The Language of Small Business Texts and Vocabulary Training (for students of Economics) Part 2. Учебное пособие

Raising the Money

fast growth in profits. To achieve either of these objectives, the amount of money invested needs to be substantial to stand any chance of success. Other pre-conditions of success, apart from large funds, are a very strong management team and a fast growing market. If you cannot demonstrate that both of these apply to you and your business, your chances of raising very large sums of money are virtually nil.

THE MONEY: WHAT IS IT FOR?

From your forecasts, you should have an indication of when your need for extra cash arises, how long it lasts for and when you would be able to pay it back or give a good return on it.

If you are starting a new business, you need money for:

−the «once-in-a-business-lifetime’s» expenses of selling up. These include what you have to spend on your premises, on equipment and furniture, on legal and professional costs, on initial marketing expenditure;

−working capital. This is what you need to keep yourself going in the time gap between paying out cash for raw materials or stocks and getting in cash from the people you sell to. All businesses need working capital; the amount varies depending on the type of business, the credit terms you can negotiate from your suppliers and the amount of credit you extend to your customers.

The longer you can get your suppliers to wait for their payment and the shorter the period you allow to your customers to pay, the less working capital you need. Your working capital requirements will also be less if you do not need to hold big stocks of goods.

In practice, all these things are easier said than done and you need to work out a strategy for controlling your business which meets your need to keep down the money tied up with working capital, coupled with keeping your suppliers and customers happy.

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If your business is up and running, you may need funds simply because it is growing and hence the amount of working capital necessary has gone up. Or you may have some specific expansion in mind.

THE MONEY: WHAT TYPE DO YOU WANT?

Overdrafts

If your need for the money is likely to be fairly short-term, an overdraft or some sort of short-term loan is your likeliest bet. Your need for finance in the short-term could be to cover a temporary shortage of cash, or it could cover your start-up requirements if these are fairly small.

An overdraft is quick to arrange and fairly cheap, but there will be an upper limit above which you are not to go without permission of the bank manager. The serious drawback with an overdraft is that the bank can demand instant repayment. While this does not happen very often, you can bet that if the bank does demand repayment or reduction of the overdraft, this will occur when you cannot do so.

If there are no assets, such as debtors, to be taken as security for the overdraft, it is likely that your bank manager will require that you give a personal guarantee even if you have formed a limited company. One benefit of getting substantial funding is that as a result of the strong balance sheet, personal guarantees, although asked for, can sometimes be avoided.

As a self-employed person you are personally liable anyway, so no further guarantees are needed. In the extreme, this means if you cannot repay an overdraft, your assets, including your house, could be seized to cover the debt.

Note that banks may be wary of taking stocks as a security for overdraft. The manager may insist on property or debtors as the only acceptable security. Always negotiate about the level of security needed; it is in your interests to give up as little as possible.

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Raising the Money

Longer-term loans

If you know at the outset that you are unlikely to be able to repay the money you want to raise in the short term, a longer-term source of finance might be the answer. You can get loans of between two and thirty years, often secured on your house. The repayment of the loan and the interest payments will be arranged at the start. The interest could be a fixed rate or it could be a certain percentage point above a bank’s base rate. You may have the option to alter from one basis to another after a number of years.

Selling shares

If you have formed a limited company, you may be willing to sell some of the shares in return for an investment in the business. If you do this, it means you will lose some of the potential gains you might get as a result of the shares increasing in value as the profits of the business grow. This is what an outside investor is looking for. The aim is generally to get a good return on the money invested through the shares increasing in value, rather than a stream of income from the business in the form of dividends.

An outside investor, such as a venture capital fund, will at some stage want to sell the shares to realize the profits. If you are hoping to raise money in this way, put in your plan that you intend to have your company floated on the stock-market (the Unlisted Securities Market, probably) in five years’ time.

The value you can obtain for your shares, if you are a new company, is a very vexed question. Frankly, they are not worth very much yet, so you might find that you are having to sell a bigger proportion of the shares than you would like to raise the money you need. This can lead to problems about voting control. What the value of the shares is can lead to a lot of haggling.

Opting for this route to raise money needs professional help; you will need to call in, perhaps, accountants, solicitors and corporate finance specialists. Ask for references from these professionals; this should help you steer clear of the rank unprofessionals.

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Taking partners

If you have started out as a sole trader but need to raise additional capital, you could do this by taking a partner. What share of the profits each partner gets in return for the capital put in is a subject to be negotiated. There also needs to be clarity about the management role each partner will have. For your own sake, you should do this before you form the partnership. A written partnership agreement is a must.

