Cash flow for a business is usually generated from profits realised. Occasionally, however, additional funds are required for expansion of the business, major capital acquisitions, or for some other purpose that the director\shareholder feel will create additional profits and further increase the value of the business.
Funding sources for an SME can be both internal (loans or new share capital introduced from shareholders) and external (banks, other financiers, private equity houses, business angels and grants).
Funding can take the form of debt or equity. Debt tends to be cheaper in the long run, because once it is repaid all of the profits and capital value of the business remains with the owners. With equity investment, the new outside shareholders will probably want some form of control over the business and may want to be actually involved.
Once the need for additional funding has been confirmed, all avenues of obtaining the desired funds need to be explored and the best source or sources identified. An approach to possible sources of funds then needs to be prepared.
Assess level of future funding requirements for business expansion plans.
Review the current financial statements and up to date management accounts for the company and develop financial projections for the business.
Assess company's current financing strategy and determine best strategy going forward to raise the funds, to enable the business to carry out its plans.
Investigate various options for external funding and explore the different options available and the feasibility of obtaining funds from those sources.
Create a target list from the preferred sources of funds – financial institutions, outside third parties, etc.
Prepare an approach to prospective sources of funding specifying the business case for the investment.
The need for the funding and the amount to be raised has been confirmed and will improve your likelihood of success.
You have a specific list of targets to be approached as a source of funding.
A professional approach to lenders has been prepared improving your chance of succeeding.
You can demonstrate precisely how the additional funds will be spent.