Beermat Club:
Ask Mike
Planning to make sure history does not repeat
Q. Last year I started a business selling handbags designed like orange segments, allowing customers to choose and change the colour of their bag. Barclays, which initially offered a loan under the Small Firms Loan Guarantee scheme, was so impressed with the product when I showed it to them that they offered a £35,000 overdraft facility backed by a personal guarantee. Then disaster struck with my UK manufacturers, resulting in the first batch of products arriving seven months late, missing the crucial Christmas period. Barclays got cold feet, removed the overdraft facility, freezing the account and calling in the personal guarantee with seven days' notice. We have done a lot of promotional work on a limited budget and have received great interest from both the UK and mainland Europe, but obviously need to source new financial backing. What is my best way forward? Cliff Spruce, Orange Bag, www.orangebag.co.uk.
A. Banks are naturally cautious and there is often a personality clash with entrepreneurs. You are totally convinced about the future success of your business but they have lost patience with missed financial targets.
You need a new bank, and fortunately small business banking is a very competitive area. However, you need to ensure that you don't end up in the same situation again.
You probably have a part-time accountant or bookkeeper. These people work reactively, dealing with history.
You also need someone more proactive who can look into the future and anticipate problems before they arise, essentially a finance director.
You probably can't afford such a person full-time, but there are organisations like FDUK that can provide a part-time finance director.
These are typically people with a strong finance background, perhaps with experience in a quoted company, but who now prefer a 'portfolio' career, working with a number of small businesses.
They will not only already have a good relationship with at least one bank, but will also be able to speak to them in language that they understand, thus managing the relationship for you.
They will also have a range of other useful business skills, including for your example experience in selecting and managing suppliers reducing your costs, and structuring your business for future growth.
These mentors add credibility to your venture and having them on your side should avoid the communication problems you experienced with your old bank.
I would also recommend you do whatever is necessary to clear any outstanding stock, before you get ready for next Christmas
Your business model seems to be web-based, selling directly to the consumer, which requires significant promotional effort to drive individual sales to your site.
I would try to do a one-off deal with an upmarket retail chain or other single organisation for whatever stock you have, to provide some much-needed liquidity.
This will probably be at a lower margin than you would like, but having a well-known name as a customer and a dent in your overdraft will get you immediate credibility with your new bank.
Barclays also responds:
When customers approach Barclays to discuss facilities for a new venture, a business relationship manager will review the customer's requirements and look at all the options available to them. Funds can be advanced by means of a loan or overdraft.
The government-backed Small Firms Loan Guarantee scheme (SFLG) is available to those who have a viable idea but do not have any security to guarantee the loan. Unfortunately, it is not available to those who have security such as those who own, or have equity in, their own property.
The alternatives are then to look at a normal commercial loan or an overdraft. As with any loan, a business loan requires monthly payments from month one and therefore will require the business venture to be producing cash flow that can service the loan.
If the venture is in the development stages it may well be a number of months before the product has gone to market and is producing sales and therefore there will be no cash flow in the early stages.
However, this does not mean that the venture is not viable, alternative funding can be looked at. The advantage in this case of offering an overdraft is that it will provide the necessary finance to get the product to market but allows more flexibility than a loan as the funds can be drawn down when required, rather than taking them all up front, which incurs interest payments on the loan straight away. The interest payments on the overdraft can be rolled up, meaning cash flow in the early months should not be a problem.
Overdrafts are really designed to provide short-term financing and help to bridge the gap between money going out to pay suppliers and bills and money coming in from customer sales. Time limits and security will be negotiated with the customer to ensure that the overdraft will be paid back. Typically, overdrafts are reviewed regularly with a customer to ensure the facility meets their needs. In the long term, the business will need to be generating cash to be a success which, unfortunately, in the risky world of business does not always happen.
Mike Southon, co-author of The Beermat Entrepreneur and Finance on a Beermat
First published in the Financial Times: 24th June 2006