If you’re looking for a sizeable chunk of cash to grow your business, the traditional sources of finance are: venture capitalists; business angels (wealthy individuals); public markets, such as the Alternative Investment Market (AIM); Government-backed regional agencies; and banks and other financial institutions.
There are newer ways of getting investment too, such as crowdfunding. Some of the core principles of success will be the same, no matter which method you choose.
Bob Woodland, a serial entrepreneur who heads training specialist Redtray, says the trick is to be persistent. He should know; for his first venture he spent a year doing the rounds before successfully raising just over £1 million from legendary investor Jon Moulton (who rejected him the first time).
‘It’s about confidence,’ says Woodland. ‘If you have a list of potential fund providers, pick the one you least want to deal with and use it as a rehearsal. The first time will be the most difficult because no one knows who you are. Once you’ve made money for investors, it’s a different story.’
Here we outline 15 of the best options currently available.
1) Venture Capital
Getting backing from a VC firm is extremely difficult. It will look for high growth prospects from a company operating in a unique space. A management team will need to show they are ambitious, switched on and ready to push the boundaries in marketing, sales and finance. If the financials aren’t a priority for you, make them one, as the numbers will be scrutinised and matched against key performance indicators.
The better you prepare, the less radical the changes to your company will be. That said, the classic dilemma for an entrepreneur is whether to go it alone or give up control of the company.
Redtray’s Woodland observes: ‘You often hear people saying that a VC strips you naked and then hands back clothes based on performance.’
That’s not the kind of deal you want to be striking. For Woodland, it’s important to pitch for additional capital at the right time in the company’s development and to be realistic about the amount you’re asking for.
‘You need a vision for the business,’ he says. ‘There’s nothing worse than to go begging for money and admit that if you don’t get investment, it’s all over.’
For more information, contact the British Venture Capital Association at www.bvca.co.uk
2) Invoice discounting / factoring
‘Many businesses fail to realise that one of the biggest assets on the balance sheet is the money owed by debtors,’ says Alex Hilton-Baird, who heads up his eponymous commercial brokering firm.
This can be done by opting for factoring or invoice discounting, which involves hiring a third party that will release between 80 per cent and 90 per cent of the money owed to you.
Naturally, there’ll be a charge, similar to a bank overdraft – but if you opt for invoice factoring, a service fee will also be charged, as you’ll be effectively outsourcing your credit control function.
It works well with other forms of financing. Hilton-Baird says: ‘Cash flow is the most important thing for a business – people forget that. They chase turnover or focus on profits, but unless you’ve got cash your business isn’t going to survive.’
3) Aquis Stock Exchange
Aquis Stock Exchange, run by NEX, allows businesses to raise capital through Initial Public Offerings (IPOs).
It’s a stock market which provides primary and secondary markets for equity and debt products. AQSE operates two markets: Access (designed to be the first stage of being a publicly quoted company) and Apex (for companies who have a proven growth strategy and higher standards in governance).
4) Venture Capital Trusts
Venture capital trusts (VCTs) were launched in 1995 to encourage investment in fledgling companies with bags of ambition who were lacking the cash flow to facilitate traditional forms of debt. For investors in these trusts, the risks of putting money into small, almost speculative, concerns are counterbalanced by lucrative tax breaks.
Investors pumped £1,122 million into venture capital trusts during the 2021/22 tax year, 68 per cent higher in comparison to the 2020/21 total of £668 million. Changes were made to VCTs in 2017 so that investors only put money in ‘true growth’ companies – in other words, firms that generate significant cash flow and earnings. So, if you’re fronting a concern with £15 million or less in gross assets and have fewer than 250 employees, you’re eligible for some of that cash.
The rules state that a company must not raise more than £5 million in finance during a 12-month rolling period through a VCT, Enterprise Investment Scheme (EIS) investment or certain other Government incentives. The only exception comes with ‘knowledge intensive’ (carrying out research, development or innovation) companies which can raise up to £10 million.
AIM was set up by the London Stock Exchange in 1995. It had just ten companies at the beginning and had over 3,900 companies raising capital from investors as of April 2023.
As AIM deals with growth companies which are generally higher risk and that’s mirrored in the figures. Though it can be very effective. Domino’s Pizza and ASOS are two notable names that have raised finance through AIM.
6) Business angels
After you’ve sold your own business or made multiple fortunes in the City, there’s only so much golf you can play. That’s when many high net worth individuals decide to use their own cash to assist entrepreneurs in the early days of a company’s life.
Known as business angels, these wealthy individuals are increasingly forming networks and groups. The UK Business Angels Association (UKBAA) said: ‘In general, individual business angels will invest anywhere between £5,000 and £500,000 in a single venture, depending on the business and the growth needs whereas Seed VCs will seldom invest less than £50,000.’
They added that this varies according to the disposable wealth of the individual and the opportunity identified. ‘Seed investors typically invest as part of a syndicate, pooling their experience and time to add more value and bring more capital to their investment. This means that larger amounts of finance above £1.5 million can be raised by investors when they pool their resources,’ they said.
The downside is that taking the angel route could provide you with as many as ten investors with ideas on how your venture should be run. Scott Haughton, a partner at angel network Envestors, describes coming to terms with this dilution of equity as ‘crossing the equity bridge’. He says: ‘Rather than have a big chunk of something very small, you’re giving away 30 per cent to 50 per cent of something that could be much larger than you initially imagined.’
