If you business needs capital in order to fund its growth there are a number of funding options available to businesses to support expansion. Essentially there are four main routes.
Firstly, banks provide a useful source of debt finance, whether for working capital or acquisition purposes.
Second, there are always venture capitalists and business angels who are looking for investment opportunities in fast growing companies.
The third option is a private placing whereby a company sells shareholdings to a number of high net worth individuals through an “offer” document or information memorandum.
The fourth option is a flotation on a recognised investment exchange which can be used as a means to raise capital, for example the Alternative Investment Market provides smaller businesses with a route to flotation to increase their profile, access capital for growth and increase the company’s ability to make acquisitions using shares, all of which can stimulate an accelerated rate of growth.
If you run a high growth early start up business, bank funding is an option, although if you are an early-stage business, with a limited asset base, a bank may be concerned about the availability of security for the loan. It may also be concerned about the ability of your business to maintain a good cash-flow to ensure payments of interest and repayments of capital. The loan guarantee scheme, where the loan is partially backed by a government guarantee to give the bank some security for repayment, is a possible route to growth. However, a more likely source of funds is from someone who will take a shareholding (or “equity”) in your business, whether this be a venture capitalist or a private individual. This sort of investment is ideal for an expanding business if it is going to take some time to generate consistent returns as venture capitalists/business angels are invariably looking for capital growth and not an income return.
Having a third party equity investor in the business can be rather daunting for some owner managers and needs to be considered and structured carefully. What this means is there will be a third party shareholder involved in the business who will look to protect its investment by including provisions in its favour in an investment agreement and the company’s articles of association. The investor will want to ensure that Key decisions affecting the business can only be taken with the consent of the investor, and it will wish to ensure that financial and other information on the business is provided to the investor on a regular basis. The investor may want to appoint its own director to the board, and the investor will usually be looking for an exit within 3 to 5 years of its investment and there will be pressure on you to provide good returns in that timescale. You need to be happy that you can work closely with your investor - if you can, they can add real value to your business, not just through the financing but also through their experience and network of contacts.
If you like the idea of an investor, but not all the constraints that go with it, then a private placing would allow you to raise a small amount from a number of individuals and can be structured so that the investors do not have the same controls that a venture capitalist would look for. For this reason, they are becoming an increasingly popular method of funding growth. However, it will mean that your company is left with a wide disparate shareholder base, which can be time consuming to manage. There are also a number of financial services regulations to deal with on a private placing.
If you would like a free of charge no obligation meeting on a totally confidential basis to discuss raising finance in your business, please contact Neil Large at Davidson Webber LLP on 01423 727211 or 07920 003796
