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  • 1. No-Nonsense Guide to Finance for High Growth and Innovative Businesses Business planning • Finding the right adviser • Bank debt Venture capital • Funding innovation and commercialising IP AIM and PLUS • Angel Finance • Invoice and asset-based finance Sale and leaseback • Managing investor relations • Grants and business support
  • 2. Contents This guide is divided into five parts: 0 introduCtion 1. PrEPArAtion High growth and innovation ����������������� 2 Before you approach anyone for funding, 1 PrEPArAtion you will need to work out where your business is, where you want it to go, and Why do you want finance?�������������������� 4 how much you need to take it there Bring in the experts ��������������������������� 10 Intellectual property��������������������������� 12 2. FundinG oPtionS And ProCESS A look at the various types of finance Calculating what you need����������������� 14 available and how to secure them Attracting equity investment�������������� 16 A business plan to raise finance ������� 18 3. AFtEr thE EvEnt Advice on getting the most out of your 2 FundinG oPtionS And ProCESS relationship with your investors, once you have secured funding Banks and Specialist Lenders ����������� 20 Borrowing against your invoices ������� 24 4. GovErnMEnt rESourCES Making use of your assets ����������������� 26 The schemes available to encourage innovation, best practice and growth Should you buy or lease assets? ������� 28 Angel finance �������������������������������������� 30 5. non-GovErnMEnt rESourCES Venture capital ����������������������������������� 36 Additional sources of funding support from the private sector Should I float my company? �������������� 42 Making the perfect pitch �������������������� 44 For more on all these issues, visit Agreeing the terms of the deal ��������� 46 the Business Link website at: www.businesslink.gov.uk/growth 3 AFtEr thE EvEnt Managing investor relations �������������� 49 4 GovErnMEnt rESourCES Help for growing businesses ������������������� 51 Getting a grant������������������������������������������� 52 Types of grant �������������������������������������������� 53 Other sources of government finance �� 55 5 non-GovErnMEnt rESourCES Additional funding opportunities ������������� 57
  • 3. Welcome The right finance is key to delivering high growth and backing innovation, but securing it can be a challenge� This online guide has primarily been prepared with small and medium businesses in mind, to help your quest for funds by providing you with a better understanding of: n Assessing your specific funding needs n Where and how to get the right advice n Various funding options n Pitching to and dealing with investors Drawing on the experiences of businesses like yours and advice from industry experts, this guide aims to provide practical business advice� Based on a review of the previous No-Nonsense guide for High Growth Companies, this publication has been created to reflect the economic climate of 2009 and the specific needs of innovative companies� Furthermore, with Business Link, the government-backed business support service, at the helm, there is no product sell or bias – just objective guidance on what’s available in the marketplace� This guide is only a starting point� We hope that, as a result of using it, you feel better positioned to access the support you require� Should you need to talk to someone, our Business Link advisers will be only too pleased to help� To find your local Business Link, call 0845 600 9 006 or visit www.businesslink.gov.uk Finally, if you are a new or early-stage business looking to raise small amounts or start-up funds, you may be interested in our No-Nonsense Guide to Small Business Funding, also available online, on www.businesslink.gov.uk
  • 4. Introduction Introduction To drive innovation and rapid growth in your business, you need clear, jargon-free advice on securing the necessary financial support W hen you’re looking for funding to take your business to the next level – whether that’s to accommodate image: iStock expansion, or develop a new idea (see the Route to Market box, opposite) – you need sound advice to help you decide on the appropriate source of finance, and how to go must have a service or product that excites about securing it. This regularly updated online people enough to keep them buying from you. guide contains the information you need to Innovation means creating something new start the process, with the key contacts and or delivering a product or service in a way links to enable you to find out more. that has not been done before. Companies that can do this are able to gain a competitive The importance of innovation edge and generate more customer interest. You don’t have to be the most innovative of Such businesses play a key role in companies to achieve rapid growth, but you supporting the UK economy. In March 2008, the Government published the Innovation foundaTIonS for growTh Nation white paper, which set out the need to foster innovation among small The Government took two significant steps and medium-sized enterprises in order to towards creating a climate that fosters raise productivity, encourage competitive innovation and entrepreneurship when businesses, meet the challenges of it commissioned the Gower Review into globalisation and operate within the UK’s intellectual property, which was published environmental and demographic limits. in 2005, and Lord Sainsbury’s report into However, developing an innovative product science and innovation, which came out and service can take a lot of time, during during 2007. The findings of these reports which suppliers and staff have to be paid. have clearly shown that innovation in Funding is an essential part of innovative business is essential to the future success and high-growth businesses, and the of the UK economy. Government is keen for such companies to Today, as we come to terms with the get access to both the money and support economic effects of the global downturn, services they need. the importance of investing in innovation, in preparation for the eventual upturn, now Support for innovative businesses appears all the more necessary. As you can see from the Route to Market box opposite, innovative companies have www.businesslink.gov.uk/growth
  • 5. Introduction many hurdles to overcome if they are to ThE rouTE To markET: be successful. However, there are many SourCES of fInanCE organisations, some backed by government such as the Regional Development Agencies STagE 1 and Business Link, and others in the private The business begins with just its intellectual property and a growth strategy. However, sector that will support companies seeking as an innovative company, it must persuade funding and investment. the established industry of its worth. A small management team with sector knowledge is Simplifying government support recruited, a business plan written and seed In the past, there were more than 3,000 funding accessed. government-funded business support schemes available to companies, which STagE businesses owners found confusing. To The company uses the funding for make it easier for companies looking for early-stage trials and tests and develops a funding, the Government has introduced prototype. The successful prototype enables Solutions for Business, a streamlined the company to get more funding, and it portfolio of around 30 government-funded aims to get market ready. support products. By March 2010, these are the only products that businesses will STagE With “proof of concept” behind it, the business see. For more information, visit must find a route to market. This may be www.businesslink.gov.uk/solutions through licensing, or directly by the company itself. Discussions with partners, potential understanding the opportunities clients and suppliers are advanced, and the Finding the right funding is about identifying commercial value of the product can now the exact needs of your business at its be assessed. Angel investors or venture particular stage of growth, and tying your capitalists invest in business as they feel the business plan in with an appropriate type company is close to full trading. of investment. Some businesses need more cashflow, especially in today’s tough STagE 4 economic times. Others require a large single As the business begins to grow, it’s likely investment, even if it has to be exchanged in additional investment will be needed to fund return for a share in the business. areas such as manufacturing, sales and Whatever your requirements, you should marketing, branding and additional staff. be aware of your options and what’s available. Further funding would be supported by venture If you have a good business case, there’s capital, but business angels may also co-invest. probably a package that will meet your STagE 5 needs. This guide helps you decide on how The company has begun trading in the much you require, the most appropriate marketplace. However, it could be many type of funding and how to secure it, backed months or years before it achieves an outright by case studies showing how companies profit, and even when profitable it will have to at various stages of development have overcome cash shortfalls. Money from sources accessed finance. It also offers advice such as invoice finance or further equity on what this will mean for your business investment may be considered here. going forward. n www.businesslink.gov.uk/growth