If this sounds palatable, then you can make your business a more attractive proposition by registering your company with HM Revenue and Customs under the Enterprise Investment Scheme.
Ultimately, this means that investors can receive lucrative tax breaks. ‘It’s the best scheme in Europe,’ claims Haughton.
For more information, go to the UK Business Angels Association website: www.ukbaa.org.uk.
7) Corporate venturing
The IBMs and Boeings of this world rely on the ingenuity of small, specialist ventures to create the disruptive technology of tomorrow. If a larger organisation does take an interest, then it’ll provide additional funding, supporting your research and development. Essentially, these companies will be making your ideas work for them, but for many ventures this is the fast route to commercialisation.
Ideally, you’ll want to retain intellectual property rights and license out the rights to your technology to customers.
8) Cash shells
For entrepreneurs intent on the fast track to growth, a shell can eliminate the time and cost of listing on the public markets.
A shell is usually a company with a stock market quote but no active business. This may be because its original business failed to thrive and/or has been disposed, or because it listed as a cash shell with the purpose of buying a business. The former are termed ‘dirty’ because while they may have cash advantages, there can be hidden liabilities.
9) Network like crazy
Julie Purves, the MD of UK software company B2M Solutions, was reluctant to take the VC route. At a party one evening, she was chatting to someone about her business when it transpired that she was talking to the MD of a commercial lettings company that also invests in technology ventures.
Unusually for a software company, B2M had won two rounds of funding from the Department for Business, Enterprise and Regulatory Reform (BERR, now known as the BEIS) before the chance meeting at the party – but Purves knew that additional funds were required to move to the next level.
She says that their first investment was made in 2004 and three years later the market really started to take off. ‘I don’t think either they or I could really have anticipated the journey we’d go on, but it’s been an incredibly robust and open relationship, which is why it’s worked.’
This one is a relatively new player in the fundraising sphere. Crowdfunding differs from platform to platform, but the crux is that a user posts a business or idea with a target fund amount. From there, investors will give money in exchange for perks like advanced previews, freebies or a credit mention.
You can even raise the whole £1m in one go – Monzo did this in 96 seconds back in 2016 through Crowdcube.
Find out about crowdfunding by reading Crowdfunding UK small business: everything you need to know
‘I like debt,’ says Redtray’s Woodland. It may not be the most fashionable statement, but Woodland is unequivocal about the advantages of debt over other types of finance.
‘If you’re building a business to sell it or float, you need an end in mind. I tend to build up EBITDA [earnings before interest, taxes, depreciation and amortisation].
‘That minimises the amount of share capital that you issue to investors, maximising the loan and other forms of finance – by doing this you give less away. I also like debt because it improves my EBITDA, as the measurement of my performance is based on calculations before I pay interest on my debt.’
12) Your own pocket
Investing your own cash will send a signal to investors that you’re serious. In the beginning, it’s unlikely that you’ll have any choice but to put yourself on the line – be it through remortgaging your house, providing a personal guarantee to a bank or canvassing friends and family for finance.
13) Asset finance
Asset finance is a flexible financing option for businesses and entrepreneurs and is widely available through banks, specialist funders, brokers and many manufacturers. It’s often associated with purchases of expensive equipment.
Alex Hilton-Baird says: ‘If you were to buy a big piece of plant machinery, you’d go for some form of asset finance. There are specialist lenders that like different types of kit, and specialist lenders that’ll supply money (if your balance sheet is good) as opposed to what you want to purchase.
‘Others, even if you don’t have a balance sheet, will lend money as they know there’s value in the machinery or the plant they’re financing.’
The borrowing is secured on the asset financed, and no other security is normally required other than some smaller SMEs where director guarantees will be requested. ‘Asset finance is seen as an inexpensive option with fewer complications when compared with other forms of bank lending, and one of the appealing aspects is the ability to tailor the repayment profile to the specific cash flow of the business,’ said Philip Davies, asset finance consultant at White Oak.
For example, you might link the revenue flow from one of your contracts to the payments you will be making to the asset finance provider. It is also common for businesses in the agricultural sector to match the annual seasonal income flows to their asset finance payments.
Given that asset finance providers rely on the security of the asset, they can look beyond the balance sheet of a business. This is something that is particularly important at the moment for businesses that might have suffered setbacks across the decade so far, and as such have seen a reduced number of lending options.
When looking for asset finance, a business wants to find a lender with the expertise that enables them to finance specialist assets. Asset finance is also an option at the point of sale and at White Oak we work with suppliers and manufactures to the SME sector who wish to offer this as a service.
14) Growth capital
‘In the broadest sense, expansion capital simply means money to help you expand your business,’ explains BGF investor, Richard Taylor. ‘However, that business funding could come in different forms and with a variety of different terms on offer, including equity investment.
‘In order to assess whether growth capital is right for your business, you need to consider a number of things. Firstly, do you want to accelerate your organic growth; secondly, do you have ideas that could increase the turnover or profitability, but which require more cash headroom; and thirdly, would your business benefit from greater board-level support.’
If the answer is yes, it may be worth exploring the idea of expansion capital.
15) Grant funding
Grants – which don’t have to be repaid – are ideal if you’re looking to expand with a specific project in mind. If you want to improve the energy efficiency, create jobs or develop a solution to a critical societal issue, chances are there will be some sort of grant for that.
Check out the government’s finance and support for businesses page to see what’s available.
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