Graham Nixey, Long Hanborough-based senior associate with Secantor, a network of part-time finance directors, explores the funding process for small and growing businesses

With the current economic climate providing a challenging backdrop, Government plans for economic revival are pinned on the private sector to provide growth in output and job opportunities.

If there is to be such a resurgence, the SME sector will require access to appropriate and reasonably priced funding.

Despite the widely reported credit squeeze, it is possible for SMEs to obtain finance and there are lenders — including the clearing banks — who have funding available.

All financial institutions need to lend money. That is where their profits come from.

Although the funds are available, financial institutions are now more selective about how they lend, and need to be satisfied that they fully understand all the risks involved in a particular enterprise.

There are no magic keys to unlock the purse strings, but the guiding principle is to make life as easy as possible for the funder, anticipate and answer the questions they will be likely to ask, and clearly demonstrate that the management understands how the business works in financial and operational terms.

A funder will be reassured by an honest and open approach.

But however compelling a proposition looks on the surface, a funder will be put off by a feeling of less than complete honesty and transparency.

Trying to avoid a difficulty that may impact on the proposal will probably generate more questions until the funder is satisfied they have found the ‘bottom’ of the issue.

The next stage is to work closely with the funder. Try to see them as being on the team, as it is them providing the money to keep the wheels turning in the business to help it expand or to become more efficient.

They are not a nuisance to be tolerated, coming on a periodic visit to make life hard, although they may do just that if not treated properly or not kept in the loop.

Funders react much better to proposals from companies where there is good financial awareness in the management team, and preferably some permanent (not necessarily full-time) financial input and depth of financial expertise.

Third, give the funder confidence the management knows what is happening and how the business works in financial terms, and that it is under control.

The key way to demonstrate this is by regular and good quality information which helps the management, and the funder, see how the business is doing, what patterns there are, any trends and, most importantly, cashflow.

The funder will want to see proper management accounts prepared, at least quarterly, but preferably monthly, and a monthly management information pack which looks forward as much as it looks back on past performance.

The management information and management accounts must be internally consistent with each other. If the balance sheet does not tie up with the profit and loss or cashflow it will generate a whole lot of difficult questions.

Questions will also occur if the management information does not reflect the evidence of what can actually be seen to be happening in the company.

Finally, the funding proposal must be credible, viable and give a compelling case for the funder to be able to put it through its own risk assessment processes and advance the cash with a strong expectation of full repayment.

It seems obvious, but that is the bottom line.

So how does a company go about raising the finance it needs?

Again it is not rocket science. The first step is to identify funders who are looking for the particular business proposition required.

The funders all have particular specialisations, such as cashflow finance or asset finance. The pricing offer will reflect the perceived level of risk, and the appetite for the particular type of business on offer.

The second step is to put the proposal together. This can be done in-house or by external advisers.

If there is an in-house finance function with the necessary experience, a good quality management information system and range of contacts with appropriate funders, the company can take the proposal forward as part of the normal course of business.

If not, it is better to use external advisers, rather than make do with unsuitable resources.

n Contact: Graham Nixey, Secantor, 01993 886875.

Web: www.secantor.com