LENDERS AND INVESTORS

YOU AND YOUR FAMILY

What proportion should come from you?

The first fact you must come to terms with is that if you do not invest in your business idea, you cannot expect anyone else to do so. As a rough rule of thumb, the absolute most you will probably be able to raise from outsiders is five times as much money as you are putting in yourself, but needless to say there are always exceptions. If you are planning a substantial business and looking to raise £1 million or more, say, you may find that investors will put up ten or twenty times as much as you. But normally, you can expect someone to match your own investment, or put up two or three times as much as you do as a maximum. But in the worst case, it could be nothing.

Example

Winston Carpenter has £10,000 to invest in his business. He works out from his forecasts and his business plan that he needs to raise more money. He is unlikely to be able to raise an extra £50,000 or more, but with a good presentation of his idea, he may persuade someone to lend or invest £20,000, say.

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Raising the Money

The rationale behind this insistence of how much you must invest yourself is that lenders, such as banks, and investors, such as venture capital funds, want you to be committed to your business, to make you work very hard and with great determination to be successful. If you have not risked the proportion of capital they would like, they may doubt your commitment. Of course if you can point to the fact that, even though it is a low proportion of the total invested in your business, the sum of money you are investing is still a sizeable proportion of your own personal assets, you could be convincing.

Where are you going to get your share of the money?

If you have money tucked away somewhere, or if you have a lump sum as a result of being made redundant, this is a relatively easy question to answer. Another common source of the money for your stake is to be given or lent it by someone in your family. But being financed by your family can lead to heartache if things start going wrong. So do not enter on this course lightheartedly. Conversely, you are more likely to convince your family than anyone else.

Another possible way of raising your share of the funds is to use your personal assets to act as security (for example, a second mortgage on your home) or by giving a personal guarantee. The drawback with this is that if your business fails, you have to find the money to carry on making your repayments, or you have to sell your home. You must give careful consideration before giving personal guarantees or using your home to raise money in this way for your business.

It would make sense to have some sort of agreed family plan for what would happen if your business failed. For example, you should discuss openly whether you are ready to sell your house and move to a smaller one should the security be called upon to repay your loan. If you cannot have some sort of strategy in your

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The Language of Small Business

domestic life which is acceptable in return for the prospect of going it alone, you are likely to have family problems when the inevitable pressures mount on the business.

You can get tax relief on these loans. If you are a sole trader or partner, any interest you pay on a loan for business purposes is allowable as a deduction against tax in working out your taxable profits. If you take on a loan to invest or lend money to a close company you can get tax relief at your highest rate of tax on the interest you pay. To be eligible for this tax relief, you must either own more than 5 per cent of the shares or own some shares and work for the greater part of your time for the company.

When should you put in your money?

The best advice is not necessarily to start your business straightaway, investing your money and subsequently approaching other lenders or investors later when you need it. The wisest course may be to prepare your forecasts and your business plans and to approach possible sources of finance before you start your business and before you actually need the extra money. To plan ahead and get a commitment in advance can be crucial.

The reason why this could be the best approach is that lenders have a couple of infuriating habits. The first is to ask what money you are going to put in when they put in their share. You may be able to point out that you invested £3,000, say, six months ago and since then have worked without drawing any salary, but lenders are likely to be unimpressed. That is water under the bridge and may count for nothing as far as they are concerned. The second is for them to adopt an attitude of «wait and see» how the business develops, while the cash is running out and you are under great pressure to raise more. In this way better deals can be struck for the investor or lender. So do not rush out and use up your money, if you know you will need extra funds in due course; get your financial backing in advance.

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Raising the Money

GOVERNMENT, LOCAL AUTHORITIES.

CHARITIES AND OTHER SOURCES

You may be able to get grants, allowances, cheap loans or prizes from a variety of sources.

Government, local authorities

The best known source of funds from the non-commercial world is the government’s Enterprise Allowance scheme. You have to meet various conditions to be accepted on this scheme:

−you must be at least eighteen and under sixty-five;

−you must be receiving unemployment benefit or income support when you apply (either directly or through a member of your household);

−you must have been unemployed for at least eight weeks before you apply

−in general, you must gave at least £1,000 to invest in your business in the first year (could be loan or overdraft facility);

−you must agree to work full-time in the business;

−the business should not have started trading before you are accepted on the scheme;

−your business must be considered suitable for support from public funds.