  • 6. sEctIoN 1 Preparation Why do you want finance? image:iStock If organic growth is proving difficult, raising funds may be the best way to expand your business. Determine your needs and the right route for you I f your business needs a cash injection, Whatever the situation, it’s vital to find the should you go for a debt option – a bank right funding. That means focusing on the loan, asset-based lending or invoice finance options that not only align with your finance – or equity investment, where you aims, but also your stage of development. trade shares for funding? By analysing what stage your business has reached and where Debt and equity you want to take it, the most appropriate way Broadly speaking, you can raise money for to fund growth should become clearer. your business either by incurring debt or If you’re seeking finance, your business selling equity. There are several fundraising has probably reached a critical point. For solutions to consider within these two instance, a start-up technology company camps. Forms of debt go beyond the familiar may need funding to pay wages and rent concepts of borrowing, overdrafts and until its first product comes to market. Or leasing, and include very specific solutions, perhaps, a consumer goods producer on the such as invoice discounting. Whatever verge of securing its first contract to supply a the debt arrangement, you are effectively multiple retailer, might need cash to expand purchasing money, usually by paying interest production and distribution. Alternatively, on credit extended to you, often on the basis a social enterprise may require funds to of being able to provide sufficient security. expand nationally, following local success, For equity finance, investors will want a or, on an operational level, a business may stake in your company based on the sum on need a cushion against cashflow fluctuations. offer, measured against the value of your business. Rather than lending, the backer is IN BRIEF thE RIght FuNDINg buying into your business. They will make a return through dividends and, ultimately, the l Determine what you’ve achieved and sale of shares. Investors tend to structure where the company is now deals with an element of debt, too. This l Ask yourself how appropriate your ensures some payback over the investment sector is for various types of finance period, prior to eventually selling the stake. l Allow a time ‘buffer’ in case Giving up a share of your business can fundraising takes longer than expected be daunting. Fear of losing control, the l Focus on the types of finance expense, the timescale and worries over appropriate to your growth plan complex deals deter some businesses from l Seek specialist advice using equity finance. But equity investors can improve your business’ long-term prospects www.businesslink.gov.uk/growth
  • 7. sEctIoN 1 by offering key skills and expertise. In fact, casE stuDy the profile of equity investment has risen in After making initial some quarters in line with the lack of liquidity equity investments, the in the debt market, particularly among founders of London- innovative businesses with potentially valuable based Fairtrade hot intellectual property. drinks company Cafédirect managed to secure additional external funding operational issues for growth. This was achived through Businesses often choose debt finance to preference shares and shareholder address an operational problem that may loans, as former non-executive director or may not be growth-related. For instance, Andy Redfern explains. cashflow fluctuations caused by seasonal “A lack of assets meant we couldn’t factors, or late payment by customers are extend our overdraft or credit facilities. frequently smoothed over by an overdraft. Concerned about the commercial nature Alternatively, invoice discounting, where a of venture capital, we decided to raise lender will pay you when an invoice is raised money through a public share issue to (so you don’t need to wait for the customer invest in our brands, develop markets, to pay), may help keep you in the black. If the repay debt, fund working capital and aim is to preserve working capital, leasing improve IT. We raised £5m in this way rather than buying equipment can help, while with sponsorship. Rather than being larger one-off outlays can be met by a loan. listed on a conventional stock market, buyers and sellers are linked up through Funding growth a matched bargain system run by Debt-based solutions may be flexible, but broker Brewer Dolphin.” there will be times when it’s necessary to 12 QuEstIoNs to asK youRsELF 1 What are my business finances like? 8 What factors affect the type of finance I Lenders and investors are more likely can seek? For instance, your company’s to release the funding you are looking growth potential may be too low for a for if your finances are sound. venture capitalist, or your sector may not 2 How much is my business spending and interest investment houses on your list. how much will the growth plan cost? 9 What contingency funds could I access, 3 How much do I need to raise to fulfil my if fundraising takes longer than business objectives? expected or if I fail to secure funding? 4 How much is it feasible to raise from 10 When does the backer need to be paid the various possible sources? back, or when will I need to find an exit? 5 What is the business worth? 11 Will I be able to raise further funds? 6 What will finance cost in fees or equity? 12 Should I be looking for one lump sum, 7 How quickly do I need the money? or staged payments over several years? www.businesslink.gov.uk/growth
  • 8. sEctIoN 1 IN BRIEF BusINEss INcuBatIoN consider equity finance. In the early 2000s, debt was cheap and many businesses Many early-stage companies improve funded growth with a large amount of help their chances of achieving rapid growth from their banks. by joining a business incubator – or However, in the wake of the sub prime business innovation centre. This provides mortgage crisis, credit may be more an environment where young companies expensive and harder to find, with many can flourish, drawing on resources lenders wary of backing ambitious growth shared with other businesses, such as plans, due to the level of risk. This has premises and management services. emphasised the importance of equity finance. Crucially, a good incubator will Rapid expansion from a turnover of also offer advice on, and access to, £500,000 a year up to £10m, for example, funding by banks, business angels may call for increasing production, opening and venture capitalists specialising in an office overseas or employing a bigger early-stage companies. Some are sales team. You could, of course, fund this privately run and established as by borrowing against assets, but even if businesses in their own rights, while lenders are forthcoming, repayments will others are sponsored, at least in part, be a drain on the business. by public sector agencies or universities. Under these circumstances, equity There are also a number of incubators investment can provide upfront cash without that began life as investors, and over the burden of regular repayments. This time began to add a range of business means reducing your stake in the company, services. Travelling in the opposite as the investor buys in, but if all goes to plan, direction, a number of incubators began the real value of your holding will grow. life as providers of business services, It’s also important to recognise that private adding an investment capability at a later investors can actively help you grow by giving stage. Most incubators have premises, advice and recommending executive and but some offer a virtual service. non-executive directors. Incubator programmes are not open to everyone. Typically, a company will Equity finance have to apply and make a case for being If you choose this route, you’ll be working given access to the facilities. Nor are closely with your investors, so make sure they a permanent option. Designed to that you get to know them first, because it’s accelerate the growth of companies at important that the chemistry is right. an early stage, the expectation is that Ideally, they should have the relevant businesses will move out and establish experience and industry knowledge to help their independence at an appropriate your company grow. time. Statistics suggest that those that Equity finance can come from a number do enter an incubation programme have of sources. These include: so-called friends a better chance of success than those and family investors – essentially personal that initially go it alone. contacts, who have the money and inclination For further information, visit Business to back your plans, with anything from a Link at: www.businesslink.gov.uk few hundred to a few thousand pounds; business angels – individuals who specialise www.businesslink.gov.uk/growth
  • 9. sEctIoN 1 in supporting young, casE stuDy When Essex-based growing companies; and technology company Lysanda venture capitalists (VCs). developed a system to monitor VCs will probably and control vehicle emissions, the only be interested in owners thought they were onto investments of £250,000 something big. But, as the original or more, and will be co-founder of the business, Simon Harris, recalls, there was looking for a flotation or no certainty that a market existed for the innovative product. trade sale within three to “For evidence of customer interest and how to get to seven years to allow them market, we had to rely on a mixture of anecdote, hunch and to achieve a high return. assertion, as we didn’t have the resources to explore these issues further by carrying out the necessary research. social enterprises “However, we received grant funding from the East of Locating funding options England Development Agency, which enabled us to hire a that match your business consultant to test the commercial potential of the product, objectives is particularly which we called Eco Log. relevant for social “His report identified potential customers and partners. enterprises looking to Thanks to this research, we are now marketing Eco Log.” expand. Often they will find that the conventional Grants of up to £20,000 to assess marketing potential are now sources of growth finance, available from Regional Development Agencies through such as venture capital Grant for Research and Development, a Solutions for or angel investors, are Business product. For further information, visit Business Link inappropriate, requiring at: www.businesslink.gov.uk them to go against their core values. In this situation, a social enterprise should Advisers will also be able to help you consider approaching a specialist lender, or establish whether you really need to look at an alternative public offering, which raise finance or if your problems can be provides funding, while letting the business addressed in other ways. For instance, if maintain its ethical stance. cashflow is an issue, it may be possible to resolve the problem by raising invoices Expert advice more quickly, or by taking a more proactive Whoever you are dealing with, seek approach in chasing unpaid debts. There sound advice. While your accountant will are always alternatives. n undoubtedly help you in your relationship with lenders, dealing with equity investors For advice on calculating your investment requires more specialist help. needs, see pages 14-15 A legal adviser should check any deal, and when preparing to talk to VCs, you should enlist the help of a corporate finance Where to go next specialist. Mid-tier accountancy practices For help with choosing the right finance, visit: with a national presence, are particularly www.businesslink.gov.uk/financetype strong in this area. www.businesslink.gov.uk/growth
