Raising Finance for Growth
Capital is the lifeblood of growing businesses and, at some point, most entrepreneurs have to raise funds.
The prospect of having to access finance, however, is one that can daunt even the most self-confident of business people. They face a bewildering array of options, each cloaked in jargon and technical shorthand which need expensive specialists to translate.
Also, some of the long-established rules no longer hold true. The 2008 banking crisis drove big changes, with demand and technology allowing new alternative finance providers to enter the market. For example, equity crowdfunding, peer-to-peer lending and co-investing have become more established and accessible for the UK’s growth businesses and changing government priorities have meant significant changes in the availability and structure of business grants.
On the one hand, this wider choice presents more opportunities, but, on the other, it adds further layers of complication. Should your injection of capital be in the shape of a grant, debt or equity? What about banks and crowdfunding? Where do private equity firms or a venture capitalist fit in? Is it possible to use a combination?
What makes the situation even more fraught, is that the choices you make in navigating these waters are some of the most important you face as an entrepreneur. Whether your business is a start-up or well established, accessing and structuring the right finance will have a significant impact on the speed at which your business grows and the size it eventually reaches.
At Growth Capital Ventures, GCV, an FCA registered fintech company driving many of the changes in finance, we help entrepreneurs make the informed choices that will nurture future growth and we dispel the mystique that surrounds fund raising. Here’s a brief round-up of the funding sources available.
In broad terms, there are three types of finance a business can aim to secure for growth: grants, debt, and equity. These can be used on their own or in combination.
Grants come in a wide range, whether it’s a start-up grant or a research & development grant for an established business. They usually ultimately come from government and are therefore subject to change – even more so with Brexit - so you need to know where to look for the most up-to-date information.
The type of grant that is right for your business will depend on a number of criteria such as: the type of business; stage of growth; geographic location; and growth plan. For young businesses grant funding is extremely useful because, after all, it’s free money - isn’t it?
Well, up to a point. We all know, there’s no such thing as a free lunch. In fact, grants usually come with strings attached.
Applying for a grant, particularly for larger amounts, can mean jumping through hoops, just like applying for any other form of finance. Also, while the grant awarding body won’t be looking for a return on its money, it will expect other benefits, usually in the form of jobs or innovation outputs.
Also, remember, if your application is successful, grant moneys aren’t paid upfront but are normally claimed during or at the end of a project, so build that into your cash flow forecast.
If you can’t get a grant, there’s debt finance. Most businesses will need debt at some stage, even an overdraft. It’s important to take the right form of debt for the stage the business has reached. You shouldn’t, for example, use short-term debt, such as an overdraft, to fund long-term plans, nor should you take on long term debt to tide you over a short term cash flow problem.
The main types of debt for a business are: loans and overdrafts; finance secured on assets; and fixed-income debt securities. Increasingly, there are also peer-to-peer (P2P) business loans and start-up loans. P2P was pioneered in the UK in 2005 and ten years later platforms have enabled lenders to provide more than £4.4bn to UK consumers and businesses. The peer2peer finance association is confident that the sector will continue to grow significantly from this base.
There is tax relief on interest payments and debt finance - unlike equity – doesn’t entail giving up a stake of your business. On the other hand, it may have to be secured against an asset of the business or the owners.
Equity investment, in the form of selling shares, will be the most suitable form of finance for high growth businesses, particularly startups and early stage companies. Equity finance can be raised solely from existing shareholders or from third-party investors who have no existing stake in the business. The public may also acquire equity stakes in early stage high growth companies through equity crowdfunding platforms, a significant development over recent years which allows companies seeking funding to connect with hundreds of thousands of potential investors by matching companies with would-be investors via an internet-based platform.
At GCV, we have refined and developed this with our co-investment model whereby the public buy shares in a company alongside experienced angel investors or institutions who anchor the investment. This gives suitable investors the confidence that the business has been thoroughly vetted by experienced business people and it gives the company the advantage of having access to the expertise and contacts of business angels.
In my experience, for many entrepreneurs, the decision to go down an equity funding route can involve considerations beyond the purely financial because it means them giving up an element of control - and that can be a difficult adjustment.
It’s a personal decision. The entrepreneur could own 100% of a business worth a £1 million or they might dilute their own equity by putting it through successive rounds of financing to grow it and end up owning 20% of a business worth £100 million. There’s no right or wrong answer, it’s down to an individual business.
Whatever form of fund raising you opt for thorough preparation is vital. After all, you are asking people for money and, before they invest it, they will want to be sure you have a sound business. They will look at your business impartially and you must do the same, which isn’t easy if you’ve put years into building it.
So, in preparing your business plan, go back to basics. Are the ambitions and plans you made when starting out still appropriate? Has the market changed? What are the challenges and what pitfalls might the future hold?
Whether your business is a well established company or an early stage start-up, accessing and structuring the right finance will have a significant impact on your future growth plans. The speed at which your business grows and the scale your business reaches will be driven by a number of your decisions. The funding package; including the structure, support and advice you take will have a major impact. It’s one of the biggest decisions you will make and with an increasingly diverse supply of finance solutions available to the growth-focused business, understanding what the best funding option needs a clear understanding of what’s available so you can decide what best suits your business.
Growth Capital Ventures have developed a guide which can be viewed at www.growthfunders.com/resources which is aimed at entrepreneurs who are looking to raise capital, giving a detailed overview of each option available.
Confidence in pursuing the right option at the right time is the key factor in most business decisions, as such, whether you are an entrepreneur embarking on your first startup adventure or the director of a century-old family business, if you are focused on finance to unlock your growth aspirations, ensure you seek the right advice for both you and your business.
Visit www.growthfunders.com or call 0330 102 5525
Published: 09 January 2018