Here at MAP, we work with agencies of all different shapes and sizes. That can be anything from a close-knit team of 5 generating revenue of £300k through to teams of 50 bringing in £5m plus. Some are ambitious with owners that thrive on the challenges of scaling a business, others are very clear that they don’t want the headaches that brings. The beauty of owning your own business is that it’s on you to decide what agency you’re going to craft to deliver on the personal life you want. Both ends of the scale are genuine, worthy business models.
The one common trait is that every one of them is looking to improve their agency in some way. Make it more profitable, more predictable, more robust and protect their personal investment. At some point, every single one of them will have considered raising funding in order to help do that.
Here’s the thought process to follow if the idea of raising finance is on your mind.
#1 Do You Have a Funding Requirement?
It may seem like an obvious first step, but it’s common to ask the question and get an unsure answer. Most service-based businesses can be grown organically if you’re winning work that is being priced correctly and generating cash by having the right financial systems and processes in place. That being said, there are always exceptions where your particular aspirations may require a cash injection. It could be for anything from working capital, the development of products, to investing in the team or a particular marketing strategy.
Your Finance Forecast is the way to cut through the confusion and know for sure if you do have a funding requirement. By mapping your scenario into a 3-way forecast showing your P&L, Balance Sheet and Cashflow, you know for sure if there’s a requirement. It becomes factual and no longer based on a gut feeling which allows the decision to be made more confidently. The last thing you want to do is raise finance to paper over the cracks. Often if you have a cash flow problem it’s actually a profitability problem. If you find yourself looking to bring in some cash to cover losses, be sure to be fixing the source of the problem at the same time otherwise it’s a slippery slope.
#2 How Do I Go About It?
So you’ve built your Finance Forecast and it’s demonstrating a need for a certain level of cash. The next step is to consider the best source of funding and that’s split into two very different categories – Equity and Debt. If you go down the route of Equity Finance, you’ll be bringing a cash investment into your business in exchange for shares and diluting your existing shareholding. For that reason, it’s important to ensure that it’s ‘smart money’ and that the investor is bringing something to the table other than just the cash. There will be people out there who have been on the same journey before and can bring expert guidance or a bank of useful contacts. You want to make sure that if you’re giving away 10% of your business, your retained 90% is worth more than 100% would be without them. Typical sources are friends & family, business contacts, online platforms, brokers, EIS schemes etc.
The other more common funding type is Debt Finance – where you borrow cash to be paid back at a future date, usually with interest added. It’s more popular as it tends to be easily accessible and less of a commitment. An overdraft with your existing bank is usually the first port of call, followed by credit cards, fixed repayment loans or invoice/asset finance. The trade-off is often that unless you’re an established business with a strong balance sheet then personal guarantees by the directors can be required. It can also be costly in terms of initial fees and interest, so the decision to be made is whether that cost is outweighed by the progress it would allow you and the business to make.
#3 What Next?
It’s a genuine part of many business models for funding to be required in order for the goals to be hit. The key takeaway is to make sure the right questions are being asked, it’s based on facts and not gut feelings, and that it’s not being brought into the paper over the cracks of a struggling business.
At MAP we work exclusively with digital and creative agencies to help them build more predictable and profitable businesses. Please give us a call if you want to take your agency to the next level today.