  • 10. sEctIoN 1 Find the right finance solution Finance Amount sought: Typical uses of finance Time Typical charges, fees option required and interest rates £100k to £500k to £1m to arrange £500k £1m plus New premises, rolling out chains, 1-3 months Interest depends on lenders – can be Bank loans 4 w w marketing, working capital, low-end more than 2-4% over base rate charged acquisitions before downturn. Typical fee is 1.5% Primarily a tool to maintain positive 1-4 weeks Service charge 0.1-0.5% of turnover for Invoice cashflow and provide working invoice discounting, 0.75% to 2.5% for finance 4 4 4 capital. Can finance less costly factoring. Daily Interest around 1-4% over growth plans base rate, has increased in downturn Provides working capital and 4-6 weeks Interest of 1.75-2.5% above base rate, Asset-based finance for a variety of reasons plus a lending fee of 0.5-1.5% of the loan lending 4 4 4 including growth plans, refinancing, mergers and acquisitions Can be used to acquire a range of 1 month Deposit of 5-30% and a finance fee assets to avoid paying out large of 1.25-10% above the base rate. Due Leasing 4 4 4 sums upfront, freeing up working diligence charge of 0.25-1% of total capital to fund less costly plans advanced Funding moderate to high-risk, 3-6 months, Legal and accountancy fees up to 5% high-growth plans, including product but could be of funds raised, capped around £10,000 Angel finance 4 w 8 or service launches, marketing and up to 1 year – may be more for larger sums (presently techology development – typically less). Private investors will take equity for post proof of concept cash. Networks charge success fees of 5% Funding moderate to high-risk, 3 months Corporate finance fees of 5%*, plus 5% high-growth plans, including to a year equity options. Legal costs up to £30,000. Venture funding acquisitions, product or Accountancy fees. Around 20% or higher capital 8 w 4 service launches, new premises, equity stake. Membership list no longer national or global expansion freely available Funding moderate to high-risk, 3 to 6 months, 10-12%* of funds raised on average, high-growth plans, including but could including advisers’ fees. Average flotation funding acquisitions, product or take longer cost is £150,000, but can be as much as PLUS market 8 4 4 service launches, new premises, £200,000 national or global expansion Funding moderate to high-risk, 3-6 months, 10.5%* of funds raised on average, high-growth plans, including although including advisers’ fees. Often as much Alternative w funding acquisitions, product or preparation as £300,000 to £400,000 Investment 8 8 Only service launches, new premises, can take Market (AIM) if over national or global expansion far longer £5m Funding moderate to high-risk, 6-12 months 10.5%* of funds raised on average, Alternative high-growth plans, including including advisers’ fees. Often as much public offering 4 4 4 funding acquisitions, product or as £300,000 to £400,000 (APO) service launches, new premises, national or global expansion www.businesslink.gov.uk/growth
  • 11. sEctIoN 1 4 Likely w Possible 8 Unlikely Pros Cons Social enterprises’ chances of Page securing funding no. Loans provide a means to finance Repayments can drain cashflow; you may 20-23 growth without surrendering equity to need to put up security; costs have risen; may 4 a shareholder be harder to secure and rates may be higher Depending on the lender’s terms A trading record and £100,000 plus turnover 24-25 and conditions, you can receive up may be needed, excluding smaller companies to 90% of the value of an invoice as and start-ups. Factoring involves the lender 4 soon as it is raised, providing capital chasing debts, which can unsettle customers Loans can be secured against a The minimum sum may be too high for some 26-27 wide range of items, plus intellectual small businesses. The lender effectively property. Currently, banks may be more takes ownership of the assets, which are sold 4 willing to lend on an asset-backed basis if the debt cannot be serviced Very flexible, as almost anything can You will not own your assets 28-29 be leased; gives access to up-to-date equipment; offers tax benefits, as 4 leasing costs are an allowable expense Angels tend to be more prepared to Angels can be hard to find; they will seek an 30-35 back early-stage businesses; may offer exit, typically after three to five years, or sale contacts, advice and skills; less formal on AIM/initial public offering; you will have to 4 Although angels will have than venture capitalists surrender equity dependent on the valuation exit concerns of the company Venture capitalists provide larger Venture capitalists expect rights over your 36-41 amounts than angels; offer expertise business; will seek an exit in three to five w Finding an exit strategy that gives investors a good return and keeps and access to top-class management; years, meaning a sale, float or refinancing; the core values of enterprise can add will usually have strong industry contacts will want a good deal on equity; will push hard complexity to venture capital deals on valuations in current financial climate Cheaper than floating on AIM or the Success depends on market sentiment and 42-43 London Stock Exchange main list, convincing investors about your company; w Investors may be wary of backing social ventures in the current climate, but offers similar advantages, notably only a limited pool of investors and liquidity unless there is a clear prospect of tradable shares that can be used to (the buying and selling of shares) is restricted; a return make acquisitions; profile and credibility; communicating with shareholders takes time less regulation than other markets and effort; you will have to surrender equity Profile and credibility; typically raises Many companies find there is little liquidity 42-43 larger amounts than debt, angels (the buying and selling of shares) in their w Investors may be wary of backing social ventures in the current climate, or PLUS; you can raise more money shares; reporting to shareholders takes time unless there is a clear prospect of through secondary issues; tradeable and effort; you give up equity; better suited to a return shares can be used to fund acquisitions medium-sized businesses; tough raising new money in current financial climate Profile and credibility; offers more Not appropriate to all business types; 42-43 funds than debt and angels, but is still you have to create publicity and make 4 Allows social enterprises to raise funds, but doesn’t open up the appropriate for small businesses; less the market yourself business to the full market pressures regulated than official markets * Typical amount – fees are negotiable www.businesslink.gov.uk/growth
  • 12. sECtIoN 1 Preparation Bring in the experts image: Shutterstock The right advice is essential when raising funds. But where can you go for help? S ecuring finance will be easier with CasE study key advisers on board, who will help CCBT began to the deal run more smoothly, and spot develop an innovative any funding barriers. For example, they will computer-based know if your business is going in the wrong treatment for anxiety direction, or if your management team is disorders, but needed investment along weak. They will also help identify alternative with an experienced management team funding sources and have useful contacts. to realise its commercial potential, Gaining funding will take you away from explains finance director Tim O’Connell. your day-to-day role in the business, with “We used the investment-readiness larger equity finance taking up to six months scheme run by Warwick Science Park’s to complete. Professional advisers will guide Investment Fund to commericialise the you through this complex process, and the business plan, bring in an experienced long-term benefits far outweigh their cost. team and secure funding. Our product, FearFighter, is now being used by one Finding the right advisers third of the UK’s primary care trusts, Start with your local Business Link adviser, and we’re planning to expand overseas.” who will assess your needs, and suggest at least three options for each position sought. Also, ask friends and business contacts for needs and examine their track record. You’re recommendations, such as your accountant looking for advisers who can not only help you and bank manager, or go to professional gain finance, but who also understand your bodies, like the Law Society. business. So you need to find out: Select experts who are right for you. Make a n What information and advice you will get shortlist, then meet to discuss your business n How often you will meet and for how long n If you will be able to call them in a crisis n What areas they will cover IN BRIEF ExpERts n What you will need to do yourself l Businesses that seek expert help build n What results you can expect turnover faster than those that don’t n How they will charge you l Accountants and lawyers are essential Be clear about how much effort you are for raising finance. For equity finance prepared to put into the relationship. To and going public, you may also need a make the most of your meetings, ensure you corporate finance adviser, a broker and have all the key details to hand. You’ll also a financial PR consultancy need to be prepared to act on their advice. l Build advisers’ costs into funds sought Once you have selected your team of experts, agree specific targets. Be honest 10 www.businesslink.gov.uk/growth
