The COVID-19 pandemic has wreaked havoc and left many small-business owners struggling in its wake. While the short-term outlook varies greatly by industry, it’s important to consider what recovery mode will look like once the economy begins to return to a state of normalcy or, more likely, establishes a new normal. Having the right strategy in place can help companies be prepared to rebuild and hit the ground running.
The first step in developing a rebuilding plan for the post-Covid world is determining just how deeply a business has been affected. There are different factors involved, starting with the hard numbers. Updating profit & loss and cash flow statements and comparing them to previous years will be useful. Consideration of other ways in which companies have been impacted is also important. Staff reductions, cuts to marketing budgets, changes in customer preferences, etc all need to be factored into any recovery plan. These may well necessitate a change to a company’s business plan, operating model and strategic goals.
For a large proportion of SMEs it is likely that increased working capital will be required and others will look for an injection of capital to deliver growth in a post-Covid world.
There a two contrasting options for companies looking to raise capital, debt or equity. Debt can come in many forms, most commonly traditional bank loans, asset-based finance, etc. Equity backed finance also comes in many forms, many of which will not be suitable for every company
Small business owners largely decide to stretch their debt as far as they can to avoid any dilution of equity. Debt funding can often prove to be a cost-effective option, especially in the current low interest rate environment. However, business leaders must ensure that this debt provides them with sufficient resources to fulfil growth plans. If this is not the case, then a combination of debt and equity could provide the balance, and financial clout, required to successfully expand business operations or enter new markets.
If business owners are set on bringing a product to market quickly, then the issuing of shares may be the only option. The dilution of equity can become more palatable if an investment partner represents “smart capital” and brings expertise and contacts, for example, to the relationship. Another key factor to consider in the debt or equity debate is the extent to which business owners are willing to put their personal finances on the line. For some, the securing of a bank loan will require them to guarantee the debt with their own assets, in most cases, the family home. Combining affairs in this way presents a risk to the business owner and their dependents, something that can be avoided if a suitable equity partner or investor is selected instead.
Successfully securing any source of funding depends upon the presentation of a solid business case. It is crucial that business owners do not get swept away by ‘Dragon’s Den syndrome’; a charismatic presentation style and genuine passion for the firm’s product or service will only get one so far. Solid facts, figures and credentials are essential if financial backing is to be secured.
Before meeting with a lender or potential investor, key materials must be gathered including robust financial projections, profit and loss accounts, the balance sheet and a robust business plan; including carefully evidenced information about market dynamics, market share, logistics, target client segments, route to market, etc.
Only by being carefully prepared can companies access the financing that they need to thrive in a post-Covid world.
