Funding round pitfalls

Never, ever believe that a funding round is complete until all the documents are signed and the money is in the company bank account.

It's good to get all parties to sign heads of terms; it's excellent to see the investors' funds hit your solicitor's client money account; it's fantastic to speak to all parties the night before completion and know (a) that they plan to attend and (b) that they can see nothing stopping them putting pen to paper BUT...

...funding rounds do fail at the last minute, and very often for reasons that were obvious when you apply some hindsight.

Common issues:

• There's always one more question: you will get asked questions at the completion meeting "bring us up to date with trading", "what's the position with the Vodafone negotiation", "can I have a quick glance at the bank facility letter" and so on. The key is preparation - you should be able to predict the vast majority of questions you might be asked, so prepare your information. As much as anything, the angels are investing in you and your team, so be investible
• Banks are unreliable: I've sat in completion meetings where the bank has faxed in the final facility letter, which strangely bore little resemblance to the draft (and not surprisingly the changes were all bad news for the company) - a sure way not to impress your potential angels. If you've been promised a key document well in advance of completion, keep on their backs until you get it.
• The "final" legal documents contain errors: it doesn't seem to matter how much you pay lawyers, there's always a mistake or two. Obviously you need to have treated every draft with a huge amount of care, but mistakes do creep through - after all, hoards of intelligent people have read it, so it must be right? Wrong! The trick here is to be adaptable - there's generally a solution, and you do have a room full of intelligent people, so take this as an opportunity to work together to find a solution. It may do all of you some good in the long term.
• Some business angels are not honourable people: think about it - your angels have done a great deal of due diligence on you and your company. Wouldn't it have been a good idea to do some diligence on them? Ask for references, take a look at their track record of investing, get to know them at every opportunity - a genuine investor will want to know that you do your homework, so take the opportunity to show how professional you can be.

You can, however, do everything possible and still have a deal fall through. It may feel like the end of the world, and potentially it will have a huge impact on you and your business, but the only words of encouragement I can give is that I have learnt more from occasions where things have gone wrong than when things go smoothly.

Accessing Collective Thought

Collective Thought is a group of experienced business angels who have built and sold businesses with a total value in excess of £300 million. These angels have a broad range of skills and experiences, and actively seek new opportunities.

Sometimes there is only a small difference between business success and failure, particularly in its early stages. The involvement of the right person, who has been through similar growing pains on more than one occasion themselves, could make all the difference.

So are we consultants? No, because we don't charge fees. Young businesses have to be especially mindful of cash flow, and business angels of this calibre would cost the earth if you had to pay a daily or hourly rate.

Once you have made contact with us, we will set up a meeting with the angels who would seem to best fit your needs. In advance of that meeting, you will provide us with the answers to a limited number of questions, so that we come partly prepared. We meet, probably for 1-2 hours, to discuss your issues and reach some initial conclusions. If it all stops there, the only thing it has cost you is time.

If we continue, then it works like this. We will propose one or more angels to work with your management team as a mentor/non-executive. They will receive equity in return for this input, which ensures that their goals are absolutely aligned with yours - if the business is successful, they make money, if it fails, they make nothing.

How do we decide whether to continue? The decision is based on our assessment of the evidence - is there a scalable opportunity and are you the right people to exploit it, together with softer issues - do we get along, can we work together successfully?

If the answer to all these things are "yes", and most importantly you feel the same way, then let's get on and make your business a success. Contact the collective on info @ collectivethought.co.uk

SFLG: Guaranteeing a good deal for banks, not business

Many small and medium sized businesses (SMEs) will have heard of the Small Firms Loan Guarantee Scheme (SFLG). It is of particular relevance to those businesses, such as those in the “new economy” which have little by way of assets against which to secure a loan. SFLG, a joint venture between the Department of Trade and Industry (DTI) and a number of participating lenders, was established to bridge this gap by providing lenders with a government guarantee against default in certain circumstances.

According to Business Link (http://www.businesslink.gov.uk/) the main features and criteria of the scheme are:

- A guarantee to the lender covering 75 per cent of the loan amount, for which the borrower pays a 2 per cent premium on the outstanding balance of the loan, payable to the DTI.
- The ability to guarantee loans of up to £250,000 and with terms of up to ten years.
- Availability to qualifying UK businesses with an annual turnover of up to £5.6million and which are up to five years old. This is generally determined by the date the business came within the charge of corporation tax (for a company) or became liable to pay class 2 National Insurance contributions (for a self-employed individual). In the case of a business transfer the five-year age limit applies to both the business making the acquisition and the business being acquired.
- Availability to businesses in most sectors and for most business purposes, although there are some restrictions.

All well and good. However I have become increasingly concerned by some of the terms offered by banks trying to “help” small businesses. The following example uses a real offer of £138,000 from one of the major high street banks to a software business:
§ An arrangement fee of 1.93% of the loan amount (£2,670)
§ 2% scheme guarantee premium (£2,760 in first year) payable annually
§ Interest of 4% over Bank of England base rate (currently 5¼%) on the entire loan
§ A “success fee” of £10,000 to be paid by the company if shareholders sell their shares.

What does this mean in reality? The bank is putting at risk 25% of the money (£34,500). The balance of the money (£103,500) is risk free because it is backed by a DTI guarantee. And it’s not unreasonable to allow for the fact that the lender deserves some reward for putting up the risk-free money, say 1% over Bank of England base rate.

Therefore on the risky element of the money, the bank effectively charges interest at 10.25% over base, receives an arrangement fee and gets a £10,000 success fee.

So, the bank arranges some risk free lending on behalf of the government for which it receives an interest rate (6¼%) far in excess of what you or I could earn plus an arrangement fee (1.93%). Not bad business in its own right, BUT here’s the nasty bit…
On top of that, it puts at risk £34,500 for which it stands to receive:
§ An interest rate equivalent to 15½% (10¼% over base)
§ An arrangement fee of 1.93%
§ A bonus of £10,000 (equivalent to 29% of the loan).
The total return to the bank – more than a whopping 46%.

This is a scheme set up to help small businesses. However the way in which the scheme is structured leaves it open to abuse. On the face of it, a loan at 4% over base for a young company doesn’t seem unreasonable. It’s only when you break it down into its component parts that the real costs become apparent. And when you do so, you are left with the distinct impression that the only guarantee here is that the banks are on to a winner.