Back in August I gave a high level overview of debt vs equity, and the role of each when you're looking to fund your future success.
Whether your business is well established or just a fledgling idea, accessing the right finance can be daunting.
With an increasingly diverse supply of finance solutions available to the growth focused business, understanding what the best funding option is can be confusing.
And it can get even more so when you start going into more detail - grants, equity crowdfunding or Venture Capital investment, anyone?
As such, today I wanted to delve deeper into the options available, so to help you start making the decisions that are right for your business.
The right money at the right time
If your business is a high growth, ambitious, early stage company or startup, looking to raise capital to scale can be fundamental to your future success.
Confidence in pursuing the right option at the right time is the key factor in most business decisions.
It’s an easy phrase to say, but as business funding options become ever more numerous and potentially complex, identifying the strategic need to embark on growth may not be simply aligned with the most effective methods of financing it.
What is best for your business, what is achievable and what offers the greatest potential for success are the key components in making an informed funding decision now and into the future.
And so in true 'knowledge is power' style, let’s define the broad options available before unpacking them all individually.
Understanding the game before stepping onto the pitch
- GRANTS - financial support via a government department, corporation, foundation or trust in the form of funds that are non-repayable, grants are usually awarded against a pre-agreed set of terms. Eligibility for grant funding will depend on multiple factors, often including location, workforce and projected growth potential.
- DEBT FINANCE - debt is effectively borrowing capital against a set of repayment terms, including timing and interest payments. Positives can include the speed of acquiring the necessary finance and the benefit of retaining ownership of your company. Negatives include the obvious obligation to repay within a set timeframe that can put undue pressure on a fledgling business, and failure to meet a repayment plan that could ultimately lead to liquidation of the company.
- EQUITY FINANCE - the exchange of an ownership stake in the business for the investors' injection of cash, advantages include the removal of the repayment obligation in a set timeframe, potentially reducing pressure on the business to grow more organically. The flipside is the owner has to forego a proportion of the business in ownership terms, and this could entail losing some control over their company.
Always explore the grant opportunities first
Before considering specific debt and equity solutions to fund your business growth aspirations, a network of UK-wide grant providers could be worthy of further investigation.
Whilst the money offered is not a loan or equity based investment, most grant awards will be subject to specific criteria and conditions.
Our expert team here at GrowthFunders have direct experience of winning grant applications for businesses across the UK, so if you have identified a fund you may be eligible for, or just want to chat through any potential options, dropping us a line can be a great starting point.
The debt options
Debt finance for business growth can take many forms and should be tailored to your specific needs.
From bank overdrafts to bonds, each can form an integral part of your business funding mix, so having a broad understanding of each can help make decisions that will have a real impact on future successes easier.
Overdrafts & Bank Loans
As with a personal account, business overdrafts are generally reserved for short term working capital requirements and cash flow improvement rather than any longer term capital expenditure.
Interest is charged accordingly, making loans and hire purchase agreements the smarter choice for the larger / longer term cash injection.
Having a solid relationship with your bank, whilst sounding obvious, can be invaluable when not only looking for short and longer term working capital, but to give you knowledge, insight and advice on funding your business for accelerated growth.
Better known as leasing and hire purchase, asset finance is often a preferred route to go when you’re looking at acquiring assets to nurture your growth aspirations, such as new IT equipment or vehicles.
As the lease or HP agreement is largely secured on the asset being financed, the need to put up extra collateral is much reduced and some plans will allow outright purchase following the agreement ending.
Bonds & Mini Bonds
Bonds - both retail and corporate - are an effective way for businesses to acquire investment in return for regular interest payments.
A predetermined ‘maturity date’ is set, at which point the original bond is redeemed and the investor is repaid their original investment.
The ability of the bond-issuer (the business) to set the terms of the agreement can make this finance route more attractive than a more standard loan agreement.
Whilst we are obviously talking about growth finance more generally throughout this post, there are certain debt products that can be tailored to the specific risks of your own business.
Growth capital loans and growth finance (or mezzanine finance) are forms of debt, but as a preferred instrument of VC investors, they can operate rather like equity.
