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Is your business prepared? Small business funding disasters; what to do, and how to avoid it

Our recent series on small business funding looked at the different possibilities out there for getting cash into your business. But no funding option is without its risks; what could go wrong, and what do you do if it does?

Self-funding: you’ve borrowed money from family and friends, but your business is floundering

In your quest to fund your own new business venture, your family have stepped in to give you a helping hand. Brilliant. But it’s still early days, or it’s a difficult time of year… either way, you’re not doing as well as you’d hoped, and you’re unable to pay your lenders back under the terms you established  (or worse, your business has collapsed and you don’t know if you’ll ever be able to pay them back).

Not being able to pay your debts to your family and friends is a pretty difficult situation. So, how can you lessen the impact of this – or even avoid it?

–       If losing the money will be disastrous for them – for example, a pension fund, or a big chunk of their small income that they can’t really part with, but they want to help you out (or are hopeful of making a profit) – don’t accept it. It’s a huge stress for both parties. Make sure you only borrow from somebody who can weather the loss, even if you might be excluded from family BBQs for a while in the event of business collapse.

–       Be up front about the risks and the implications for your relationship. Communication is key here.

–       Set out a clear repayment plan at the start – and also a contingency plan for disaster. How else could you pay them back if all else failed? Would they be happy for you to pay them several years in the future, and would they put an interest on this amount as a way of recouping the inconvenience?

–       Document everything that’s agreed.

Investment: you don’t have the control you’d like

So you’ve pitched your idea, you’ve won the support of an investor, and it all seems fine and dandy. You’re excited about their support, advice (and their money) and it looks like the start of a long and beautiful relationship. But then the honeymoon is over and things start to sour. Investors have a say in what happens in your company, and they might be insistent on decisions that you don’t agree with. What do you do when you feel as though you don’t have control of your own company?

–       Set clear boundaries before the initial investment; agree on some non-negotiables in running the business, and find out how much the investor would like to be involved. Get a lawyer to help you develop a shareholder’s agreement that outlines in no uncertain terms what rights your investor has when it comes to running the business.

–       Include in your shareholders’ agreement, a worst-case scenario option if the partnership doesn’t work out, such as buying them out of the business.

–       If these preliminary measures fall out of the window once the business is up and running, make time to communicate your disagreements.

–       Don’t be intimidated by an investor’s experience. Take their views and suggestions into account, but ultimately it is your business and your decision. However, it is also their money. You must be willing to take responsibility for your decisions.

Case study: “I mistook age for experience”

“When I found the two people who invested in my business I was easily convinced that because they were both more than twice my age they and had more business experience they would have twice as much value to add to the company,” says an anonymous CEO on their experience in this field. “I couldn’t have been more wrong! Just because they had worked with big companies in the past didn’t mean either of them had any valuable decision-making contacts or any skills when it came to closing a deal.

“I soon realised that they were nothing but dead weight and had to negotiate to buy them out – a very expensive lesson for me. Be careful who you go into business with! Most people are not worthy of being your business partner.”

Case study: “We persisted through rejection”

Another problem can be getting funding in the first place, as Guy Mucklow, CEO of Postcode Anywhere, knows.

“I naively thought that it was a necessary part of the process in getting a start-up going,” says Guy.“We went to market just as the dot-com bubble burst and received rejections at every point. In fact we even received a flippant email from a Barclays VC who told us that we were doomed as the ‘gorilla’ in our market would eat us for breakfast.

“My advice for anyone starting a business would be to not be deterred by rejection. I would positively encourage founders to bootstrap their business past proof of principle. If you’re committed to the start-up, your employees and your customers will be, as well.”

Crowd-funding: you didn’t meet your Kickstarter target

We’ve all been there; your dream to start a Doctor Who cafe staffed by roller-skating Daleks seemed like it would blow Kickstarter up, but nobody shelled out. You were left crying and alone, looking at the measly “0.5% of target reached” on your screen (thanks Mum and Dad for the tenner.)

How, then, can you increase the chances of your Kickstarter campaign catching fire?

–       Build an audience beforehand; don’t wait for your campaign to start. Tell family and friends about your idea; float it on social media. Get people excited, and then you can hit the ground running.

–       Make sure it’s realistic. Don’t be the business equivalent of this guy who begged Kickstarter users to help him buy a house. Not cool.

–       Make sure your prices are accessible and realistic.

–       Put in the hours! Tweeting a couple of times a day won’t cut the mustard… you need to be relentless.

–       If your campaign fails the first time, you can always try again for a smaller amount of money.

Government grants: nobody wants to give you one

Government grants can seem as elusive as the Loch Ness monster, and are probably harder to understand (good job our feature explains them pretty comprehensively). It’s a competitive field, so what happens if after months of preparing and pitching and crossing your fingers you’re turned down? Here are some ways to improve your chances, and to lessen the blow if all else fails.

–       Be as ready as possible for pitching and fighting for a grant. Make sure your business plan is impeccable, that you’re the most organised person in existence, and impress them with your vision and preparation (without being arrogant or over-ambitious).

–       Do your research – there is a whole host of organisations that give out grants but it takes time to track them down and figure out if they’re right for you.

–       Don’t put all your eggs into one basket – ensure that you research other options rather than focussing all your energy into obtaining a government grant, so that if it doesn’t work out you have another option to aim for right away.

–       If you do win one, still be prepared to find other funding options, as often the grants do not cover the whole amount or you have to match the grant amount with your own money.

Bank loans: the interest is eating into your profits

If you have been granted a loan from your bank it can be a massive help – but the repayments each month are another outgoing to add to the list. If your bank doesn’t trust you, or you haven’t considered the best options, you might find yourself with a crippling interest rate that both eats into your profits and potentially increases the amount of time you’ll be paying it back, possibly lumbering you with a long-term burden.

Tips to avoid this:

–       Shop around before applying to a loan – don’t just go with the first bank you see. What bank is best suited to your business plan, and where can the best interest rates be found?

–       However don’t necessarily just have a knee-jerk reaction and go with the lowest interest rates; many banks offer package deals for business banking that offer other benefits, and these might be worth the extra payment each month.

–       Ensure before you commit to the bank loan that your finances can take it. Have a financial strategy in place with projected incomings and outgoing, and make sure there is room for error if your business does not do as well as expected, or if problems arise.

Have you survived any funding disasters? Share your own tips in the comments below!