Where to go when the banks say “No!” and they will!

You want to turn your brilliant idea into wealth, so you need to build a business that you can sell. Right?

But you need investment and you understand how banks work and you know banks won’t give it to you. So what can you do? Here are 3 ways of funding a business without a bank!

The first step is to write a business plan.

It must place a value on what you want for the business when you sell it. You paint a picture of what the business will look like when you sell the picture to raise money. How many people it employs, how much profit per employee it makes, a definition of the perfect customer, the “pain” your product or service is addressing. You explore the routes to market and then devise your marketing strategy. You have a clear picture of the “perfect buyer” for your business. How large his/her business is, what he/she hopes to achieve buying your business, why he/she would buy your business etc.

Then you use your plan to raise money.

Where do you go?

Most people at this point waste their time by going to a bank. They have all their great ideas turned upside down, produce lots of pretty graphs and detailed forecasts only to be told at the end of a six month intensive process the bank likes your idea but is not prepared to fund your business unless you give them the keys to your house and car.

Alternatively you could consider releasing shares in your brand new shiny company in return for investment. Under the Enterprise Investment Scheme (EIS) an entrepreneur can release up to 30 per cent of the shares in order for the investor to receive a tax refund from the Government of 30 percent.

Supposing you release 30 shares at £5,000 each then you as the business owner will receive £150,000. The investor will get back from the Government £1,500 per share, so the cost of their share is only £3,500. In addition, provided they keep their investment in your company for over three years then any gain they make from the sale of the shares is free of CGT. (Under the new Government guidelines that govern Seed Enterprise Investment Schemes (SEIS) investors will get a 50 percent tax rebate from the 1st April
2012).

Who will invest? Family, friends, suppliers, customers, mentors, your professional advisers – anybody with money and believes in your idea!

If you don’t want to sell your business you may wish to consider “inward investment” from investors seeking UK passports.

If you are an investment banker living in Dubai, Bahrain or Beijing you may wish to relocate to the UK and if you do not have ancestral ties then the only way to get a UK passport is via an Entrepreneur’s visa. The overseas investor has to invest a minimum of £200,000 into your business and as a minimum he/she has to have a directorship, but it can be an unpaid appointment. The UK Government stipulates that the company must employ two new members of staff from the proceeds of the investment.

A third source of finance for the more mature company is restructuring.

I am currently working with a company that is owed £1.0 million but owes £1.2 million. Using the device of a Company Voluntary Arrangement (CVA), this company is turning it’s debts into an interest free loan of £600,000 payable over 5 years this translates into a monthly payment of £10,000 pm. So over the next 90 days the company will receive £1.0 million from it’s old debts but only be paying out £10,000 per month.

In three months time the bank account, which is in zero funds at the moment will be swollen with cash receipts.

As their adviser, I am then project managing a business turnaround that will introduce tight controls, improve profitability, find new routes to market and devise an appropriate succession programme.

Is there gold at the end of the rainbow?

If you know where to look there is money for almost any business with a solid business plan but it is not at the banks!

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3 comments on “Where to go when the banks say “No!” and they will!

  1. John says:

    A must read article!! Yet when doing this for non-profits we find it so very difficult in raising funds for a start-up. Any suggestions on this matter? Steps?

  2. Ngel Taylor says:

    Good article John,

    Your explanation of how the EIS scheme works was first class. I believe this type of scheme is perhaps a way to encourage and motivate a workforce within any business by offering a share in future profits.

    Can also be used to attract high calibre employees to an enterprise that wants to grow its business.

    Nigel

  3. plenty of food for thought and good article! I’ve covered this topic in a finance feature in our January issue of the South London Business Magazine. There are alternatives out there, it’s about knowing where to look. I list some alternative sources in our finance feature (out 31 January).

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