If you meet all these conditions you will receive an allow-

ance of £40 a week for the first year to supplement the income from your business while it is being established.

BANKS

Which bank?

Your bank manager is an obvious port of call, but not always the best nor the one you should make first of all. The advantages of going straight there is that if you have been a good creditwor-

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The Language of Small Business

thy customer with a good record, your manager should favour your application. And this is what should happen to the vast bulk of people with a good business proposition which is well presented and well researched.

But there are a couple of reasons why you should not head straight here or why you might expect not to secure the money you want. In the first place, your presentation of your plan will improve with the number of times you give it. If your bank manager really is your best possibility and you have not practised your presentation, you might blow the opportunity. It could pay you to approach another bank, simply to practise what you are going to say and be prepared for the questions which will be asked.

The second disadvantage may occur if you are looking to your bank to provide substantial funds. Each branch bank manager has a different discretionary lending limit; above the limit your application may need to be processed elsewhere and so you may lose part of the personal touch on which you were relying for a sympathetic hearing of your case.

The moral is shop around. Do not be put off by being turned down, try another bank or another branch which you think may be more used to business deals. Remember to ask what rate you will be charged; compare this with what other banks would charge.

What sort of money ?

Banks can offer money in two ways:

−overdrafts;

−loans.

Loans can be very flexible and the exact terms vary from

bank to bank. You can borrow money for periods of up to thirty years. The rate of interest can be fixed or variable, a number of percentage points over the bank base rate. Sometimes for larger loans (e.g. £15,000 plus) you can negotiate a repayment holiday

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Raising the Money

from repaying the capital you borrow. So for, say, one or two years, you pay only interest. You may also be able to arrange stepped repayments. The amount you can borrow can vary from £1,000 to £1 million. The type of loan you can get depends on the viability of your plan.

There is also a government scheme called the Loan Guarantee Scheme, although not all businesses will qualify. A loan under this scheme can be for up to £100,000 and last for two to seven years. There can be a holiday for two years before you have to start repaying the capital. The Department of Employment guarantees 70 per cent of the outstanding amount due to the lender (85 per cent in some inner-city areas). This will be paid if your business goes bust. You have to pay the rate set by the bank plus the guarantee premium demanded by the government, currently 2.5 per cent on the part guaranteed (2 per cent in inner-city areas where the 85 per cent guarantee applies). The scheme is intended to provide loans for small businesses where there is not enough security for the bank from other sources (for example, your personal assets). The bank will take a floating charge on the business assets (that is, the loan secured on assets in general rather than one or two specific named ones). Note that personal assets must be charged before the loan guarantee is considered.

The practice varies from bank to bank about the cost of setting up the loan. There could be an arrangement fee, for example, of 1 or 11/2 per cent of the loan, but not more than £500; check before you arrange the loan and try to negotiate on this point. You may be required to take out life insurance for the amount of the loan.

Apart from the standard requirements, such as soundness of your business plan and amount of money you have invested yourself, the banks will also look at the size of loans you have already.

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The Language of Small Business

PRIVATE INVESTORS

(including Business Expansion Scheme)

It may be possible to raise money from individuals who wish to invest or lend money to small businesses. Since the advent of the Business Expansion Scheme (BES) more individuals are prepared to invest money in return for shares in your company.

Taking advantage of the BES scheme

Small companies can raise money from individuals under this scheme as the tax relief for investors is very generous. It allows investors to get tax relief on what they invest in newly issued ordinary shares of new or small unquoted companies at their highest rate of tax, that is, up to 40 per cent. Each taxpayer can invest up to £40,000 in any tax year and get the full tax relief. Investors can claim up to one half of the tax relief for a BES investment (but no more than £5,000) against their income in the previous tax year, as long as the investment is made before 5 October. Shares issued after 18 March 1986 are free of capital gains tax when you dispose of them after the required five-year period (if you sell before five years are up you are not eligible for tax relief against income).

Only outside investors get the tax relief. So you are not eligible if you put your own money in, nor are any paid directors or employees of your company.

To qualify under the scheme your business must be a company and must, among other things:

−be unquoted, that is, your shares cannot be bought or sold on the Stock Exchange or Unlisted Securities Market;

−carry on business mainly in the UK, although you can export all your output.

You will not qualify if your business, for example, is banking, insurance, leasing or hiring, share-dealing, accountancy or legal services or dealing amounting to financial investment, such as

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