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‘A well run business shouldn’t need to raise capital’ – Poll result

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  • 26/10/2017
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‘A well run business shouldn’t need to raise capital’ – Poll result
In the digital age, rafts of technological innovation are transforming industries at every level and ushering in a host of tech based challengers, leading to the need for firms to invest in change. But how do brokers fund these potential investments?

According to this week’s Mortgage Solutions poll result, half (51%) of the brokers who responded said they did not make significant cash investments in their business. For those who did, cash flow from profits (27%) was the biggest source of funding. Personal cash (18%) also proved a common source of funds, while no-one reported using invoice finance.

 

Dangerous overheads

Martin Stewart, founder and director of London Money, notes that most firms should be able to fund most expenses without having to find funding sources.

He says: “A well run business shouldn’t need to raise capital. It should be profitable because unless you control the overheads then expect the overheads to control you. I am always amazed by how poorly run some financial advice businesses are. If I was a consumer I would be fact finding the company and the adviser to see how well they were set up financially before entrusting them with my financial future.

“I think the only time a business needs to raise capital should be when the outlay is likely to put a strain on the balance sheet – purchasing premises, other businesses or aggressively expanding in to a national brand. Everything else can come out of petty cash,” Stewart added.

 

The risk of debt

Ian Gray, senior partner at Kinnison, warned about the risk of raising debt or using equity investors to inject funding: “When we remember back to the credit crunch in 2008, the firms that went under were those that had huge fixed overheads and a lot of debt to service. Because the mortgage market fell off a cliff, brokers couldn’t do business for months – so you had this huge interruption in your turnover.

“At the firm I was with at the time, we had to get rid of half the brokers and had an office which only cost about £5,000 a month, we also had to take all the brokers off fixed salaries and put them on commission.

“So the lesson learned from the credit crunch is that to survive lean conditions, which happens sometimes – such as the difficult tradition conditions due to Brexit – it’s important that brokers are flexible with how they deal with their fixed costs.”

 

Cash reserves

But when push comes to shove, significant investment can be a necessity so building up a reserve is vital. One broker, who wished to remain anonymous, said: “We are lucky that, over the past seven years we have managed to build a decent cash reserve. We run with no loans and pay every bill on the day of receipt. I like to know that the money in the bank is mine and I haven’t got to allow for anything.

“As part of a network, we have support with technological advances, but also invest into our own systems to ensure we are never at the behest of a network.”

And with the prospect of a significant business move on the horizon, funding that is essential: “At present, we are studying the market and are aware of the way the market is moving. With this in mind, we may look at establishing a separate call centre style operation to deal with customers not looking for the traditional face-to-face advice. The call centre will be very much based around embracing current technology,” he added.

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