Starting and knowing how to grow your business is hard.
While 1,100 new businesses start each day in the UK, just 41pc are operating after five years, according to government figures.
Even for those businesses that make it past five years, they can sometimes fall into a “steady state”. They do not grow, they do not fail. They keep going. They plateau.
To highlight the scale of this issue, some 95.7pc of UK firms are micro businesses, with fewer than 10 employees.
See also: How free publicity can grow your business
Just 3.7pc of firms are on the next rung, having between 10 and 49 employees.
And merely 0.6pc, or some 35,000, are classed as mid-sized, with more than 50 employees.
While some owner managers might be happy with maintaining a steady state, others want to go for growth.
But how do they break out and expand?
4 things you need to do to grow your business
►Look for appropriate sources of growth capital
Research from the British Business Bank shows that many small firms delay their growth plans because of insufficient access to funding. Just one in three (36pc) smaller businesses now use external finance compared with 44pc in 2012. Nearly a third of firms say they have delayed their growth plans because of this lack of funding.
However, while many commentators point to the problem that SMEs aren’t getting any funding, the reality is more nuanced.
Certain parts of the market function well. Smaller businesses are able to access both bank funding and finance from new entrants such as peer-to-peer platforms.
See also: How to grow your business from scratch
Larger businesses, or those with traditional assets, are generally well served by banks and specialist debt funds.
The real problem is for slightly larger, more sophisticated SMEs and owner-managed businesses, without the assets to use as security.
This is because while banks can provide funding that reflects the value of the assets in a business, they can’t help if a business has no further assets to borrow against.
As a result, small but growing firms must consider the difficult choice of scaling back their growth, diluting their ownership or agreeing to onerous personal guarantees.
►Keep ownership and control when you can
Many traditionalists argue that equity funding – through venture capital or private equity – is the solution.
Often that holds true. However, third-party investment does not suit every sector, business or owner manager. It also dilutes ownership.
Our own research of 300 SME business owners shows they do not want to issue equity in their business to fund growth.
Indeed, more than half (53pc) would be unlikely to issue equity to fund growth.
When looking at the reasons why, it’s clear that business owners feel they don’t need someone else telling them what to do.
Clients Caple has helped with unsecured lending support this view.
Paul Starkey, founder and managing director of the UK’s leading manufacturer of orthopaedic braces, Neo G, puts it succinctly: “We know what we need to do, we just needed the funding to do it.”
Charmaine Vincent, CEO of recruitment agency Baltimore Consulting, agrees: “I didn’t want to pursue private equity because it would have meant giving away a sizable amount of the business in return for funding. This would have meant I diluted the ownership and simply swapped one third party for another.”
The lack of genuinely unsecured lending is therefore a significant barrier to growth and keeps many firms in a “steady state” – neither growing nor failing.
►Keep accurate forecasts
Now many funders are beginning to base lending decisions on different criteria.
Rather than just relying on a single set of accounts, many funders now want to look at detailed forecasts which project the future performance of the business.
Firms asking a lender to fund growth, and buy into the strategy of the business, must support their case with clear, high-quality forecasts.
Consequently, it has never been more important for small businesses to have cash flow forecasts.
As these forecasts are only as good as the assumptions they are based on, business owners need to be able to explain them.
Often the challenge of justifying the forecast, and a bit of tension that comes with it, can help create higher quality and more accurate forecasts. These are far more useful than presenting an overly optimistic view of the future.
►Seek professional help
Given the increasing range of different finance providers and the need for high-quality plans and forecasts, it has never been more important to seek advice from an accountant or business advisor.
An accountant or adviser will help clarify what the firm is trying to achieve and the purpose of the funding. They will help test and improve the assumptions growth forecasts are based on.
The adviser will be able to assess potential sources of capital, as well as the cost and suitability of that capital for the business.
Business advisers are also well placed to take account of an owner managers appetite to risk and their approach to lending. For instance, many directors do not want to agree to onerous personal guarantees that many high street lenders require.
Once the accountant has recommended an appropriate source of finance, they can then help develop the business plans and forecasts that make the case for funding.
Often accountants and advisers make the difference between a firm accessing funds and not.
Breaking out of the steady state
While UK has an impressive number of start-ups, we need to do more to help these start-ups to survive, thrive and grow.
We need more small firms to grow and become mid-sized businesses. This means helping them to access funding, securing the right type of finance, create high-quality forecasts and seek professional help.
In doing so, more small businesses will become mid-sized firms, benefiting the business, creating jobs and boosting the UK economy.
Dominic Buch is co-founder and managing partner of Caple
