28 Jan, 2011
A MEATY blog about FUNDING with ‘fish & ponds’
Whilst visiting a client the other day I asked him on my arrival how he was and he proceeded to announce to all who would listen, “If today were a fish, I’d throw it back”.
Most of us in business have days like that whether it is starting, growing or running a business. Business has, and always will be tough, and what can make it tough, more often than not, is the need for cash. A lack of funding and the predictable pressure it brings can easily trigger the type of comment made by our client I popped in to visit.
1. What is the fishy they are trying to catch? (Meaning the amount of money needed and what it is for).
2. What is the pond they need to fish in to catch this fish? (Referring to the type of fund and funder).
3. What rod can I use to catch it? (Meaning the method of identifying and applying for the funds).
Once we know the fish we want to catch, we should next explore what ponds we are likely to catch this fish in. Whilst there are various ponds such as asset finance, invoice discounting, leasing, and grants, here are a specific few to think about:
Banks are the most obvious lenders of money. Usually they think of loans to SMEs in bands between £5k and £50k, £50k and £150k. Loans can be taken on a 3 – 5 or 5 – 10 year basis and a fixed interest rate is applied usually above base, currently between 7% and 10%.
In some cases, loans may include a premium option where a lump sum is attached at the end of the repayment period. Directors’ personal guarantees will normally be required unless there is tangible security available within the business. Match funding may or may not be required.
Mezzanine investments bridge the gap between traditional bank lending and equity finance. It can be used as a stand-alone product or alongside an equity investment to create a package and often range between £150k and £500k. Mezzanine funding is in essence debt funding (e.g. a loan) with a premium or equity option attached upon repayment.
It is usually used when traditional lenders e.g. banks/invoice discounters will not support a business or full security is not available. As Mezzanine funding relies upon cash generation for its comfort, if a company can demonstrate a positive cash-flow forecast then a Mezzanine loan can be used. Mezzanine funding is very suitable for businesses which are looking to expand where the sales build up is considered strong but will take time. It can also be used for MBOs and acquisitions. These Funds are usually quite expensive.
Equity investment is most likely to be suitable for major growth projects or MBOs which are considered too high risk for debt only funding, and provides capital in return for a shareholding in the company. Equity funding is often in the region of £500k to £1.5m.
The size of the shareholding will depend on a number of factors including the current value of the business, how much capital is required and the level of risk in the company’s growth proposition. Whilst equity funding does mean relinquishing shares in a business, its aim is to significantly increase the value of the company. This means that whilst the original stakeholders’ shareholdings are diluted, their stake will potentially be worth a lot more.
The nature of equity funding means that the funder will at some point want to sell their share or ‘exit’ to make a return on their capital. As a rule of thumb, investors look to invest in companies where there is a realistic prospect of an exit within 3 to 5 years, and where they would expect the value of their investment to double at least in that time frame.
These are wealthy private investors who prefer to invest directly (personally or through a syndicate) in private companies in return for a shareholding in the investee company and possibly a position on the board of directors. Investments can range from £5,000 to £2m.
They like to provide capital for young companies at the start-up phase or during a level of expansion. Unlike venture capitalists whose money is often pooled by investment firms business angels usually invest their own funds.
They are not only valuable for their financial contributions, but also for offering their expertise and in many cases, contacts to their invested company. It is always a pond worth fishing in when you are exploring funding for a seed or start up business.
Small Loans for Business
These are government funds which provide loans from £3k to £250k to businesses, including sole traders, partnerships and limited companies. These Funds can back a range of propositions including start ups, spin outs, early stage, growth, development capital and expansions. They are a terrific option for SMEs and the first criterion for a loan is that a bank has refused to lend to you. They will not however support Research and Development in new Companies as the business must be trading or be about to launch.
Usually businesses from most sectors (property and a few other sectors are excluded, including fishing!) can apply and the Fund has a strong focus on financing businesses with technology and innovations such as those within biotechnology, creative, digital and energy industries. Some may also include the retail sector. These loans are funded through the European Regional Development Fund and the Regional Development Agencies (together with their successors).
You would never go fishing without a rod or a net of some description and the same is true when looking for funding. One of the rods you can use is to ask your business advisor or your accountant for some input on how to look for funds.
We always begin with a Search of our databases once we have grasped exactly what the client is looking for. We ask the client to complete a 10 minute questionnaire via our website and armed with that information go fishing for what funds match the criteria gathered by the questionnaire. We then analyse the findings of the Search, produce a Funding Report for the client and highlight what the best options might be. Following this we contact the funder to discuss the client needs and more often than not, have an initial appointment with the client, the funder and ourselves to determine the funder’s interest in the project and test the chemistry between the funder and client.
So there we have it. In essence, funding is really all about fishing. Knowing what you want to catch, where it is best to make the catch and the best rod to use.
Charles E Lucas is the EBA Funding Expert.