Show Me The Money
QUESTION: “I run a small business. We need to raise finance to support our growth: where do I go for help?”
ANSWER: Funding options fall into one of three main categories: Grants; Debt; or Equity. Your company may be eligible for a grant – check out ww.financesoutheast.com – but for now we will concentrate on the other two categories.
DEBT
Organisations to approach for debt finance include the high street banks, specialist HP/leasing agents, specialist mortgage providers and specialist asset finance providers.
Debt finance is available in various forms:
Bank debt
A loan over a specified term, typically two to five years, often known as a “Term Loan”.
Bank overdraft
Repayable on demand, and often more expensive than a term loan.
Mortgages/leasing/HP
A form of debt secured on a specific asset owned by the company. Repayments may be scheduled for repayment over longer periods, particularly in the case of property.
The amount the bank will be willing to lend will be limited to a proportion of the value of the specific asset.
invoice discounting/factoring
Only certain types of trade debtors are acceptable (eg business debtors not private individual debtors) and there will be additional sales ledger administration costs. This can make factoring more expensive than a term loan. However, the amount that you are advanced is based on a percentage of your debtors, so the advantage is that as your sales/debtors grow so does the amount that you borrow.
EQUITY
You can get equity finance from various sources, depending on the amount of money you require.
Business Angels
Individuals looking for an opportunity to invest in a company with potential. Low levels of investment are often available (typically £50k to £500k). Business Angels are often experienced entrepreneurs, who can add value as well as providing finance. Raising money this way is quicker than raising Venture Capital finance, as you are only dealing with an individual rather than with an organisation. However, this route typically involves surrender of some shareholding, and a Business Angel may well want to actively participate in business as a condition of their investment.
Venture Capital Trusts (“VCTs”)
VCTs are quoted limited companies set up to aid investment in smaller unquoted trading companies (including AIM listed stocks). Most VCTs are run by investment managers and raise their funds from private investors. Current tax incentives make it attractive for investors to invest through VCTs. Generally VCTs invest smaller amounts, typically £200k – £2 million.
Venture Capitalists (“VCs”)
Venture Capitalists specialise in investing in companies with a high growth potential. Typically they will be looking to invest more substantial amounts (£5 million plus). However, some specialised VCs will look to invest c.£1 million plus.
Working with Venture Capitalists is likely to involve some loss of control over the company, and they will also want to have a clear exit strategy (trade sale/float) in order to realise the gain on their investment, within a defined period of time. This can lead to a short/medium term view (three – five year exit plan), which may not coincide with your views of how your business should develop.
South East Funds
Pocket (proof of Concept Fund)
Up to £30k repayable for SMEs looking to jointly exploit technology or ideas with a university or research establishment. www.financesoutheast.com
Hub Catalyst Fund
Up to £30k loan for portfolio clients of the Enterprise Hub Network.
www.financesoutheast.com
Accelerator Fund
Up to £200k loan facility – often unsecured – to support growth companies.
www.financesoutheast.com
South East growth Fund
Supported by SEEDA. Up to £500k equity fund, focused on growth companies.
www.segrowthfund.co.uk
WHAT TO DO IF YOU NEED FINANCE
If you are thinking that now is the right time for your business to consider refinancing: first, prepare your business plan (your local Enterprise Hub Director or your accountant can help you with this); second, discuss your needs and goals with your adviser, or with Finance South East, and they will assess your options for the amount and type of finance you require and help you present your business case to any potential investor to maximise your chances.
This guide has been prepared jointly by Sally Goodsell, Chief Executive of Finance South East and Michelle Ward, Corporate Finance Associate Partner from Roffe Swayne Chartered Accountants.
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Created Date: 02-02-2006