  • 13. sECtIoN 1 FuRthER poINts to thINk aBout What to ask before you hire an adviser: you should also: n What types of fundraising does the n Speak to one of the expert’s recent expert specialise in? Check their track clients to find out how they operate and record in your business sector what they did for them n Which lenders and investors do they n Think carefully about the fee structure, work with? Are they impartial? so that it provides the right motivation n How quickly can they secure you finance? to allow you to get the most out of your n How do they propose structuring fees? relationship. One possible option would n Can they supply three references, ideally be to combine a retainer, a bonus for in a similar business area? getting better terms and a closing fee and communicative. Let them know if you and broker to help you comply with the are unhappy with anything, and check they regulations. A PLUS market listing requires a feel you have stuck to your side of the deal. corporate adviser. Expect to pay £100,000 to £400,000, plus 3-4 per cent of funds raised. Who should you consider? Accountant: One of the first outside sources Financial PR adviser: Compulsory for a to consult, accountancy charges will depend market listing, financial PRs charge from on how much you raise (typically 1 per cent £2,000 to £5,000 a month. or more of larger sums) and the scope of the work. Otherwise expect an hourly rate of £200 High growth coaching: Coaches offer key to £400, or £175 to £300 outside London. advice on how to grow your businesses. Coaching for High Growth, a Solutions for Legal adviser: You can’t raise equity finance Business product, delivered by Regional without a legal adviser. Fees for raising Development Agencies and accessed £500,000 in venture capital would typically through Business Link, assigns coaches with range from £15,000 to £40,000, while a experience at chief executive level. They work flotation will cost from £50,000 to £150,000. with companies with high growth potential to foster and develop management skills. Corporate finance adviser: Sitting between Companies wishing to take part must make your business and potential lenders or a case for inclusion. For more information, investors, corporate finance advisers help to visit: www.businesslink.gov.uk/solutions n source and secure all types of finance at a higher level. Charges are usually made up For advice on calculating your investment of a series of fixed costs, a closing fee and needs, see pages 14-15 bonus. Fees may reach 7 per cent for deals under £1m, but 2-6 per cent for larger deals. Where to go next NOMADs, brokers and corporate advisers: For more on advisers go to To list on the Alternative Investment Market www.businesslink.co.uk/advisers (AIM), you’ll need a nominated adviser (NOMAD) 11 www.businesslink.gov.uk/growth
  • 14. sEctIoN 1 Preparation Intellectual property Protect your intellectual property image: Shutterstock and other intangible assets, as they may be important when you are looking for investment I f your business is innovative or creative, successful, you can license your IP to other you will probably have developed some businesses or to manufacturers abroad. intellectual property (IP). The law allows you to protect the originality of What intangible assets can be protected? your business, and you should take all Usually for IP, only the three “registered the steps possible to ensure others can’t rights” in UK Law are considered: patents, steal your ideas. IP can also be a major trade marks and design rights. They protect advantage when searching for finance, as the innovative processes, the name and the investors are looking for a concept that can’t design of your product or service. be copied easily. In fact, if you have not taken But you also have unregistered assets, the necessary steps to safeguard your IP, like copyright, know-how and confidentiality. few investors will want to risk their money by These can be protected using contracts with investing in your business. staff, manufacturers and distributors. It is Currently, businesses built on innovation vital to be thorough in protecting your IP, and and creativity have an advantage when investors will ask what steps you have taken. looking for funding. They can be cheaper If you employ a company to improve your to set up and expand, and your competition prototype, have a clear contract that ensures has a harder job copying your good ideas. you own the rights to any improvements. If Often profit margins are higher than for your product is a spin-off from education, or labour-intensive businesses, and if you are uses ideas from your previous job, you’ll need to be clear about the ownership of all IP. IN BRIEF pRotEctINg youR Ip Where do I start? l IP is not just a patent. Most original Consider your IP from day one, and secure ideas can be protected in some way your rights as soon as possible. If you’re l Protect your IP before looking for unsure about the rights you own, audit funding, or you may put off investors and them and take the necessary steps before risk your idea being stolen applying for funding. Use The Intellectual l Be careful when using contractors. Property Office’s (IPO’s) IP Healthcheck to Make sure they assign the IP from their print a report showing what action needs to work to you and insist on non-disclosure be taken. Visit www.ipo.gov.uk for this and other useful IP information, including a list of 12 www.businesslink.gov.uk/growth
  • 15. sEctIoN 1 relevant events. For further information from casE study Business Link on how you can make the Unable to secure most of your intangible assets, visit funding for his www.businesslink.gov.uk laptop security If you need an IP specialist lawyer, most products business, will offer a free introductory meeting to Norman Shaw of discuss your needs. The Chartered Institute ExactTrak, based in of Patent Attorneys (www.cipa.org.uk) and Oxford, met two intellectual property the Institute of Trade Mark Attorneys (www. (IP) lawyers from Mathys Squire, who itma.org.uk) can recommend one near you. explained that his problem was that he didn’t hold patents on his invention. What are the costs? “I was having a problem getting A basic UK patent costs around £3,000 to investors to take me seriously. £4,000, but global patents are far more “Mathys Squire worked with me expensive. Registered rights are charged to identify the innovative and unique for a period of time in a certain area. For steps that were the basis of three example, registering a trade mark for patent applications. 10 years costs £200. You need to protect “With my IP protected, three venture your product wherever it is sold or made, capitalists offered funding for the next especially in emerging economies, where it’s stage of development, and the first cheaper to copy ideas. You’ll also need to pay big orders are already coming in. My for expert advice if your concept is similar to prototype also received government others on the market. You may not be able to funding, and none of this would have protect registered rights that are similar to happened without patent protection.” your rival’s IP, but can, for example, ensure the confidentiality of your know-how is safe. some Regional Development Agencies. The What questions might investors ask? grant help that’s available to businesses Aim to show you’re protected in two ways. varies widely. For more information about First, prove your business can’t be copied grants, see pages 52-56. easily. The harder it is for rivals to enter If you are collaborating with a commercial your market, the more attractive your partner to produce a prototype, draft proposal. Second, show that your idea has agreements to protect your IP are available licensing potential. You can use your IP as a at www.ipo.gov.uk/research-ukip.htm n source of profit, either making it available, or using contractors to manufacture your For advice on attracting equity investment, product for other markets. To do this, see pages 16-17 consider exactly what you need to protect in different markets, and include this in your business plan. Where to go next Visit www.ipo.gov.uk for guides, education pre-commercialisation funding? and the free downloadable IP healthcheck If you have a bright idea, but need some help for your business to commercialise it, funding is available from 13 www.businesslink.gov.uk/growth
  • 16. SECtION 1 Preparation Calculating what you need image: iStock Before seeking finance, it’s important to know how much you require, your chances of securing it and which source best suits your needs F inancial backers expect you to have areas you may need to assess include: salary carefully considered your funding costs for staff you plan to recruit, the cost requirements, so that the amount and of the equipment required, or how much timing of borrowings has been rigorously suppliers would charge for the new stock lines assessed and there is a robust strategy in you propose to sell. place to provide repayment – essentially, that Rob Donaldson, head of MA and private your business is investment-ready. equity at advisory firm Baker Tilly, advises asking for slightly more than you need How much should I ask for? when raising finance. “The fixed costs can You need to cost each aspect of your growth be high if you are looking to secure smaller strategy. For acquisitions, try to identify amounts of money,” he says. “So make the potential target and its likely price. To sure you raise enough, as you don’t want launch a product or service, you’ll need to do it twice.” a marketing plan, which should include: You should also plan to include some who you will target; assumptions about breathing space for at least a year, as it’s how many sales or customers you hope to difficult to ask for more once a sum has acquire; the proposed medium; and the cost been agreed, and extra funding could of the campaign. Opening or purchasing new take several months to raise, potentially premises will require an assessment of the compromising operations. cost to buy or rent in the suggested location, “Company directors tend to take as well as any proposed modifications. Other an optimistic view of prospects,” says accountant Stephen Bayfield of PKF. IN BRIEF YOUR FUNDING NEEDS “Investors gain confidence if a contingency plan is evident, as things rarely go to l Research what level of funding your plan. Remember, sales are usually more plans require, the risks versus your unpredictable than costs.” expected returns, and how the funds Ultimately, you may need to temper your will be repaid ambition. It’s worth formulating alternative l Consider what affects your growth plans in case the financier offers you calculations, such as sector factors, a smaller amount than you have asked for, to track record, business strategy, the life make sure you don’t lose time trying to raise stage of your company, existing financial funds while your existing resources dwindle. resources and the value of your assets If your sector is unusual, new, or you’re a social enterprise, the time taken to raise 14 www.businesslink.gov.uk/growth
