CASS BUSINESS SCHOOL
WHILE politicians and senior bankers slug it out in public about whether the banks are lending enough to small businesses, what can entrepreneurs do to increase their chance of success in the competition for scarce capital resources?
Firstly, you should consider whether you really need external capital to make your plan work. All financiers will require a commercial return for their cash – that’s their business after all. Before incurring this cost, examine whether you can manage with money from family and friends. Alternatively, you may be able to use your own business model to raise cash from suppliers and customers who may have broader commercial motivations than simply a rate of interest on their cash.
Many great UK businesses have been started in this way and we explore the pros and cons of these routes, and the lessons from them, with nascent entrepreneurs during our annual new venture creation programme. However, if this does not get you what you really need, how do you increase your chances with the bank or an equity provider?
The foundation of this is a concise and credible plan. At the core must be a good idea for a distinctive product or service that enough people will want to buy, but a good idea is not enough. You must go further and ask yourself how your business model converts that good idea into a product or service and then into a sale and then into cash.
Consider too whether you have all the bases and potential problems covered with skilled and motivated team members. Examine what others are doing in your market and what the barriers are to effective competition. What external relationships do you have lined up to sustain the business, such as customers, suppliers and networks of advocates and supporters? How visibly committed are they? If the thought process behind the plan is rigorous and totally honest you will end up with a better business, with access to finance as an ancillary benefit.
Providing growth capital for a small business is about judging potential. When you put all the strands of the plan together a financial provider needs to feel confident your business will become an engine to generate the cash to pay him back – with an appropriate profit for the risk he has taken.
Nick Badman is Chair of The Peter Cullum Centre for Entrepreneurship at Cass Business School, City University London. Visit www.cass.city.ac.uk/pcce for more information on the annual New Venture Creation Programme.