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Finance FAQs
To set up a new business will I need to raise finance from external sources?
How do finance providers decide whether or not they will lend funds?
Will the industry I'm in affect my ability to raise finance?
Will my finance needs be different if my business is growing rapidly?
Can I get finance if an opportunity arises outside my business?
What should I include in a business plan?
Why do I need to prepare a business plan?
How can I ensure my business plan stays confidential?
How detailed should my business plan be?
What is a cash flow projection?
Will the amount and period of finance I need influence my choice?
How do I work out how much I need to borrow?
Why does the cost of finance vary so much?
Can I raise finance in other currencies?
Can I get bank finance if I’m starting a new business?
How will different finance options affect my profitability or cash flow?
Will external finance increase my risks?
To set up a new business will I need to raise finance from external sources?
Probably, unless you have retained earnings or access to your own start-up capital.
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How do finance providers decide whether or not they will lend funds?
It depends on how long the finance is being provided, the amount provided, the reason for the funding, your company’s credibility and prospects of profitability. Most finance providers will ask to see a business plan to help them understand your company, its markets and your vision for its future.
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Will the industry I'm in affect my ability to raise finance?
To a finance provider, every industry has its own level of risk and this can affect the amount of finance provided or the terms and conditions imposed. However, it is only one of many factors they consider.
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Will my finance needs be different if my business is growing rapidly?
Yes. A rapidly growing business normally requires more capital over the long term than it is able to generate in the short term. In this case a long-term bank loan or equity finance is more appropriate than an overdraft.
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Can I get finance if an opportunity arises outside my business?
It's possible, but a finance provider will need compelling reasons for investing in something outside your company's stated objectives. Finance providers can analyse your current business for prospects and potential problems, but financing an investment outside your area of expertise introduces unknown factors and risks.
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What should I include in a business plan?
You should include your current business status, management plans, a description of the market in which your company operates, an evaluation of the risks you’ve identified, the impact of new investment, and credible profit and cash flow forecasts.
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Why do I need to prepare a business plan?
To evaluate the risks involved in financing your business, a provider has to understand your company, its markets and competitors, your future plans, as well as the level and timing of expected profits.
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How can I ensure my business plan stays confidential?
To prevent a finance provider using your ideas, it may be worth insisting that they sign a non-disclosure clause before you allow them to read your business plan. However, with reputable institutions such as banks this is not usually necessary.
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How detailed should my business plan be?
The level of detail in a business plan depends on the amount and type of finance you need. As a general rule, the more finance required in relation to a company's asset base, the greater the risk and the greater the need for detailed analysis.
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What is a cash flow projection?
A cash flow projection is a forecast of cash inflow to and outflow from your business, which tells you when and by how much your available cash will rise and fall. To produce a cash flow projection you must forecast sales and expenditures and identify the dates of revenue collections and payments. NB A cash flow projection is not the same as a profitability forecast, which provides an accounting measure of profitability.
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Will the amount and period of finance I need influence my choice?
Yes. If your finance needs are far greater than your asset base or profitability, you may need to consider equity finance instead of bank lending, especially if you need finance over a long period. However, these alternatives are not mutually exclusive and you may end up with finance from a combination of sources.
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How do I work out how much I need to borrow?
Preparing a cash flow projection is useful. For example, if you spread the payments for your investment over a period of time, maybe by taking out a bank loan, a cash flow projection will help you decide how much capital is needed to cover an anticipated cash deficit. Always aim to raise finance in excess of your projected needs to allow for a margin of error.
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Why does the cost of finance vary so much?
The cost of finance depends on the level of risk a provider associates with your business. For instance, with loan financing you pay higher interest to compensate the provider for increased risk. With equity financing, funding is unsecured which means a high level of risk for the provider. So they must believe you have a good chance of earning a high return, usually in the form of an increase in the company's valuation. There may also be safeguards built into the deal to reduce the chances of failure and give the finance provider the right to intervene if things go wrong.
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Can I raise finance in other currencies?
Yes, but there are risks involved. For example, if your revenue stream is in HK dollars and you get a low-interest Japanese yen loan, you risk exposing yourself to higher loan repayments if the Japanese yen strengthens against the HK dollar. This is why it is advisable to raise finance in the same currency as your revenue stream, although there may be some opportunities to hedge your exposure to foreign currency loans.
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Can I get bank finance if I’m starting a new business?
Yes, but as a start-up business you won’t have a track record, asset base or cash flow. However, if you are an existing customer with an established relationship, your bank may be willing to waive some of their internal rules to fund your business. Generally they will look for protection either in the form of equity or security. They may agree to match what you are prepared to put into the business yourself, or to advance funding secured by your personal assets. A bank is also a convenient one-stop shop for other sources of finance such as overdraft facilities, leasing and invoice factoring.
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How will different finance options affect my profitability or cash flow?
With equity financing, there are no interest payments so there is no impact on profitability or cash flow. However, your investors may require distribution of profits in the form of dividend payments after a certain period of time. They may also have an exit strategy that requires you to buy them out in the future. Both scenarios can affect your cash flow significantly.
With loan financing, the interest payments you make will affect both your profitability and cash flow. However, you may be able to structure the loan so that interest payments are deferred until your business has grown the necessary revenue streams to support the repayments. The same goes for asset based financing.
Bear in mind that interest payments are tax deductible and can reduce the overall cost of your debt, whereas dividend payments are not.
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Will external finance increase my risks?
Yes. With loan financing, you will need to make interest payments and repayments of the capital. If your business doesn't meet these obligations, there is a risk that the bank may foreclose on you. With equity financing the providers share the risk and rewards but they may remove or restrict you if the business does not perform adequately.
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