  • 17. SECtION 1 growth capital will be further extended, CaSE StUDY and this should be built into your costs. Seatwave is a £30m You may also need to consult specialist London-based lenders (see Banks and Specialist ticketing company Lenders, pages 20-23). which has gained backing from What affects the amount I can seek? venture capitalists Be realistic, given the stage of development on three separate occasions. Chief your business has reached. For most finance operator Aksel van der Wal companies, funding tends to rise explains what you need to consider incrementally from small amounts of when looking for finance. secured debt and personal investment, to “Business owners need to think about more sophisticated facilities, such as invoice not only what they want to achieve, but finance and leasing, and business angel, also how much of this is realistic. Once venture capital and public market funding. this has been done they can look at how When considering how much you can expect much it will cost. Our growth was mostly to secure, think about these two factors: viewed in terms of hiring new staff and marketing. Because of the way our How financial institutions view your sector payment model works, we don’t have n Your management team’s track record huge cashflow issues. However, ticketing n Existing and potential future competitors, is seasonal so that had to be taken into and the economic climate account when making forecasts.” n Your existing debt facilities n Your asset backing – what assets can you use as security with investors or lenders? about angel and venture capital finance, n Your vision – it’s important to have clearly go to pages 30-41. defined goals and ambitions For a listing on the Alternative Investment Market, most companies look to raise at least What is the most cost-effective option? £5m, with the PLUS market typically used to Raising finance can be expensive in terms of generate slightly less. Listing costs may top time, and arrangement and advisory fees. For £500,000 on AIM (less on PLUS), so consider more on advisers’ fees, go to pages 10-11. carefully whether either market can meet your If you are raising venture capital, you need needs. The financial climate has seriously hit to be aware of the costs involved. So if you’re the stock markets, so flotation may not be the likely to need extra finance in the medium right move until the economy improves. n term, it’s often more economical to seek more at the outset. For advice on using bank debt for growth, As most debt is secured, costs tend to be see pages 20-23 lower, although for cashflow loans a funder will require independent due diligence, which will be paid for by the borrower. Where to go next Cash outlay for angel investment tends to For The Institute of Chartered Accountants be minimal, but risk is usually compensated in England Wales, visit: www.icaew.com for by a higher equity stake. For information 15 www.businesslink.gov.uk/growth
  • 18. SECTIoN 1 Preparation Attracting equity investment It’s a battle securing investment from venture capitalists and business angels, so it’s vital to make your proposal as attractive as possible U nder any circumstances, encouraging trading environment, as well as explaining investors to trade finance for a how you are going to take advantage when stake in your business is tough, and the recession subsides. currently it’s harder than ever. Ian Shields is a manager at g2i, which Only a fraction of the proposals venture helps businesses prepare for funding. capitalists (VCs) receive get as much as a He says investors will be impressed by a phone call. Even fewer will go all the way and business plan that understands the effect secure investment. the recession is having on companies. Today, risk is seen even more vividly, the “Identify how you’re going to get through flotation market is effectively closed, and the downturn and take advantage when you investors have less to invest – there are come out the other end,” he explains. simply fewer deals around. To stand It’s also important to know what the a decent chance of success, you need a investor is looking for from a company, so strong proposition, able management and assess the following: rigorous preparation. n The backer’s investment range n The stage of business they typically finance Getting investors’ interest n Their geographical reach Your proposition must show a carefully n Their deal portfolio and sector preferences evaluated business idea detailing the risks If you’re seeking angel finance, go to and rewards. Emphasise how potential networking events to get an idea of who investors will benefit financially and the you’re up against. For more on business timing of their exit, if applicable. You should angels, see pages 30-35. also include where your business sits in its chosen market and why it will succeed Your management team against existing and potential competition. Investors need to be able to believe in and It’s also very important to show an investor work with your management team. They how your business will cope in a tougher are likely to be looking for: Personal qualities: Illustrate IN BRIEF SECURING EQUITY INVESTMENT your business pedigree by highlighting past successes l Match your proposition to investors’ requirements Contacts: Prove you have good l Investors consider track record, the quality of the contacts in your chosen sector management team, contacts and financial commitment Commitment: Show that l Work out what returns you can offer you believe in your business l Decide how much equity and control of your business enough to invest some of you would be prepared to share your own money in it, and that you’re prepared to put in 16 www.businesslink.gov.uk/growth
  • 19. SECTIoN 1 CASE STUdY Richard Williams is chief executive of Hampshire bio- detection company image: iStock Stratophase, which has attracted £3.6m of finance from investors, including maximum effort. Social enterprises may Boston-based East Hill Management. find it difficult to secure investment that “You’ve got to pitch your business requires security, as directors are unlikely plan according to what your investor to want to offer personal guarantees. is looking for,” he says. “We are Therefore, social enterprises should explore developing devices that can detect fatal all alternative security sources before viruses without the need of a laboratory. approaching an investor They could be useful in medical Team: Emphasise your directors’ previous settings, but because of the nature of experience in their role and at a similar level that industry, they could take years Track record: Push your past experience. If to produce, which could have put off you’ve been through tough times, it’s vital to potential investors. explain the lessons you’ve learned “To avoid this, we adopted a low-risk model, using the technology to develop The returns you can offer products for military, agricultural and An investor’s main concern is the potential manufacturing environments before return and when they’ll see it. They typically moving into the medical sphere.” seek businesses offering an early exit, by trade sale or flotation (for more on exit strategies, see pages 36-41), and will Also, treat rejection as a chance to want to know: improve your offering. Ask for feedback and n Is the proposition feasible? try to fill gaps in your proposal. n Can the management deliver the plan? The ability of VCs to raise funds has been n Are the potential rewards enough? adversely affected by the ecomomic downturn, n How will I get my money out? and this has resulted in many investors having n If the business is to be sold who will buy it less money to re-invest in businesses. n or how will the market react to flotation? For advice on what to include in your What are best and worst-case returns? business plan, see pages 18-19 By attracting equity investment you are growing your business, and although you will have a smaller stake, it will potentially be Where to go next worth significantly more. For more on equity finance, visit: Remember that equity investors in social www.businesslink.gov.uk/equity enterprises will not necessarily be looking Visit the British Venture Capital Association at a conventional exit strategy, but may still at: www.bvca.co.uk want a return on their investment. 17 www.businesslink.gov.uk/growth
  • 20. SEcTIoN 1 Preparation A business plan to raise finance Securing funding isn’t easy during a recession, so getting your image: iStock business plan spot on is essential if you are to convince investors T o acquire the funds you need to grow, and growth strategy; unique selling points your business plan should be tailored (USPs); sales; forecasts to your finance provider. A potential History and background: The business; its backer wants to see why you need finance, origins; historical performance; sales data how you plan to use it, how they will get The market: Size; growth rate; major their money back or realise a return on their players; your position; technical advances; investment, and the evidence that backs up forecasts; relevant government regulations any claims you are making. Opportunities: Vision and objectives; If you have an inexperienced management customers and their needs; target market; team, which has never dealt with raising product or service positioning and value finance before, you should consult an offering; USPs (such as plans to cut prices); adviser, who can help you prepare the patents or other legal protection; pricing; right business plan. distribution channels; marketing plans Operations: Financial; organisational and The structure of your plan human resources; requirements not yet met Executive summary: Your overall vision; Management team: Brief background of your a mission statement; plans; the current key people; their responsibilities and relevant state of the business; details on your skills; gaps that need to be filled product or service; your value, proposition SWOT analysis: Strengths; weaknesses; opportunities; threats. Be thorough here, to avoid investors spotting weaknesses and IN BRIEF BUSINESS PLANS threats that you have not identified l Include background information on Financial forecasts: Sales; gross margin; the business, market analysis, future logic behind figures; profit and loss account; opportunities, existing operations, balance sheet and cashflow three-year brief management biographies, SWOT forecasts; payback period; breakeven point analysis, forecasts and existing finances Financing: Loans and debt arrangements; a l Try to keep it under 40 pages and breakdown of how funds will be used tailor it to the type of finance sought – 10 Exit routes: Possible exit strategies – for pages may be enough to secure debt more on this, see the box on page 41 l Keep the look and feel straightforward This covers most forms of fundraising, although securing debt requires less detail, 18 www.businesslink.gov.uk/growth
