BUSINESS WITH CONFIDENCE icaew.com Clive Lewis, Head of Enterprise SME Access to Finance Introduction

BUSINESS WITH CONFIDENCE icaew.com SME Access to Finance - Basic Rules UK Clearing banks do not offer Risk (also called Equity) Finance Banks lend on the premise that all finance will be repaid Comfort to bankers - Security from the business’ assets - Future profitability (increase in net assets) and cashflow - Security from outside the business

BUSINESS WITH CONFIDENCE icaew.com SME Access to Finance - The Basic Balance Sheet LIABILITIESASSETS Long TermFixed Assets Owners InterestProperty, Plant& Machinery, Goodwill Accumulated Profits & Losses Current Assets Short Term Stock & WIP CreditorsDebtors TaxesCash

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance - Long Term Finance Debentures - a document that either creates a debt or acknowledges it. The term is used for a medium- to long-term debt instrument used by larger companies to borrow money. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit. Loans and Mortgages – offered by a bank usually with undertakings called covenants

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance - Short Term Finance Bank loans – fixed repayment terms Overdraft facilities – flexible lending but repayable on demand Trade Credit – suppliers Factoring and Invoice Discounting advances secured on sales invoices to pre-approved (by factor) customers. Leasing & Hire Purchase – lending against assets such as motor vehicles, equipment and computers

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance - Equity (Risk) Finance Proprietor and Friends and Family Business Angels (up to £100,000) – wealthy entrepreneurs Business Angel Syndicates (up to £1M) – groups of BAs Enterprise Capital Funds (£500k to £1m) – government schemes Small Scale Venture Capital (up to £2m) - Venture Capital (£2m to £20m) – high risk/ potential high reward Floatation on public markets (UK – AIM, OFEX or Main Market)

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance What banks look for: 1. Cashflow forecasts Evidence to support the turnover forecast Historic trading accounts Details of potential income and how calculated Details of loan repayments and interest, dividends, taxes, etc

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance What banks look for: 2. Aged Debtors & Creditors Lists What are payment terms are they in writing? Any trends towards late payment? Comparison with previous months? Explanations of changing trends? Do you do credit checks?

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance What banks look for: 3. Management Accounts and KPIs How is business performing compared with past trends? Up-to-date figures essential Indicators of future trends such as orders, enquiries, etc

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance What banks look for: 4. Historic Trading accounts for 3 years Trends in sales, gross margin, overheads, profits Owners remuneration/ dividends

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance Current situation re bank finance in the UK : Banks are more risk averse and want greater visibility of business performance Banks are seeking an open and honest relationship that can help resolve a business problems Banks are now charging higher margins on interest, higher arrangement fees and monitoring costs SMEs must understand their risk profile and how they might improve it If refused finance appeal to a higher authority in bank

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance Current situation re bank finance in the UK continued: Be aware of what deals other banks might offer Improve financial management such as reducing working capital, focussing on cashflow, etc Consider raising more equity finance to supplement debt finance

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance Raising outside equity: Business Plan is the key and must be credible Equity investors know the sector they are investing in Essential you demonstrate that you know the market the business operates in

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance The business plan must include: An executive summary showing the capital required, the business idea & a summary of the profit and cashflow forecasts A history of the company Current and future products or services Description of the market and sector, the marketing strategy and the sales and distribution process Full details of the management Detailed financial information A risk analysis

BUSINESS WITH CONFIDENCE icaew.com SME Access To Finance Issues for SMEs in UK Appropriate mix of equity and debt finance Cost of finance – interest rates historically low but likely to start rising in 2011 Greater emphasis on strong financial management Good relationship with finance providers can help Ensure an adequate supply of finance available for growth plans

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