The Market for Credit Finance - Tony Goulbourn - Accelerate 2014 Sheffield

The Market for Credit Finance

Viabilty Test• Key distinction between viable and unviable

businesses• Unviable businesses – lender unlikely to lend at any

level• Viable businesses – e.g. a lender may be unable to

lend the full amount due to:– Lack of security– Lending Criteria / Policy– Account operation– Current trading– Poor credit rating– Uncomfortable lending 100%

• Bank may take comfort from additional funding for headroom / contingency

Funding Risk and Return Matrix

Return

High Return/High Return

Low Risk/Low Return

Low Return/High Risk

Low Risk/High Return

High

Low

Risk

Low High

The Funding Life Cycle

Sources of Finance

• Own Funds - First option, prove idea• Family and Friends - They know you so may support and help• Government Grants – If available, mostly Research &

Development based• Banks - Generally like security and a track record, not much risk

taken• Invoice / Asset Finance Providers - Will require business assets

as security• Investment Funds - Gap funders, may take more risk. • Private Equity Firms - Generally larger investments, they want

good returns• Business Angels - Private individuals who have spare cash to

invest• Crowd Funding – Crowd Cube, Funding Circle and Market Invoice• In reality it is often a package of funding.

How do Lenders look at Risk?

“The business is viable and can demonstrate ability to repay”

• The Management and people involved• Historic performance - the trends are important• Assumptions behind the forecasts – provide details of market

assessment & sales growth• Funding requirement and purpose - appropriate package is key• Debt serviceability - the ability to repay• Key business risks – what may affect the ability to repay: e.g. what

will affect income & how well can costs be controlled• Is the Bank/Funder willing to recommend and / or support the

business

The Challenge

"The majority [of investment opportunities] were declined on the basis of a suspect business plan or business model … The most common characteristic was the inability of the applicant to demonstrate a credible revenue model. They could not show that the company could attract sufficient paying customers to cover the costs of the business. Behind this generalisation are a range of problems. The inability to demonstrate any unique selling point - why would anyone purchase your product? The inability to demonstrate a route to market - how are you going to get your product to a customer? The inability to demonstrate that there were sufficient potential customers to warrant the new business. Very often the plans concentrated on the product or technology developed by the applicant, but little or no consideration had been given to the costs of marketing, distribution or customer servicing" (cited in Mason and Harrison, 2004).

And finally...

Planning is important but you need to do what you said you were going to do!