  • 21. SEcTIoN 1 with added emphasis on assets, security, n For equity investors, focus on market creditworthiness and aged-debtor analysis opportunities and exit options, such as – who owes you what and from when. trade buyers. Venture capitalists are A business plan for a social enterprise having a tough time, as currently the will also need a clear explanation of what market for flotations is effectively shut, the social enterprise is and your social while investors are more cautious. This objectives. It should show that the company makes floating unlikely, but if you’re not has a strong track record, is able to repay exiting for three years, it can be discussed any borrowing, and, if relevant, generate sufficient profit to interest a social investor. Focus on the present To read and download a sample plan, visit While projections are vital to backers, www.businesslink.gov.uk/businessplan don’t forget existing sales, customers and the make-up of your management team. How much to include “People buy people, not business plans,” says Each section should be between two and four Khedair. “Business ideas remain conjecture pages, with slight variations depending on the without the right people to implement them.” type of business – a manufacturing company, for example, might talk more about its Keep a straightforward look and tone products’ intricacies. Avoid over-emphasising Lengthy plans are off-putting, says Khedair. any one section, and only use headline “An executive summary should be just figures in the executive summary. that – a summarised version of the main “Knowing what to leave out is as important areas of the plan,” she stresses. “Restrict as knowing what to include,” says Jane it to two sides, letting the rest of the plan Khedair, managing director of Business provide the detail.” Plan Services. “An effective business plan Presentation is everything. Keep the is more than just a set of spreadsheets, but plan’s language and appearance clear and the narrative shouldn’t be a novel. It needs to accessible. Use photos and graphics if have sufficient detail to present the relevant relevant, but don’t overcrowd it. Supply the facts and whet readers’ appetites.” plan as a professionally presented document. Seek advice, but an adviser shouldn’t Empathise with your audience write the plan without your input. It should n Backers want to be confident that the reflect your character, because investors are interest and capital repayments can be backing you as much as your idea. n met. Talk about how risk can be controlled, loss can be limited, and security. Adjust For advice on negotiating with investors, the tone to suit the audience see pages 46-48 n Invoice and asset-based financiers are less concerned with security than the quality of your debtor book, credit management Where to go next capabilities, bad debt record and the extent For more on business plans in general, visit: to which the business suffers credit notes. www.businesslink.gov.uk/planforgrowth They may also want to have an idea of the For more on business plans tailored to sell-on value of your assets. For more on equity investors, visit www.bvca.co.uk asset-based lending, go to pages 26-27 19 www.businesslink.gov.uk/growth
  • 22. SECTION 2 Funding options and process Banks and specialist lenders The credit crunch has made it difficult to secure funding from lenders, but there is still money out there. So how can you raise it and is it right for your business? G etting a loan from a lender may be aware of the EIB’s lending packages, as it a little tougher than usual at the may help you get a cheaper loan. For more moment, but despite all the furore details on these, visit: www.eib.org surrounding the credit crunch, cash is still available for businesses and entrepreneurs. Enterprise Finance Guarantee In response to the serious problems Are the banks still lending? caused by the credit crunch and demand Banks are still providing finance, but it may from small businesses, the Government be more difficult to secure than before. The has intervened with a scheme to interest rates banks are charging are likely encourage bank lending to businesses. to be higher, because they are assessing The Government had previously supported risk in light of the economic situation. At a bank finance for businesses through the time when many well-known businesses Small Firms Loan Guarantee (SFLG). have suffered, successful growing and viable This has currently been replaced with the companies are finding it hard to get funding. Enterprise Finance Guarantee (EFG), A key problem is that banks aren’t lending a Solutions for Business product. to each other as much as before, leading Under EFG the Government will to a slowdown in credit for everyone. As guarantee lending to viable businesses. a result, banks need to borrow money The scheme means the Government is from institutions they may not have used providing £1bn of guarantees for £1.3bn previously, such as the European Investment of lending to small businesses. There are Bank (EIB). The EIB doesn’t lend directly several lenders on board, offering loans to small businesses, but lends through of between £1,000 and £1m for a period of local banks. Several UK banks already take three months to 10 years. Visit www.berr. EIB loans to support their small business gov.uk for a list of the lenders involved. To clients. So if you are applying for a bank qualify, you must be a UK business with a loan, make sure your bank manager is turnover of up to £25m, and have no obvious access to finance. The guarantee can be IN BRIEF KEY ASPECTS OF BANK dEBT used to support new loans, l Good for buying assets and medium-paced expansion refinance current ones, or l Raising between £1,000 and £1m plus is possible convert part or all of an l Assets and track record of the management are key existing overdraft into a l You may have to make personal guarantees, such as loan to release capacity in putting your house up as security order to meet working l It has become tougher to secure since the credit crunch capital requirements. Under current government plans, 20 www.businesslink.gov.uk/growth
  • 23. SECTION 2 BANK dEBT PROS n It is cheaper and easier to obtain than equity finance n You do not have to give up any control of your business to a backer CONS n Businesses with little trading history may find larger loans hard to obtain n Defaulting on repayments or breaching conditions may mean paying back in full sufficient cashflow to service the loan may not be considered. However, your bank may offer a capital interest holiday (or repayment holiday) from the start or allow you to make lump sum repayments. image: iStock Regardless of the exact nature of the deal, the bank will want to know the following the scheme will be available up to 31 details about your business before they will March 2010. be willing to lend: For more information on the EFG, n The track record and financial position of together with other ways the Government your business and the management team is helping small businesses, visit: n The loan’s purpose and your ability to repay www.businesslink.gov.uk/realhelp n The value of your personal guarantees Banks generally ask for security on the Should I get a loan? loan in the form of a personal guarantee. If If your business needs a significant injection you don’t have the necessary funds, banks of cash, you may have no choice other will usually ask for your home as security. than applying for a loan. The only real alternative is to sell shares in your business. What are the costs? However, you must be aware that equity is Bank loans are cheaper to raise than often the most expensive form of funding equity, but pose more of a cashflow in the long term, since you are exchanging burden. Always check the annual percentage part of your business in return for cash. rate (APR) for interest on any loan. It is Also, as a result of the credit crunch, your worth shopping around. Get a written company is likely to receive a lower valuation quotation first, and read the small print, than previously. looking for hidden charges. In general, If you do take a loan, you will have costs include: repayments scheduled from the outset. n Interest, which is usually 2.75-4 per cent This means new businesses looking over the base rate, although it may be to launch products or services without higher for new businesses and deals can 21 www.businesslink.gov.uk/growth
