Gaenor Cassell, partner of Burness Paull LLP
Gaenor Cassell, partner of Burness Paull LLP, discusses the three key steps that food and drink businesses and entrepreneurs need to consider when seeking funding to grow their business
Any growth strategy, especially one which involves taking your business onto an international stage, is likely to need funding. Restricted cash flow is often considered as the primary barrier to business growth.
However, accessing debt funding for the vast majority of companies in the food and drink industry can be challenging – especially for SMEs. So how should you go about it?
There are three key things that you can do to maximise your chances of obtaining funding.
The first of those is that before you approach a lender, make sure that you are thoroughly prepared. Invest time in putting together well-presented and comprehensive information package which can be delivered to that lender together with your request for funding. This should include a business plan and projections which are modelled to take account of all scenarios which may be relevant to the growth and success of your business and those investing in it - including and most importantly downside scenarios. For example, what could be the impact on your current and future financial position of price or currency fluctuation, regulatory change, bad weather or predicted geopolitical situations in jurisdictions which are relevant to you or your main customers or suppliers? How will the current strain on the retail sector affect your growth plans? A polished, professional, comprehensive and robustly-challenged information package which answers most, if not all, of the questions that a lender may ask, will win you a huge amount of credibility and help demonstrate your capability to operate your business during the bad times as well as the good. This is crucial to a lender considering backing your business.
The second is that when you are contemplating what type of financing will work best for your business - be creative. The most available and reasonably-priced type of financings offered by High Street Banks to SME businesses in the food and drink industry are invoice financing, asset financing or equipment leasing. Many businesses have preconceptions about invoice financing. Historically they were considered by many to be the financings of last resort. However, if you understand and comfortable with the risks and limitations associated with such facilities, you may find that they will provide your business with working capital liquidity at a reasonable cost.
Invoice financing does not, however, work for every business. Although the low-cost nature of invoice financing is attractive, some businesses find that it does not work for them as it is too cumbersome to administer and therefore does not generate the necessary liquidity when needed. In addition, they are likely to be on demand and so therefore not necessarily the ideal choice for all funding requirements. If this is the case for you, equipment leasing is not a viable solution and you are struggling to gain traction with the High Street Banks in relation to any other debt options, you might want to consider speaking to one of the growing number of non-bank lenders in the market. Over the past few years lending in the non-bank funding market appears to have outstripped that from the mainstream banks. Non-bank lenders obtain their cash from a variety of sources such as private equity, institutional cash or peer-to-peer lenders, and while the facilities offered can often be more expensive than those provided by High Street Banks they can also offer more flexibility - especially in relation to cashflow lending where there are no significant tangible assets to be secured. In addition to being an alternative to High Street Banks they can also serve as a bridge to obtaining more traditional cheaper sources of funding - the idea being that businesses use them until they can establish the track record and scale required to attract funding from a High Street Bank.
The majority of non-bank lenders have to date focussed their attention in England and in particular the South East, however many of them are now looking for opportunities north of the Border. The challenge for non-bank lenders is demand - a recent survey indicated that only 1% of food and drink businesses in Scotland were aware of their existence. However, the British Business Bank’s 2018 Small Business Finance Markets Report reveals evidence that although the High Street Banks are still the predominant channel for the UK’s small businesses – SMEs are increasingly diversifying their choice of finance provider. If you are considering doing business with a non-bank lender do your research first. Talk to your peers, your professional advisers and even your main bank. Often banks will recommend their customers speak to a non-bank lender if they are unable to provide the facilities requested. The lending community is small and many of the originators for non-bank lenders are ex-bankers - so the likelihood is that your relationship manager may be able to recommend or suggest alternative lenders for you to approach.
The third and final thing to remember is that when you are considering who to borrow from, is to be selective. Consider what additional advantages for your business and its growth plans can be gained from entering into borrowing arrangements with a particular lender over and above increased liquidity. This is equally the case when choosing a bank to do your clearing and/or ancillary business with and professional advisers. Identifying and maintaining strong local partnerships and developing good business networks can be imperative when expanding in any jurisdiction.
The question is: what is the best way to source these? Many of the High Street Banks have international portals, networks and relationships that their customers can gain access to. Your professional advisers should be able to use their knowledge of the market to make introductions to potential lenders. If your growth plans are international your professional advisers should also be offering you access to their international business relationships and knowledge.
So in summary: ensure your information package is well prepared, be creative and flexible when it comes to considering different types of lender and ensure you get real added-value benefits from your backers and advisers. If you mix all those ingredients together you’ll be more likely to have the recipe for success when it comes to securing the funds you need to grow your food and drink business.
Our BQ Bulletin emails will land in your inbox at 7.30am, Monday to Friday, with a mix of the latest local business news, national news, and features to inspire you. Sign up here!
Click here to read our privacy statement