Show me the money
Everyone needs cash, whether it’s for a start-up or for expansion. From crowdfunding to asset-based lending, Andrew Stone looks at where remanufacturers can get the money they require.
Securing funds to invest in growing your business used to be a simple case of going to your bank for a business mortgage or overdraft and waiting for the answer. It could be a slow and painful process, often ending with a ‘no’. Happily, things have improved in the past decade as more providers beyond the traditional banks have spring up. They are offering a growing range of financial products that can help remanufacturers tailor lending to the specific business needs of their businesses. “There are now so many alternative sources of finance to the banks,” says Clive Lewis, head of enterprise at UK accountancy body ICAEW. “Whether you are funding new offices and premises or new equipment, your options are much wider than they used to be. Lots of companies now use asset finance, hire purchase and leasing products, for example.”
Wisdom of crowds
Businesses looking for asset-based lending (where you get a loan based on your collateral) in particular are increasingly well served, says Lewis. “Stock can also be financed a variety of ways as well as overseas sales. The other innovation of recent years is the online investors and lenders. You can now get access to equity backing and to lending online in ways that did not exist at all just a few years ago,” he explains.
Crowdfunding - or Peer to Peer (P2P) platforms in which individuals pool relatively small personal stakes and vote which firms they want to back - is one of the fastest-growing and most innovative new funding options. P2P debt funding from platforms such as USbased Lending Club or the UK’s Funding Circle is relatively simple and focuses on factors such as credit ratings and your own financial standing. Securing it can be quicker than going for bank lending, although typically it is also more expensive. Asset-based P2P is also on the rise with providers such as Marketinvoice seeking to speed and simplify the lending process.
Equity-based crowdfunding (allowing investors to pay for a stake in your company) offers a more flexible alternative to venture capital or ‘business angel’ backing. It has several advantages, says Lewis. “Lots of small and medium businesses are reluctant to raise equity, partly because you would have to spend a lot doing so and you need to ask for sizeable sums of money to get private equity involved. The online funding services enable you to go for smaller amounts, it is cheaper and the stakes you give away are typically lower.”
This means owner-managers typically retain more control and may not have to offer a seat to the investor on the board, nor will they necessarily have to commit to securing an exit for the business within five years - as is so often the case when private equity backers invest, says Lewis. Remanufacturers will find a growing audience of potential investors in these new platforms, says Matt Cooper, chief commercial officer at six-year-old Crowdcube, an international network of 400,000 investors. Its average size of a funding round is approximately £700,000 ($900,000): the largest has been £10m but can be as little as £100,000.
“We have investors from 96 countries,” Cooper says. “It is the most active crowdfunding platform in Europe and we have a regulated platform in Spain. We are seeing more European businesses come to the UK to raise money on our platform because of a funding gap in their own countries.” What started as a way for digital and consumer goodsrelated start-ups to secure seed funding is evolving into a platform for larger - increasingly manufacturing - businesses who come to Crowdcube from Europe and beyond, says Cooper. “Over the last 12-18 months we’ve seen a huge uptick in hardware businesses, including in cleantech and upcycling. The whole circular economy story is proving incredibly popular.” That’s the good news.
Build your case
The bad news is that many conventional lenders, equity providers and individual investors on funding platforms are still not familiar with remanufacturing as a process or as a discrete business sector. This is a challenge any remanufacturing business must overcome, says Felix Feuerbach of remanufacturing consultancy Kemény Boehme & Company. Lenders may well look at equivalent manufacturing offerings and be put off by the comparison, says Feuerbach.
“They may see you have a smaller margin on the parts you will be selling and may be afraid of that. You will need a solid case to convince them that there will be more volume on parts and that you are serving customers that the companies selling new parts are not targeting.” One strategy he advises some clients to adopt is to fund the trial of one or two new products to be able to demonstrate how well they sell, before approaching lenders for money for other product lines. “If you have already started with a pilot product that works then you have a strong case.” Regardless of who you go to for borrowing, telling a solid financial case - including identifying the market opportunity with the right research and having a credible market share target - will help convince your potential backers, says Feuerbach. Historical management accounts including recent up-to-date ones, a solid trading track record and information on the main shareholders are the basics of any funding pitch, says Lewis.
Former banker and small business finance consultant, Mark Taylor, agrees. To succeed, companies must show they understand their business and what the risks and opportunities are to it, says Taylor. “They need to be as up to date with their audited and management accounts as possible and they also need to make sure their forecasts are solid. A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of strengths and ways you will mitigate threats are a good way to prove that you are capable. For me that’s the key. Answer those questions before the lender has a chance to ask them and there’s less chance they will turn around and say ‘this is a risk, so we won’t lend’.”
If you are not clear where to turn first, traditional brokers or business advisors may be able to help you quickly identify the best option for your business and its particular lending needs, concludes Chris Simpson, a director at consultancy The Business Doctors. “You may find you end up spending a lot of time thinking about where to access the money. An independent funding solutions business can be a good route to help you navigate that complexity.”
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