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Ambition Rules, But Cash Is King

Business funding can come from a variety of sources - but they will insist you've done your sums rigorously warns DAMIAN WILD

 

At the tender age of nine, Jeff Leng bought a book on how to be an entrepreneur. Now 27 and with a successful year's trading under his belt, he's entitled to call himself one.

Leng is one of the three founder directors of Rise Technical Recruitment, a Bristol-based enterprise specialising in the engineering recruitment market, which they launched last June.

Having gone into the recruitment business straight from university, Leng soon grew frustrated with his employer, a large firm in what can be a cut-throat industry So he and three colleagues decided to launch Rise. "We wanted to do something we knew we could do and we wanted to learn from the mistakes of our previous organisation," he says.

Rise says it puts staff first - but not for purely altruistic reasons. The company wants to keep its best people and Leng reckons a good way to do this is to place practical emphasis on work/life balance issues. "We want them to enjoy the journey," Leng claims. But he has also made sure there is an incentive to work hard: as the company opens new offices it plans to hand over a stake in the business to those who run them.

For all the emphasis on people, Leng and his partners would not be where they are today without a hard-nosed approach to finances. When they first started planning the launch of their consultancy, they sat down and drew up a business plan, looking at expected fee income and costs - including an entry often forgotten by entrepreneurs: the salaries they would need to pay themselves. "We worked out we needed at least £30,000," says Leng.

To raise the money, the three directors raided their personal savings and borrowed from friends and family. Leng sold his car.

They then touted their business plan around the high street banks, a process Leng describes as painful. "They were very receptive, but in terms of actual delivery they were quite bureaucratic," he says. Some took four or five weeks to respond, and delays like that can hurt when you are setting up on your own. "It's quite scary going from being employed to having no salary at all." Lloyds offered the fledgling entrepreneurs a £5,000 overdraft, and with that they were ready to launch.

Before long they found themselves drawing on the overdraft. But Leng and his colleagues had done their homework before they began touting their business plan around.

Robert Craven, author of Kick-Start Your Business and managing director of business advice consultancy The Directors' Centre, says too many would-be start-ups are ill-prepared when they go looking for funding. And what often costs them dear is an unrealistic view of the numbers.

"Once you get to the bottom of your cost base, add a contingency of 15% - business rates go up, electricity goes up and so on," he cautions, reminding would-be Richard Bransons that cash is king. "You can be highly profitable in year one but that's no good if all your money is tied up in stock."

Once you have worked out what you need, Craven suggests you approach family and friends first, then banks, and finally hunt down any grants that might be available. Grants - essentially free money - may sound attractive but applications can cause delays and, since they are specifically targeted, could convince you to change your business model for the worse.

Only after exhausting those avenues are you likely to want to consider approaching direct investors, sometimes known as business angels, Craven advises. He warns: "Once you look at more entrepreneurial forms of finance, they will want a share of the business."

If you are looking for more than £10,000, most families and friends are unlikely to be able to help very much. And at this stage the wannabe entrepreneur must be prepared to put his or her money where their mouth is. "Investors - banks or business angels - don't look kindly on people who are prepared to risk other people's money but not their own." If you have no savings, think about remortgaging.

Craven bemoans the fact that there is a lack of clear guidance out there, but offers some reassuring words: "If you've got a great business idea and you can demonstrate on paper that it will float, someone will bite your hand off to help you out."

It's at this stage, says Victoria Johnson, a small business policy adviser at the Association of Chartered Certified Accountants (ACCA), that you should consider seeking professional help. "An accountant would look at the business and its objectives," she says. "It's really important to consider the mix of finance, not just the level of finance. Accountants deal with so many businesses they know what's available and they can tap into the private investor market as well. One of the most common complaints from accountants is that start-ups seek finance from the bank and then come to them. It's often too late by then."

But it doesn't have to be an accountant. The government's Business Link network provides advice on everything from business planning to raising equity finance. They can also advise on how to choose and manage an accountant.

According to the British Bankers Association, fewer small businesses are using overdrafts to fund growth and more are turning to loans and grants. This is backed up by recent ACCA research which found that about half of entrepreneurs use a bank loan t launch their businesses, with nearer 60% accessing some form of grant.

But behind those numbers, says Johnson, there are some interesting and, perhaps surprising, gender distinctions. Men are more likely than women to seek advice about formal funding options, whereas women are more likely to seek advice about informal sources such as friends and family.

And while one in three men turns to their wider family for support, only one in five women do so. More women than men use their own savings, but men are much more inclined to turn to direct investors than women.

There are other emerging finance options too. One new website, for instance, straddles the divide between direct investment and borrowing. Barely a year since its launch, Zopa has more than 75,000 registered members who borrow and lend from each other directly, at rates that can undercut mainstream competition. "People are better than banks," it boasts, and with borrowing rates that can be as low as 4%, the site shows that can be the case.

Those sorts of headaches are behind Rise. They now have offices in Bristol and Bromley, with staffing levels in double figures. They turned over £400,000 in their first year, with a gross profit of £120,000.

But they are not resting on their laurels. For year two they project a £1.2m turnover and are moving to bigger premises. True to the commitment that staff should "enjoy the journey" they are installing a pool table and plasma-screen televisions.

The directors plan to expand the markets they serve to take in the education sector as well as permanent and contract engineering vacancies, with ambitions to become a £70m business.

And as they were profitable within three months, they were able to pay back their borrowings.

So how do Rise's bankers feel about the company now?" "They love us," says Leng. And he's bought himself a new car.

Follow the money

• For the ACCA report on sources of finance, go to www.accaglobal.com
• A guide to starting up, plus a list of grants available for businesses, can be found at www.businesslink.gov.uk
• For a free copy of 'Kick-Start Your Business', go to www.tenongroup.com
• For information on government services for small businesses, including the small firms loan guarantee scheme, go to www.sbs.gov.uk
• Find out about borrowing and lending through Zopa at www.zopa.com

  
  

About ROBERT CRAVEN

Robert Craven is a keynote speaker and author of the business best-sellers 'Kick-Start Your Business' and 'Customer Is King'. He has recently been described as 'one of the UK’s leading marketing specialists' and the 'entrepreneurship guru'. He runs The Directors’ Centre, helping growing businesses to grow.
For further information, contact Robert Craven on 01225 851044. (rc@directorscentre.com) www.directorscentre.com

publication details

Published in Sunday Times, 10 September 2006.