Understanding Business Accounting For Dummies, 2nd Edition (125 page)

The British Venture Capital Association (
www.bvca.co.uk
), the European Venture Capital Association (
www.evca.com
), and the National Venture Capital Association (
www.nvca.org
) in the US have online directories giving details of hundreds of venture capital providers both inside and outside of their respective countries and continents.

You can see how those negotiating with or receiving venture capital rate the firm in question at the Funded Web site (
www.thefunded.com
) in terms of the deal offered, the firm's apparent competence, and how good they are at managing the relationship.

Business Angels

One possible first source of equity or risk capital is a private individual with his or her own funds, and perhaps some knowledge of your type of business. In return for a share in the business, such investors will invest money at their own risk. About 40 per cent of these individuals suffer a partial or complete loss of their investment, which suggests that many are prepared to take big risks. They've been christened ‘business angels', a term first coined to describe private wealthy individuals who backed a play on Broadway or in London's West End.

Most business angels have worked in a small firm or have owned their own businesses before, so know the business world well. They are more likely to invest in early-stage investments where relatively small amounts of money are needed. 10 per cent of business angel investment is for less than £10,000 and 45 per cent is for over £50,000. They are up to five times more likely to invest in start-ups and early-stage investments than venture capital providers in general. Most business angels invest close to home, and syndicated deals make up more than a quarter of all deals, proving that angels flock together!

In return for their investment, most angels want some involvement beyond merely signing a cheque and may hope to play a part in your business in some way. They are looking for big rewards. One angel who backed the fledgling software company Sage (who supply accounting, payroll, and business management software for small and medium sized companies) with £10,000 in its first round of £250,000 financing saw his stake rise to £40 million. Various industry estimates suggest that upwards of £6.5 billion of angels' money is looking for investment homes, although the sum actually invested each year is probably much smaller than that.

To find a business angel, check out the online directory of the British Business Angels Association (
www.bbaa.org.uk
). The European Business Angels Network Web site has directories of national business angel associations both inside and outside of Europe. Go to
www.eban.org
and click on ‘Members' to find individual business angels.

Banks: Long-Term Money

Banks are the principal, and frequently the only, source of finance for businesses that are not listed on a stock market or that don't have private equity backers. In the UK, for example, businesses have nearly £55 billion on loan from the banks at the time of writing, which is a substantial rise over the past few years.

For long-term lending, banks can provide term loans for a number of years, with either a variable interest rate payable, or an interest rate fixed for a number of years ahead. The proportion of fixed-rate loans has increased from a third of all term loans to around one in two. In some cases, moving between a fixed interest rate and a variable one at certain intervals may be possible. Unlike in the case of an overdraft (see the section ‘Banks, Short-Term Money'), the bank cannot pull the rug from under you if circumstances (or the local manager) change.

Bankers look for asset security to back their loan and to provide a near-certainty of getting their money back. They also charge an interest rate that reflects current market conditions and their view of the risk level of the proposal.

Bankers like to speak of the ‘five Cs' of credit analysis - factors they look at when they evaluate a loan request.

Character.
Bankers lend money to borrowers who appear honest and who have a good credit history. Before you apply for a loan, obtain a copy of your credit report and clean up any problems.

You can check out your own business credit rating at CheckSure (
www.checksure.biz
). By using the comparative ratios for your business sector you can see how to improve your own rating. The service costs around £6 to £10, depending on the level of detail you require.

Capacity.
This is a prediction of the borrower's ability to repay the loan. For a new business, bankers look at the business plan. For an existing business, bankers consider financial statements and industry trends.

Collateral.
Bankers generally want a borrower to pledge an asset that can be sold to pay off the loan if the borrower lacks funds.

Capital.
Bankers scrutinise a borrower's net worth, the amount by which assets exceed debts.

Conditions.
Whether bankers give a loan can be influenced by the current economic climate as well as by the amount.