Four out of five small businesses in the UK fail to survive beyond the first six years. That is a frightening figure and it’s little wonder that banks demand a professional business plan before they will consider any form of investment in your business. For most designers who want to set up their own business, either solo or in partnership, the bank is one of the first stops, not only for advice, but also for financial backing.
So what steps do you need to take to prove you’re on to a winner? In fact, how do you gauge – apart from faith and confidence in your own creative genius – that you have what it takes to be successful, rather than one of the four out of five which fail? The ingredients are many and the chemistry and timing has to be right; and you can’t have control over everything. But the areas where you have a controlling stake – at least to start with – are the financial elements of setting up a business.
For the ambitious designer, there is no shortage of lenders willing to cover short- or long-term loans. But an independent financial advisor is essential to help you decide on the finance you need, whether you can pay borrowed money back and within what sort of time-frame.
According to the small business unit of almost every high street bank, many of those four out of five business tragedies could have been avoided if a little bit of time had been spent talking to the experts and taking advice. Of course, the banks would say that, but it is good advice – you need financial guidance on the path to profitability.
Two steps are vital before a designer sets up in business; the first is to compile a business plan, and the second is to find an independent financial advisor. The advisor can help with the business plan, but most people on both sides of the fence – those setting up and the financiers – agree that the best way to find a good independent advisor is by word-of-mouth. The advisor can be a solicitor or an accountant, but it’s important that whoever you choose is someone you get on with, who has a track record of displaying sound business judgement and who can become part of your management team.
Putting together a business plan is based less on personal judgement. According to Claire Alexander, partner at accountant Alexander Salmon, a professional business plan is an essential part of setting up a new business. “It’s a blueprint of your business, and ultimately you’re using it to sell your financial credibility to a potential financier,” says Alexander.
But, she adds, people do shy away from forming such a plan. “Part of the problem is the language – cashflow, market research, profit margins, turnover. For many designers, it sounds alien and more suited to the multi-national giant corporations than a fledgling studio,” she says. “In fact, it’s all down-to-earth stuff. Designers are used to studying strategy – it’s part of the service they sell, so why shouldn’t they do it for themselves? Especially when it means the difference between being a successful business and being out of business.”
Establishing a relationship with your financial advisor and compiling a business plan should have pinpointed what sort of financing package you need.
There are various loan schemes available, as well as other forms of financing. Most new companies need a funding facility and many are serviced by the high street banks. Short-term loans can be met through a bank overdraft, but overdrafts are the most expensive way of borrowing.
Medium-term funds can be provided in the form of loans, but security is usually required.
Some consultancies may need longer-term financing and there are several routes available, including long-term loans. Other options include backing from private or institutional investors and venture capitalists. While the benefits of these options include not having to pay interest, the investors are likely to want a shareholding in the business and to take a share in the profits.
And those raising finance through venture capital could find themselves faced with less control of their business, greater accountability, and the pressures of future expectations from the investors. Also, fees are generally involved.
Ultimately, good planning is essential to survive in the business jungle. The business plan is for life, and a good management team will review its business plan – including examining its sources of finance – regularly.