EXPAND WITH SECOND ROUND FUNDING

John C Cranfield, Chief Executive, First Step Microfinance

Want to develop your business further? Second Round Funding could be just what your business needs, writes John Cranfield.

Are you at a crossroad in your business and unable to make that crucial turning point? Are the initial costs incurred during the start up and development stages of your business leaving you short on funds? Then perhaps you could benefit from second tier funding.

There are a number of reasons why a business would require second round funding. Often there is the need to move to larger premises, you might want to up grade your equipment or increase your product range. Then again you might want to increase production because your market might be opening up. Therefore, you need working capital to allow you to buy materials, to increase your production and indeed to expand your labour force. With funding at the second stage these objectives can become a reality.

ELIGIBILITY FOR SECOND STEP FUNDING

In order to establish if a business is suitable for second tier funding we would look at the business to date. Obviously we would see the repayments from a first loan application coming in satisfactorily. But we would also have to have a look at the company’s two-year end of year accounts and management accounts. Due to a constantly changing and diverse world I don’t believe in projections more than two years. Having said that I would still want to see a new set of projects as to how the business plans to develop and expand over the coming years. It is essential before agreeing to assist with second step funding to establish where the money is going to be spent, how it is going to be utilized and how the payment capacity is going to be built up. The same principles apply to second phase funding as to a first loan. Although there is the added comfort that this is not a first time loan it is still important for a business to have a strong business plan and for them to adhere to the normal loan requirements.

MANAGING FUNDS

Of course it is essential to ensure that the second loan is utilized for the purpose of which it was lent. Therefore if it is capital equipment that is required to meet increased production demand then we would ensure that the money was used to purchase that equipment and the same in relation to labour or larger premises.

Although an application for a second step loan is treated in the same way as a first step loan there is one main difference. With a second step loan there is prior knowledge of repayments on the first loan.

Also quite often there is additional support from the lender to the borrower. By engaging a mentor a business can avail of additional support in their endeavor to up-scale the business and succeed.

UP-SCALING

Generally when a business gets to the stage where they are unable to meet increased demand they have two choices. They can keep the business at the level it is at, which can have a negative effect, or they can up-scale and take on the new challenges, which can have a positive ripple effect on the business as a whole. In order to further fund your business you will need capital and that’s where second step funding can come be introduced to ensure continued success, growth and expansion.

Author: John Cranfield is Chief Executive, First Step Microfinance. For more information email info@first-step.ie or call +353 (01) 2600988