In basic terms, the lender or investor can convert their interest into an equity or ownership stake in the business if the loan repayment isn't met.
Alternatives to the traditional bank lending model have become more prevalent following the banking crisis, opening up more bespoke options for your growth financing requirements.
The peer-to-peer (P2P) loan market enables savers and borrowers to contact each other more directly than going through a bank.
The overriding concept is that businesses can borrow more easily by essentially cutting out the middleman, whilst savers have the potential of higher rates of interest on their money.
Lenders and borrowers are matched via online platforms that allow businesses to present their case to the loan community
Lenders can loan smaller amounts against total financing requirements, spreading their investments across multiple businesses, whilst never directly investing in the business from an equity perspective.
Fully regulated by the FCA, peer-to-peer lending is a growth area in business finance, often offering greater flexibility and more transparency than traditional lenders.
Which debt option is right for you?
With the ever-evolving business debt landscape comes the potential to make the wrong decision for the growth aspirations of your business - even when you are in receipt of all the facts.
Here are some things to consider when deciding what debt route may be right for you:
- Ensure the terms of the agreement can be tailored to your business needs
- Do you need short term or longer term finance (i.e., an overdraft or a loan)?
- P2P loans can give you access to a wide range of investors
- Remember there is tax relief on debt interest payments
- If a business is in a period of growth, the amount of asset-backed funding available will track growth
Equity or not equity? That is the question
Exchanging a stake in your business for a capital injection can be one of the most important decisions you’ll make on your growth journey.
Understanding the equity solutions that can help you reach your goals beyond those that are purely financial can open up a range of options that could efficiently accelerate your business aspirations.
So, what are the options available in the equity marketplace?
People focused on investing in businesses with high growth potential - often on a high risk, high return basis - Business Angels look for a return on their investment by taking a proportional ownership position in your business, commensurate with the amount invested and the potential uplift.
Increasingly, Business Angels club together and invest as a group or a syndicate, invariably with a 'Lead Angel' acting as the key communication point for the multiple members and the business.
When considering Angel investment into your business, always look beyond the capital.
A good Angel Investor should also bring invaluable experience, particularly in the investment stage you find yourself. They will invariably make investment decisions quickly, so be sure to do your homework on finding the right Angel for you.
As with Angel Investors, VCs should bring a wealth of experience alongside their capital investment.
They invest into a portfolio of businesses that allow them to offset any losses against their successes. Amounts invested tend to be higher than Angels, and as a result startup investment is rarely a VC stronghold - allied to the fact that a strong track record is a general VC investment criteria.
Strategic knowledge should be a key element to look for from VC investment, assuming you meet the high growth / high return potential they are looking for.
Whilst being potentially complex, costly and time consuming, VC investment can offer real business growth acceleration alongside razor sharp insight.
Private Equity (PE)
Money sourced from high net worth individuals or institutions, Private Equity (PE) funding, as the name suggests, is offered in return for an equity stake in your business or project.
PE investment typically supports management buy-outs or buy-ins to more established businesses, rather than the investment into early stage startups that VC funding provides.
However, as with VC investment, high growth potential is a key driver for attracting PE funding.
PE firms typically work alongside the established management team of the business, bringing hands on experience alongside the injection of funds. They can provide a cleaner connection between management and investor than other structures, such as publicly listed companies with many thousands of individual investors.
The PE firm will look to add as much value to the business as possible before exiting via the stock market or a corporate buyer / acquisition, generally over a four-to-seven year investment holding period.
The digital equivalent of attracting VC or PE investment, equity crowdfunding platforms allow the startup or high growth business the opportunity to pitch for funding from what can literally be thousands of potential investors.
As with VCs and PE funds, you need to have a super solid business case, including all supporting collateral you would expect.
One extra element not usually required in more analogue settings is the pitch video, a short recorded synopsis of your business idea - and the more professional and incisive it is, the better.
