Ask Fleximize: Money Issues

How do I continue when my cash flow has dried up?

This is not an easy situation in which to find yourself. You need to get more cash into your business as quickly as possible and – equally (or more) importantly, you must fix the problem that caused your cash flow to dry up.

For example, try to kick-start new sales with special offers and marketing pushes, and focus on liquidising your current stock before you acquire more. Look for other assets you can sell, whether that’s surplus property or your customer list.

If you’re struggling with rent, try to reach a deal with your landlord or look for cheaper premises. Try to renegotiate prices and credit terms with your suppliers, who have a vested interest in keeping your business afloat. If necessary, consider employee layoffs or negotiate temporary pay cuts. Any of the above tactics may have an impact, but you’ll first have to do some research and analysis to figure out where the major cash flow blockage lies, then take action to remedy the situation.

The recession forced us to burn through our credit line, how can we grow now?

Despite the recession, if you’ve got a strong and robust business model this should help you to pay down your debts and, if necessary, to secure new sources of finance. It will be beneficial to revise your business plan, setting out where you are now, where you want to get to as the economy recovers, and how you intend to achieve that growth.

If your existing finance source is unwilling to extend your credit line, consider alternative approaches such as seeking new private investors or utilising one of the growing number of crowd-sourced lending and investment platforms. This could help you to devise new products or undertake market research to support your plans for growth. You might even find that this offers a preferable source of finance in the longer term.

With a slow economy, is bankruptcy the answer or should I find investors or a buyer?

You’ll almost always be better off finding a buyer or investor if you can. Bankruptcy in the UK can clear your personal debts, but it carries strict conditions including preventing you from being the director of a company. Businesses can be subject to a similar process under insolvency regulations. In both scenarios, however, it’s best to make every effort to avoid the costs and onerous conditions of these formal processes.

Even if your business is unprofitable, it’s possible it could be turned around with the right expertise and investment. In this case, you might be able to sell it as a going concern. Alternatively, selling off the assets including any property or patent rights could leave you with enough of a windfall to start a new business.

What is sweat equity?

Sweat equity describes someone’s investment in a project, business or product in the form of their time and effort. It is distinct from ordinary equity that’s purchased with money.

The concept commonly applies to business start-ups. A team of people might work on developing a business idea and getting it off the ground before the business is in a position to be able to pay them the appropriate level of salary. The business may instead reward these workers with a partnership or share in the business. In this way, they would become part owners of the business without having made any financial investment, but solely via their hard work and ‘sweat’.

Are there alternatives to bank loans?

Yes. There's Fleximize (But we would say that wouldn't we!?). Seriously, though, there’s a booming industry in alternative business lending; the best-known are the p2p or marketplace lenders that match businesses that need loans with individuals looking for a decent return from their savings. Savers’ money is spread between different businesses to reduce the risk, they benefit from more attractive returns than they’d get from a savings account, and the business gets a fair deal on a loan.

There is an entire world of alternative finance out there, in addition to these marketplace lenders – from invoice financing/discounting/factoring companies to revenue-based finance providers. Do a little research, or have a look at our whitepaper to find out more about the wide world of alternative finance.

Of course, you should also consider investors, as long as you’re prepared to offer them a share in the business. In addition to traditional private investors, there are also crowd-sourced equity investment sites operating on a similar basis to the loan sites.

You could also approach your local credit union, which are now free to offer business loans thanks to a change in the law.

How do I determine what percentage of profit should be mine?

It depends on who else is laying claim to the profits.

If you’re dividing profits between partners in your business, you will need to negotiate each person’s percentage based on their investment, the work they’ve put in and the skills they’ve brought to the company. Alternatively, you could just split the profits equally. It’s best to reach an agreement and put it in writing right from the start, to reduce the possibility of disputes later on.

If you’re splitting profits with the designer or creator of a product, again you will need to come to a negotiated settlement. In this case you could offer them an upfront sum, or ongoing royalties based on sales. This should be based on the size and significance of their contribution to the business.

How do I value my stake in the business?

Assuming you know what percentage of the business you own, you simply need to apply this fraction to the total value of your business. Working out exactly what your business is worth, however, is the tricky part.

There are a number of recognised valuation techniques for different types of business, and you can use the services of a professional valuer if you wish. In all cases, however, the ultimate aim is to determine how much someone would be willing to pay to buy your business.

A valuation may look at the current value of a company’s tangible assets, its price-to-earnings ratio, the cost of starting up a similar business, or other techniques specific to a particular industry.

What’s the best way to get funds for an existing business?

*Trying to remain impartial*. The best way to raise capital for your business will depend on your particular circumstances, including the attractiveness of your business to investors, your creditworthiness and any funding sources you may have already utilised.

Assuming you’ve already invested as much of your own money as you can afford, for many small businesses one of the next most popular sources of investment capital is the owner’s friends and family. The advantage of this route is that your investors will already know and trust you, but you should treat this kind of investment seriously and make sure your friends and family are fully aware of the risks. Similarly, if your business is large enough to have employees you might like to offer them the chance to become investors too. This can be a great way to get both interested investors and a well-motivated workforce.

Another source of funds is from private investors who seek out investment opportunities in non-traditional markets. These are sometimes called angel investors, and in addition to money they can bring a lot of experience and expertise to your business. However, they will commonly demand a large stake in your business in return.

Next to consider are venture capital firms. These investors focus on existing businesses with a solid foundation and the promise of high returns, so you’ll need impressive accounts and comprehensive risk and contingency plans in place.

Established companies can consider a public flotation, but this is a complex and advanced step that requires a lot of preparation.