ONWARDS AND UPWARDS

Orna Stokes, Senior Manager, Specialist Sectors, Ulster Bank

There has never been a better time to seek second round funding writes Orna Stokes of Ulster Bank. She advises entrepreneurs on how they can identify their funding needs and how to source the best finance options for their business.

There is a clear distinction between first and second round funding.  First round funding is needed to establish a new business venture – at this point the venture has no track record and in fact the new entrepreneur may have no experience of running a business.  At first round stage, there may be no customers, perhaps no product, and no business support structure.

Second round funding is usually required once the business has been established and the entrepreneur is now looking to expand. Having succeeded in the first stage of business the appetite to move forward is now very strong and it’s at this stage in their cycle that thoughts turn to additional funding.

IDENTIFYING YOUR NEEDS

Generally an entrepreneur seeks second round funding when they intend to make a step change. They may be looking to develop a marketing plan, hire additional staff, purchase property or open another premises. They may be trying to establish a strategic position in the market place.  Finance will be essential for this expansion.

Businesses often say that while first round funding is difficult to access, raising second round funding is a less challenging process. While our Start-up Package makes funding accessible to new businesses at a great price, as a general rule it is easier for growing businesses to raise funds, than start-ups.

As an already established business, you can point to the business' achievements since start-up, you will have a track record of sales success and you will have good understanding of the financial needs of your business. The key challenge at this stage is to develop an effective business plan that can inform your audience and win you sufficient funding to make your step change. But the Second Round Business Plan is not just about raising money - it allows you to critically assess what you have achieved and to develop a strategic roadmap for your future.

When you have developed that Second Round Business Plan, you and your business will be in good shape and should be well received by your Bank Manager.

PLANNING FOR EXPANSION

In addition to Bank finance, there are complimentary sources of second round funding, such as seed funding, venture capital. And lets not forget grants and BES schemes. It is important to identify the right mix of funding to suit your business model and future goals. If you are making long term investments in the business, they are most appropriately funded by Long Term Debt and Equity, rather than shorter term facilities such as overdrafts.

Bank Finance and Invoice Discounting are often the most logical sources of finance if you have a debtor base.   Historically, invoice discounting was only considered by customers if they had a broad spread of debtors.  However, progressive Invoice Finance Providers, such as UBIF, are proving to be an effective source of finance to growing businesses. UBIF recognise that early stage companies may not yet have a  breadth of customers, but can consider funding debtors, in anticipation of a broader customer spread.

FINANCE ROUTES

Your existing investor base will be a key source of second round funding. Remember though, that the more you raise from investors, the less equity you are likely to retain for yourself, so getting the mix of equity and bank debt is important.

City and County Enterprise Boards are another valuable source of funding particularly if you are looking to do training; you may be eligible for a grant or investment funding.

Another option to consider is venture capital, which can provide medium to long-term finance in return for an equity stake in potentially high growth companies.  Obtaining venture capital involves selling a share of your business.  Therefore, business owners may not consider this to be their best option in all cases.

The Business Expansion Scheme (BES) afford outside investors the opportunity to invest in a business while taking advantage of personal tax incentives.  BES is likely to make a strong comeback as legislative changes come on board and may be an option worth considering for many businesses.

CONFIDENCE AND CONVICTION

As the owner of an established business, you will have developed a myriad of skills you didn't possess at the first fund-raising stage. Take courage from what you have achieved already, and where your business is now. Try to think ahead, develop your business plan with a balance of realism and vision for your business. You can now be more selective about the sources of equity you raise - choose your investors for their relevant skills as well as their funds. Work with a Bank that recognises the challenges and achievements of growing, and is hungry for your business.

Despite, or maybe because of the recent challenges in the market, I believe this is a great time for people looking to raise second round funding. Investors are refocusing on private growing businesses, for good returns . We at Ulster Bank are hungry to do business with growing businesses. So it's good news all round for growing a business.

Author: Orna Stokes, Senior Manager, Specialist Sectors, Ulster Bank. If you would like to talk to Ulster Bank about your options for expanding your business why not drop into one of our local branches and talk to an Enterprise Advisor or call us on 1850 314151

Published in the October 2007 Issue of Irish Entrepreneur