An established professional in the construction sector found SME Strategies through our LinkedIn articles. We developed a business relationship and he became a personal tax client. He then set up a specialist lighting company in London which needed funding.
What was the challenge?
The client’s own finances were committed to other projects. As a new business, he needed funding to buy stock both from UK suppliers and also China to get the business up and running on a proper basis. He asked SME Strategies for advice.
How much cash is needed?
It is natural that many entrepreneurs want to raise as much as funding as they can for their ‘big idea’. Whilst this is laudable, the greater the amount of funding, the greater the risk to which a borrower can be exposed. Asking the question “What if it all went wrong?” might appear negative but can save a lot of heartache down the line should disaster strike.
A good and tested business plan is essential (it does not have to be long – indeed it shouldn’t be long). The business case should be set out succinctly in words and numbers. It should clearly identify both risks and their mitigation. The plan needs to be kept under review especially as a successful a start-up will by definition grow out of all recognition of its beginning.
We worked out how much funding was needed and for what. This is fundamental to get right. Is the funding for cash flow purposes (eg to buy stock) to get the business trading or to fund expenses (eg salaries) until the business is profitable or a mixture of both? It is important not to look for too much finance. £150,000 seemed about right amount of funding for us with most being for trade finance. There is sometimes a risk for entrepreneurs to look for funding for a new BMW along with the strict business needs! It is good for a new business (indeed any business) to keep its overheads low whilst ensuring that there is finance for the key parts of the business. Just because something is key though does not mean it needs a large budget. Marketing for instance is vital for this particular business but it does not need a large budget. This business needs smart use of an existing network and the creation of strategic alliances.
What were the options?
We briefly considered equity or debt funding – debt funding was the right route for him. We looked at various options including a secured commercial bank loan, self-funding via a personal loan/mortgage and various platforms. We wanted a specialist funder who understood the construction sector – with the best will in the world many funders do not. The payment arrangements in construction can be complex*.
The client needed trade finance (to buy stock) which reduced the number of available funders. We wanted bad debt protection for our customers as the inevitable does sometimes happen. Carillion being a notable industry case in point – many subcontractors failed through no fault of their own when Carillion went bust. We also wanted to be careful about the exposure the client would have in any personal guarantee. A common misunderstanding is that all personal guarantees are the same – they are definitely not.
Having a good relationship with the individual staff of the funder is key. The devil is in the detail. All manner of little and big obstacles and idiosyncrasies are likely to appear along the way. We wanted a proactive funding team who would help get round obstacles rather than stop a funding deal in its tracks. For instance we had to overcome issues with the landlord of the warehouse refusing to sign a landlord waiver. Getting Chinese suppliers approved is not always straightforward. Another often overlooked aspect is that a cracking support team at the funder can offer real benefit to the business by sharing tips to avoid all manner of potential pitfalls.
We chose to work with Bibby Financial Services. We know them well at SME Strategies and they specialise in construction. We secured a little more funding than we needed to give us a contingency. Bibby’s considerable experience enabled us to negotiate sensible terms. Dealing with senior staff made the whole process so much easier. There was genuine negotiation of terms with them and some flexibility given to us. The personal guarantee was agreed at a fixed quantum of 50% of the funding limit. This quantum cannot be increased without the written agreement of the guarantor. The guarantee is unsecured – all of which makes it significantly less onerous.
With the funding in place, suppliers can trade with confidence with the client and this allows better prices to be obtained. The additional paperwork and monthly reporting needed for funders is on the one hand a burden but on the other hand is actually a discipline that ought to be in place anyway.
One thing to watch out for is to ensure a client doesn’t take their foot off of their own credit control procedures by thinking that funding is in place. Otherwise good customers might think that with a funder in place their adherence to the agreed payment terms do not matter – they really do matter. Any delays in payment by customers all have to be paid for by our client.
Running a successful business is a juggling act to keep the plates in the air spinning. With the funding set up, the business is trading on a firm financial footing – the finance plate is sorted. The client can now spend his time on the rest of the spinning plates. These include marketing, signing up contracts and the operational side, not worrying about finance and juggling the cash flow. We are working together on the next priorities for the business which are finding then securing great projects.
*In the construction sector, The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) include provisions to ensure that payments are made promptly throughout the supply chain. This complexity can have significant implications for cash flow for contracts in the construction supply chain.
“I am very grateful to David for his help in setting up our funding with Bibby Financial Services. He helped with much of the paperwork and his eye for detail spotted a lot of things that otherwise might have passed us by. I know having him as our business adviser and accountant gave Bibby assurance that we were being properly advised. David genuinely cares and is committed to our long-term interest. He says what we need to hear not just what we want to hear! My wife is delighted that he is working with me – he is now an integral part of the team and I know he will help us go from strength to strength.” SS, London.
If you need funding for your business please get in touch for a complimentary conversation.