  • 24. SECTION 2 CASE STudY What is the loan dependent on? Hi Ho Silver, based Banks have a strict underwriting process in Somerset, is a and set the following provisos before a loan multi-million pound can be agreed: jewellery business n You have to sign legally binding covenants, which has been and if you breach the conditions, the financed solely through overdraft loans. bank will be entitled to immediate full However, until director Emma Warren repayment joined the business, it had only been n Your profits should demonstrate an ability able to get limited finance from the to service the debt bank, and so its ability for growth was n Monthly management accounts and being inhibited. audited annual accounts are required to be To change this, Warren set about presented before and possibly throughout improving the quality of information the the period of the loan business produced. This took the form n Lenders may want to see how you of formal management accounts that manage debt, with analysis of how much could show a lender exactly what the the business is owed alongside when money it was investing in the business the invoice was issued (this is called was going to achieve. aged-debtor analysis) “Part of my brief was to get management accounts in order and Getting the best deal to establish a relationship with the Take the time to shop around – it could save bank. This makes a huge difference. you money in the long term. Make sure you If your bank has proper management negotiate with the bank manager to get the information which is presented monthly, best deal, and ask if you can have any special and you inform them about the decisions terms in writing. that you are making, then it makes it a Use a financial broker to propose the lot easier for them to support you.” best deals for the type of finance that your business needs. A broker can save you time vary. Interest is charged on the amount and money, and can also increase your of the facility you use at one time, and is chances of getting a loan by presenting levied quarterly or monthly your proposal in the best way to the most n A lending fee with arrangement costs of appropriate lenders. But don’t forget to 1-1.5 per cent of the loan can be charged establish what fees, if any, the broker n A prepayment fee may be levied if you will charge you. decide to pay the loan back early You will be able to find a list of financial n Charges are based on the level of risk and brokers by visiting the National Association your standing of Commercial Financial Brokers’ website at www.nacfb.org. How quickly can a loan be secured? Research the small print. Apart from It can take between one and three months to interest rates, assess other lending finalise the detail, but you should get an initial criteria, such as loan terms and set-up answer within weeks. Getting quotes from a fees. Consider having an expert, such as a few banks can force a quicker decision. solicitor, review the loan documents. 22 www.businesslink.gov.uk/growth
  • 25. SECTION 2 Negotiating the terms AlTERNATIvE SPECIAlIST lENdERS of your loan A loan agreement can be a Not all businesses fit into the same type of model, and as long and complex document. a result, have difficulty getting finance from traditional How you agree the terms of lenders. If your business has a social, charitable or ethical the loan will have a direct dimension, then you could try the sources below: impact on the health of your Name Website business. Remember that almost everything will be up Adventure Capital Fund www.adventurecapitalfund.org.uk for negotiation. Aside from discussing basic Big Issue Invest www.biginvest.co.uk issues, such as the due date of the loan and the interest rate, Charity Bank www.charitybank.org you also need to establish the amount of the loan fees. It’s Futurebuilders England www.futurebuilders-england.org.uk important to make sure that Triodos Bank www.triodos.co.uk you will have the flexibility to pay off your loan earlier than Unity Trust Bank www.unity.co.uk the due date and, if possible, try to avoid any penalty for Co-operative early settlement. Community Finance www.icof.co.uk Negotiate for a grace period for your payment schedule and check to make sure that late payment However, specialist lenders can be charges are practicable. more flexible in the way that they look at other aspects of the business, particularly The alternatives to the high-street banks personal guarantees. Big institutions typically use a computer “We work with the usual types of security to give loan decisions, and if your sector is (property, etc), but don’t take personal unusual or you run a social enterprise then guarantees,” says Cooper. “We can work with it may not fit the model. security from a community of guarantors, Briefing the bank on your market can help, where risk is split between them.” n but if you are rejected there are alternative lenders that specialise in particular sectors, For advice on calculating your investment as well as in helping businesses that have needs, see pages 14-15 failed to get funding elsewhere. While specialist lenders often operate in areas that the main ones won’t consider, Where to go next they still examine the same criteria. For more details on bank debt visit: “We look at a number of factors, including www.businesslink.gov.uk/bankdebt business background and history, and For more information on the banking sector what experience the management team in general, go to The British Bankers’ has,” explains Sue Cooper, deputy head of Association’s website: www.bba.org.uk business banking at Triodos Bank. 23 www.businesslink.gov.uk/growth
  • 26. sEcTIoN 2 Funding options and process Borrowing against your invoices Raising funds against the value of your invoices can dramatically improve your cashflow, but is debt factoring or invoice discounting right for you? I nvoice finance comes in two forms: suitable, such as those that allow the return factoring and invoice discounting. For both, of goods or take cash payments. cash is advanced to you when you raise an invoice. The lender pays an agreed percentage How much can I raise? of each invoice, with the balance, minus fees, Typically, lenders advance 80-90 per cent paid on settlement. The difference between of invoice value, depending on the quality the two is that factoring includes sales of the debt. If your customers are deemed ledger and collection management. creditworthy, you’ll get a higher percentage. Invoice finance is only suitable for partnerships and companies selling goods What are the costs? or services on credit to other businesses. For factoring, costs usually range between 1-3 per cent of turnover, whereas invoice The benefits of invoice finance discounters usually charge between 0.1-1 per Getting invoices paid upfront helps maintain cent. The factoring charge depends on how cashflow, which could help to keep you much work is involved in the collection of the afloat in a recession. Invoice finance is a ledger. Some invoice financers may insist on cost-effective alternative to overdrafts or bank a minimum level of turnover for a minimum loans, and there is often no need for extra fee. The second cost element is the interest security before the money is advanced. charged on what you are borrowing, which can However, they’ll want to see sound range from 1.5-3 per cent above the base rate. management processes and, for invoice An optional cost to consider is bad debt discounting, an efficient credit control insurance. With a ‘recourse’ facility, if your system. Invoice finance lenders will consider clients don’t pay within a specified period most sectors, but some companies are less (usually 90 days), the lender will reclaim the money from you. By opting for a ‘without recourse’ service, you’ll be covered for up IN BRIEF INvoIcE FINaNcINg to 100 per cent of the invoice value on the l Immediate advances of as much as default of the debtor. 90 per cent of the invoice l Retail and cash businesses are How quickly can I get a deal? less appropriate than manufacturers, It can take from a week to a month to get an distributors and service providers answer, depending on the size and complexity l Can help to even out cashflow of your business. Lenders will want to: l The charge is a one-off percentage n Examine your business and its accounts of turnover, plus interest on the n Carry out some due diligence, including amounts borrowed scrutinising your sales ledger history and your credit control procedures 24 www.businesslink.gov.uk/growth
  • 27. sEcTIoN 2 casE sTudy Stuart Dunbar is the co-founder of Oak image: iStock Exports, a Cheshire- based exporter of non- perishable British food. n Perhaps suggest changes to your “We have to buy and distribute stock, processes, before the facility is cleared and it can be up to 60 days before we get paid. As our customers are all What do lenders want? overseas, invoice finance has proved Profitable businesses are preferred, but some the ideal way to handle the problem. lenders will consider companies that are not “There was a gap to be bridged yet in profit or have been insolvent, if they have between the 30-day payment terms we a robust turnaround plan. These are concerns had with UK suppliers, and the 60-day shared with banks, according to Kate Sharp of terms many of our overseas customers the Asset Based Finance Association (ABFA). worked to. Invoice finance means “Lenders require good debt, a good business our cashflow is freed up by releasing plan, sound management and financial a percentage of our invoice value, credibility,” she says. “You need to have your providing a smooth, consistent source books ready and people available who know of funding that grows with our sales.” where you want to take the business.” For advice on business plans, go to pages 18-19. Lenders will constantly monitor your sales The downside of invoice discounting ledger, which can help identify credit risks This isn’t the cheapest form of funding, so and tighten up your processes. “Finance balance your need for smooth cashflow companies also carry out extensive credit against forfeiting some invoice value. Also, checks on your customers and can pass this if things go wrong, you may find you’re tied information on to you,” adds Sharp. into a deal for at least 12 months, so before you sign up, find out what happens if you Is INvoIcE FINaNcE FoR you? want to get out of the contract early. Remember, invoice discounting is a PRos competitive market, so negotiate on terms n The amount advanced grows as your and conditions, such as notice periods. n company expands n Improves cashflow and gives you flexible For advice on the benefits of leasing over access to additional funds buying outright, see pages 28-29 n Helps introduce credit control discipline coNs n Only really works if you sell products or Where to go next services on credit to other businesses For more advice on invoice discounting, visit: n Not the cheapest form of finance, but the www.businesslink.gov.uk/discounting recession has made it more attractive For the Asset Based Finance Association, n You can get tied into long contracts visit: www.abfa.org.uk 25 www.businesslink.gov.uk/growth
