Taking a business to the next stage can be daunting. It requires confidence, capability and capital. In recent years, the third of these all-important ingredients was relatively easy and cheap to secure through bank lending. That changed with the financial crisis. Today, many business owners will tell you that the new reality means their growth ambitions have had to be put on hold.
However, there is a strong and available alternative form of finance to plan for the long term: equity. A sound balance sheet needs more than just debt. Equity funding was most commonly used to grow businesses before the world got hooked on the availability of cheap debt. Indeed, at the BGF we believe that equity has always been one of the best ways to fund a growing business.
Equity investors are taking a calculated risk on the future success of your company and as such are focused on its growth potential. This ensures that the relationship between management and equity investors is one of partnership. This is particularly true of a minority investor, such as the BGF, who will be keen to ensure that the interests of all shareholders are aligned with their own.
Equity investors work hard to further the growth prospects of the company in which they are invested and will generally bring with them a book of contacts, as well as broader financial and operational expertise. All of this will benefit your business.
The different characteristics of debt and equity mean that certain types of company are better suited to each and getting the mix right is crucial. For example, lenders are more interested in protecting themselves from downside risk, they will pay particular attention to the track record of the company to ensure that it is able to repay the loan and interest in the short term. Of course many smaller companies are less likely to be able to find loans as they do not have the necessary track record.
Also, as loans require regular cash payments of interest and principal, companies looking for loans need to have relatively stable cash flows. Very seasonal, lumpy or cyclical cash flows make lenders uncomfortable and will likely reduce the debt capacity of a company.
We are not suggesting that funding has to be equity or debt. And we are not saying that there is anything wrong with debt. But we do believe that that there is everything wrong with too much debt. It constrains businesses and stifles growth.
Equity investment, as part of the funding mix, can create a better balance and is an alternative that we would encourage fast growing smaller and medium sized businesses to consider. The question for any growing company should not be ‘how much can I borrow’ but rather ‘how should I plan for, and fund, future investment’.