Fundraising for businesses can be useful, and sometimes necessary, when it comes to delivering growth, including taking on new staff, opening new offices, capex etc. However, many people do not know what fundraising entails, and the different funding options available.
In this article I will look to explain the different funding options available, while also mentioning some specific funders, which could help accelerate your business’ growth plans.
Types of Funding
There are two main options when it comes to funding, the first is debt, which refers to most borrowings that you will be familiar with, including term loans, invoice finance facilities, asset-based lending etc. The funder will provide cash, and in return the business will pay capital plus interest over a period of time back to the funder. The funder will take assets or personal guarantees as security for the funding they are providing. Typically, there will be certain covenants put in place (debt service cover, leverage etc) which will mean that the business will have to perform at a certain level, regarding cash generation and gearing, throughout the period of the repayment of the debt.
The other main type of funding available is equity, where a funder takes a shareholding in the business for the funding that they provide. They will receive dividends and benefit from the capital growth in the business, whilst also taking the risk should performance worsen and the value of the business reduce. This is a longer-term source of finance, given there is no repayment profile, and ownership is diluted, however it can also mean that the business can benefit from governance or additional support and experience provided by the private equity investor.
A combination of these two, mezzanine, is also available, where an equity investment is combined with some features of a loan. A common example is where all, or part of a loan made provided by a funder converts into equity after a set timeframe.
Along with growth capital, be it in the form of debt, equity or mezzanine, businesses should also take full advantage of R&D tax credits, which supports companies that work on innovative projects in science and technology, Capital Allowances, which a business can claim when buying tangible fixed assets, and grants, including the grants available from the North of Tyne Growth Fund. This North of Tyne Growth Fund is a European Regional Development Fund (ERDF) aimed to support capital expenditure for small or medium businesses planning a capital investment of at least £134,000, within the Newcastle, North Tyneside or Northumberland regions.
Types of Funder
Banks are the traditional debt funder, who will provide all forms of debt funding mentioned above. Different banks will provide funding to different sizes, sectors and types of businesses, and will lend an amount based on the historic profitability of the business, and may require security over assets as well as personal guarantees or management cash contributions. Debt funds are an alternative to banks when it comes to debt funding. Debt funds can provide debt to company’s and can usually provide a greater debt amount and/or require less security than banks, however they will expect a higher interest rate to be paid by the business given they are taking on more risk.
Private equity is the main source of equity funding. Private equity focus on investing and taking a shareholding in mature, high growth businesses, as they will typically look to sell their stake in the business for 3 times their original stake, over a 3 to 5 year period. Most private equity firms will provide additional support and capital to the business to help the shareholders deliver their growth plans. Venture capital is a different form of equity funding, which is specifically focussed on early stage companies with high growth potential and also pre-profit enterprises. The main difference between this and private equity is the focus on new/early stage companies, many of which will be pre-revenue or pre-profit.
Some funders can provide a mixture of debt and equity, for example the regional development funds, which focus on providing funding to NE based, established businesses who are looking to scale in the region.
Example of a North East Funder
An example of a local, relevant, regional development fund is the £120m North East Fund, supported by the European Regional Development Fund, which opened for business in 2018. This fund is known as Jeremie 2, being the second instalment of the Jeremie funds, which stands for Joint European Resources for Micro to Medium Enterprises. The first Jeremie fund, which was launched a few years ago, provided vital investment to almost 1,000 North East companies, while safeguarding or creating more than 6,000 jobs. As a regional development fund, it focuses on providing funding to north east based businesses who are looking for funding to grow their business and increase headcount. There are a number of fund managers tasked with deploying the North East Fund, including NEL, FW Capital , Maven and Mercia.
Conclusion
In conclusion, there are many different types of funding available, however the type that is relevant for your business will be dependent on the size, age and sector of your business, as well as the security you are able and willing to provide.
In any fundraising scenario, in order to obtain funding a detailed business plan and integrated financial forecast would need to be prepared. This is something that RG can assist with, having advised on numerous fundraising transactions over the years .
Should you like to discuss fundraising options with us, please contact us on 0191 281 1292.