics of your business, you need to be able to get your vision and enthusiasm across in your pitch, whether that’s in paperwork or a presentation.
While exciting numbers will take you a long way, investors need to have a positive feeling about you as well. Being able to create and deliver an appealing pitch should also bode well for your marketing skills and your chances of recruiting the best people to your company.
Bplans again has some templates available for download that can offer a useful framework.
If you decide to work with a broker, they will know how the lenders and investors they work with prefer to receive information and what ‘pushes their buttons’, so they should also be able to offer some support.
A great pitch should put you in an advantageous position when it comes to the negotiations before signing on the dotted line. Be prepared to work with a funder or broker to agree terms but also remember to keep your options open – you don’t have to accept the first offer you receive if the terms don’t work for you.
You may hear many potential funders saying ‘I’m out’, but don’t lose heart. As long as you learn from any constructive criticism on offer and amend your business plan accordingly, the right funder may still be out there for you.
Consider Trunki, the ride-on hand luggage suitcase for children. In 2006 founder Rob Law left the Dragons’ Den with no investment after Theo Paphitis managed to snap the strap on the product. According to startups.co.uk , the company kept going and in 2013 secured £4m backing from the government-backed Business Growth Fund. It has product sales of over two million and counting, with high profile customers reportedly including Brad Pitt and Angelina Jolie.