Investment readiness unlocks finance for start up and growth

For every size and level of enterprise, some form of finance, to fund a new venture or grow an existing one, is usually needed along the way.

Financial exclusion from mainstream funding is a common and serious barrier to start-ups by underrepresented or disadvantaged groups trying to get onto the financial ladder. Even for start-ups from more advantageous circumstances, finance can be hard to get, especially for the would-be entrepreneur with no track record and a lack of financial collateral or savings.  New companies know little about asset or invoice finance as alternative ways to improve cashflow and add liquidity to their ventures, and less about whether their business is right for equity finance.

Debt funding via the high street banks is the most favoured source for many new businesses and the government keeps pumping new or recycled money into the supply chain, including via a new intermediary ‘business bank’. In the UK, Europe and worldwide, we are all having to get used to the fact that an abundance of relatively easy-to-access credit is a thing of the past. And from the supply side perspective, relatively low-value transactions are more risky and far less profitable: a low priority, as banks attempt to restore their balance sheets.

Despite the extension of the Enterprise Finance Guarantee (EFG) scheme, 41 percent of all debt funding applications are turned down by the high street banks, and businesses report a lack of clarity and transparency in the application and decision making processes, compounded by long delays in getting a decision.

But it’s not all down to the banks

Start-up business plans and financial projections, at all ‘levels’, usually demonstrate wishful thinking, rather than commercial reality, exacerbating perceptions of the difficulties around access to finance. Business plans and propositions are frequently weak, especially around the most important drivers of business success, a robust, validated route and timescales to prospects, sales and revenues. This inability to demonstrate where and when the eventual and only source of all business finance – from customers – is coming, lies at the heart of failure on the demand side.

Female entrepreneurs are more cautious in funding their businesses, with research showing that women typically finance enterprise at significantly lower levels than their male counterparts. Research by Enterprising Women with growth-oriented businesses revealed that 58 per cent of women responders would need to be more than 90 per cent certain of being able to repay debt finance. There are many socioeconomic and cultural factors behind this, but tailored investment readiness support for women can significantly reduce this key barrier to business sustainability and growth.

The rise in alternative lending forms, such as peer-to-peer lending, crowd funding, vehicles such as CDFI’s (Community Development Finance Institutions) massively increasing their funding from government, and philanthropic funding, such as Fredericks Foundation, has in part arisen due to these difficulties, accelerated by social enterprise and the “Big Society” becoming the topics de jour of the current government.  However, with little capacity built into the demand side, these businesses often still struggle to convince themselves, let alone lenders, that they can combine commercial sustainability with delivering a social good.

Cultural barriers for SMEs

Throughout the UK there is frequently a reluctance to borrow or seek external investment.  Business owners, particularly brand new companies or more traditional, 2nd or 3rd generation businesses, see it as some kind of failure that the company cannot fund organic growth and has to look outwards for help.  For them, and for female entrepreneurs in particular, a shift in attitude and perception needs to be made, from “going into debt” to “investing in my business growth” – a much more positive statement of self-belief and confidence.

These cultural barriers are further exacerbated by perceptions around “lack of, or difficulty accessing, finance”, which are usually categorised as a “financial problem” which therefore needs handing over to the accountants to solve.  In more than 30 years of experience, YTKO Group has seen first-hand that this is normally not the case: it is far more frequently just a symptom, not the cause.  Lack of cashflow is mostly due to that all-important, but slightly tainted, slightly dirty area, in our UK culture – lack of sales.  We’re always ready to talk to an accountant, but we’re not nearly so ready to focus all we’ve got on selling more stuff.

Is this our history of door-to-door encylopedia, vacuum cleaner and double glazing salesmen?  The memory of ‘Alf Garnett’s’ stunning performance in Death of a Salesman? Constant phone calls at home, by people selling everything under the sun, or the pile of junk sales leaflets on our doorsteps? Our stereotypes of American salespeople as so ‘pushy’? Or is it that “trade” was always something that happened downstairs, not upstairs…. I believe such cultural values really get in the way of our business success, but like the elephant in the room, we don’t want to deal with them.

Most difficulties in finding funding are down to a lack of investment readiness, and in particular, the lack of a properly validated and robust plan for marketing and sales that will generate growth and revenues, with a clear and demonstrable understanding of where those revenues will come from (customers), how often, when, at what price and why.  With financial projections created after that validation, not before.

For prospective financers of all kinds and at all stages, an investment-ready business proposition demonstrates clearly the business road map, the key milestones the money will enable, the viability and certainty of debt repayments, or a return yielded to an equity investor.

It de-risks the proposition – and frees up the money, whatever it’s source.

A clear case for public sector intervention

At all stages of the business journey, gaining the right amount and type of funding at the right time can double or triple growth immediately and catalyse the creation of sustainable new jobs and significant GVA. In Bristol and Plymouth through YTKO Group’s Outset Finance programme, the return on investment for funders has been more than 200 per cent in terms of money leveraged into the local business communities. And that’s without taking into account the GVA of more than 70 new jobs.

For authorities looking to increase sustainability and growth among their private sector businesses and social enterprises, especially in rural communities with few formal (or informal) finance networks and connections, it is necessary to take a holistic, multi-faceted approach to resolving these challenges.

A robust, market-led approach to investment readiness, underpinned by a real understanding of funders needs and coupled with the provision of and connection to a range of finance options, will enable businesses to jump the finance hurdle.