Generally speaking, there are three main equity crowdfunding models:
- Pure crowdfunding: each investor has equal stakes and all become a direct shareholder
- Angel-led crowdfunding: one experienced investor leads the round, including terms negotiation and due diligence, and then the ‘crowd’ follow
- Nominee structure crowdfunding: the online platform plays an ongoing role representing their crowd investors’ interests by appointing a single nominee
Co-investment: the evolving model of equity crowdfunding
In recent times, equity crowdfunding has started evolving into a co-investment model.
Co-investment provides retail, angel and sophisticated investors with the opportunity to invest in some potentially very profitable deals, alongside large financial institutions, such as private equity funds and venture capital firms.
The reason the co-investment model is becoming more and more attractive to investors is it generally means investment opportunities are more thoroughly pre-vetted, with considerable due diligence carried out, and realistic valuations given.
This is generally due to the involvement of the large institutional funds, but also the fact institutional investors and investment platforms are subject to increasing regulations from the FCA.
At GrowthFunders, we’re pioneering an online co-investment platform that allows a range of investors to invest directly into businesses and projects that deliver growth and impact.
We work with ambitious entrepreneurs to facilitate investment, but also take businesses through an investment readiness process that is highly attractive to investment networks.
HMRC: friend not foe
When considering growth investment for your project or business, it is wise to consider the often attractive tax benefits that could influence your decision - and some of the most notable come in the for of SEIS, EIS and VCTs.
Seed Enterprise Investment Scheme (SEIS)
A company can be eligible for the Seed Enterprise Investment Scheme, and therefore offer the relevant tax benefits for investors, so long as the following criteria are met:
- Employ fewer than 25 full time employees
- Have less than £200k in gross assets
- Have not received any EIS or VCT investment (see below)
Currently, a maximum of £150k can be raised under SEIS.
Enterprise Investment Scheme (EIS) & Venture Capital Trusts (VCTs)
The old brother to the SEIS, the Enterprise Investment Scheme targets larger companies or more established businesses.
To be eligible to receive investment through EIS or VCT, a company must meet a number of criteria, including:
- Employing fewer than 250 full time employees (extending to 500 for ‘knowledge intensive’ businesses)
- Having less than £15m in gross assets (and no more than £16m post raise)
- Not be listed on a recognised stock exchange (although AIM is permissible)
For any entrepreneur looking to raise capital to grow, wherever you are on your business journey, knowing what options are available is key to making successful progress.
Starting with grants, it can’t be denied they are an extremely favourable financing option.
Recommended to always be accessed by any stage business if available, it’s important to understand grants are not a long term financing option for those high growth businesses looking to make headway in the market.
For this reason, shortly after accessing any form of grant you will often need to consider additional financing options, which may take the form of debt or equity (or both), to help continue driving your business forward.
With equity investment, it can be a great way to finance many different businesses.
Whether starting out or experiencing a high-growth phase, equity is an important part of finance arrangements for businesses and usually brings broader expertise with it, with some investors taking a minority stake, whilst bringing invaluable advice and networks.
Investors’ interests are aligned with the business, meaning all are on board for the growth journey.
Under the equity investment umbrella comes equity crowdfunding, the more modern term for this often being seen as co-investment. This can be an attractive financial model not only for businesses, but also for investors.
Such investment style enables retail investors looking to make smaller contributions to be able to invest alongside professional, sophisticated and institutional investors.
As such, this type of investment model not only delivers the capital needed, but also allows companies to benefit from brand ambassadors in the retail investors, and experience and networks from the professional and sophisticated investors, as well as accessing further funding from institutional funds.
In terms of debt investment, it will undoubtedly be involved in growing a business.
Debt comes in many different forms, each of which can be more or less appropriate to the type of business, the stage it is at in its development and the plans it has to grow - often an established company will use a blend of different debt products from a range of providers.
On the financing journey it is highly likely a business will need both a mix of debt and equity finance, which brings additional value and benefits from those sources involved.
At all times, taking financial advice is always strongly recommended. We aim to provide a considerable amount of educational information on all types of financing here at GrowthFunders, but taking professional advice ensures you're able to begin down the raising capital path most suitable for you - especially when you've taken the time to increase your own knowledge, too.