  • 28. SEcTIoN 2 Funding options and process Making use of image: Shutterstock your assets You can use items like stock, machinery and premises to secure funding, and in the current climate this can help to persuade lenders to agree to a loan A sset-based lending (ABL) is a secured ability of a seasonal business can fluctuate. business loan where the borrower uses Financiers usually retain security over the their assets as collateral. Financiers assets for the contract’s duration, with the lend on items with high sell-on values, such lending decision based on their value. as stock, machinery, premises, invoices and ABL has grown considerably over the even brands or trademarks. It is distinct from past decade. Figures from the Asset Based invoice discounting, as invoices make up only Finance Association (ABFA) show that in the part of the arrangement. For more information first half of 2008, the industry advanced over on invoice discounting, go to pages 24-25. £17.3bn against invoices, stock, property and Typically, you’ll have access to a revolving other assets, which were themselves worth credit facility, where you have an upper limit, £31.2bn. The credit crunch has deterred but the total borrowed changes frequently, banks from lending, but ABL offers security as with an overdraft. The amount is subject and may help you to persuade them. to the value of collateral at the time, and is constantly assessed, so the borrowing Who is it for and how much can be raised? ABL works well for asset-rich businesses undergoing a step change. For example, IN BRIEF ASSET-BASED LENDING those looking for extra working capital to fund l Debt can be secured against assets, growth or seeking to part-finance a larger including stock, machinery, premises, deal, such as a management buy-out. The invoices and even brands amount raised is down to the assessed value l Manufacturers, distributors and of the assets and the likely depreciation rate. retailers are the most likely users. It Some assets are worth more than others: has not been a common source of UK n Invoices can secure 80-90 per cent upfront finance, but it is growing in popularity n Plant, machinery and property also raise l Security over assets is retained by the high advances of around 80 per cent lender for the duration of the contract n Stock and raw materials tend to result in l Lenders may advance more than a lower advance of 30-70 per cent. Values invoice discounters, because they look are usually based on what assets would be at all the assets of the company worth in a ‘forced’ or ‘orderly’ sale. l Asset-based lending is provided by some banks and specialist lenders Insuring your assets l Some lenders have a minimum “Non recourse arrangements” are worthy of loan size of £5m your consideration in the currrent economic climate. This is where an asset based lender 26 www.businesslink.gov.uk/growth
  • 29. SEcTIoN 2 provides credit protection against debtor’s cASE STuDy insolvency in respect of the invoice finance In 2007, Qualtech part of an asset based lending facility; if a Engineering, based debt is not collected due to the financial in Devon, produced inability of the customer, the factor assumes revenues of £250,000 the loss. Many asset based lenders will and had just five staff. provide this service. However, director Emma Warren was What are the costs? keen to grow quickly. Typically, the annual cost of borrowing on When another engineering business, a revolving credit facility is around 1.75-3.5 Yale Systems, was put up for sale it per cent above the base rate, plus an annual appeared to be the ideal opportunity. and/or closing fee of around 0.5-1.5 per cent Unfortunately, the investment required of the total borrowed. was too high for angel investors and too Should you decide to seek a term loan low for venture capital. against fixed assets, you would be charged at “We decided to use asset-based similar rates to your credit facility. To support lending, and raised finance by placing loans, however, the financier would have our machinery as security. The new appraisals or valuations undertaken on your combined company, UK Precision, now fixed assets. The cost of employing a valuer, turns over £1.25m and has 20 staff.” which varies depending on the assets and size of facility, will be passed on to you. You will also be charged for monitoring, What do lenders want? relating to the constant ongoing review of Solid businesses are preferred by lenders your collateral arranged by your backer, rather than those promising huge returns. along with due diligence costs (see below). “We seek companies with assets and prospects for improvement,” says Dennis How quickly can I raise the money? Levine, chairman of ABL specialist Burdale Not as quickly as pure invoice finance. The Financial. “We tend to finance buyouts or sums involved are larger and the valuation of refinance businesses where traditional certain assets is more complex. The lender sources are less flexible.” might need the services of a specialist valuer. Lenders expect to be provided with a You’ll have to be prepared to undergo a variety of reports – daily, weekly or monthly, detailed evaluation of your business (due depending on the assets being funded. n diligence), where the lender will look at all your accounting systems. They’ll value For advice on bank overdrafts and loans, property, plant and machinery, and will see pages 20-23 review your cashflow and budget projections. You’ll have to prove your cashflow is smooth enough to weather any seasonal fluctuations Where to go next or unplanned drops in business. For a list of asset-based lenders from The whole process should take four to the Asset Based Finance Association, visit: six weeks. After signing, some lenders may www.abfa.org.uk allow a cooling-off period. 27 www.businesslink.gov.uk/growth
  • 30. SEcTIoN 2 Funding options and process Should you buy or lease assets? Purchasing important items upfront for your business may drain your cash reserves, which is something companies can ill-afford. So, consider leasing B uying outright might sound like the investment in the UK in 2007. [Source: simplest way to acquire equipment, as Finance and Leasing Association]. cash purchases can work out cheaper There are a number of leasing options. in the long run. What’s more, the goods are A popular long-term approach is a finance classed as business assets, so they can be lease, where you pay a deposit followed used as security. However, it may not be the by regular payments that ultimately best use of your working capital. A key way to cover the full value of the asset and the survive the economic downturn is to preserve interest accrued. cash in your business. So, if you don’t need to Another option is operating leasing, which own the item immediately, consider leasing, allows you to use the assets for a shorter which allows businesses to use valuable period – the finance house can either sell or assets – such as machinery, cars or furniture lease them again at the end of the contract. – without paying upfront. Instead, these items If you don’t want the worry of covering are bought and owned by a finance house and maintenance costs, consider contract hire. leased to you for a set period. This is often used with vehicles, and monthly Leasing is the most popular way for payments can cover maintenance and fuel. businesses to buy vehicles. In 2007, £19bn was provided to register 50 per cent of all The advantages of leasing new cars in the UK, while leasing accounted n Cash that would have been spent on assets for almost 28 per cent of fixed capital can be released to finance growth n You can deduct the costs from your taxable income. For more details, visit IN BRIEF LEASING www.businesslink.gov.uk/taxdeductions l You get immediate access to the n You don’t own a depreciating asset and can assets, but pay on a monthly basis, return it, offering flexibility easing the pressure on your cashflow n You can lease almost anything, from cars l Leasing companies effectively lend you to computers, machinery and furniture the total cost of items leased n You can access the latest equipment and l Almost anything can be leased – cars, may get maintenance as part of the deal property, IT and telecommunications equipment, machinery, printers and The disadvantages of leasing photocopiers, even furniture n A long-term lease will probably mean you l There are various tax benefits – for pay more for the item than buying it outright example, you can deduct lease costs n Leased items are not classed as business from your taxable income assets, and so can’t be used as security l It can take as little as a day to organise n You won’t own the equipment at the end of the lease 28 www.businesslink.gov.uk/growth
  • 31. SEcTIoN 2 cASE STudy East Midlands-based company Martin Wright Ltd has built a solid reputation as a vehicle diagnostic image: Shutterstock and mechanical repair company, for brands such as BMW and Audi. The business requires specialist equipment in order to carry out its day- Finding a leasing company to-day work effectively, and had to decide Most high-street banks, a range of specialist whether to buy or lease those assets. independent leasing companies and some After initially failing to get finance, the manufacturers themselves now operate company obtained grant funding to help leasing arrangements. buy the equipment outright. “Working with Business Link helped How much will it cost? us look at all options available to us. Finance fees can vary considerably As a result, we decided it was more depending on the item you want and your suitable for us to buy because of the own creditworthiness. However, interest changing economic conditions.” rates are at an historic low, so, in theory, lenders should be able to offer you a good deal. It’s always worth shopping around and tax benefits of buying outright against leasing. getting a few quotes. Also be prepared to Your accountant should also be able to tell you negotiate, because lenders could reduce if the overall cost is too high. their rates or waive charges, or be more There are other cost benefits, too. One of flexible on payment terms if you do. the biggest savings for small businesses can The most important thing is to get the type be in administration. For example, it’s quite of deal that best suits your business. Deals common for the responsibility for dealing typically span one to five years, but some with a company’s vehicle fleet to be added on can be for longer, such as those for larger, to someone’s job, and an operating lease or more valuable items. contract hire can help to reduce the workload Some lenders may ask for a deposit to and hassle involved. n help underwrite the deal. So, anticipate this and try to use it to your advantage For advice on making the most of the assets when negotiating. You may be able to get you own, see pages 26-27 lower monthly payments by offering a slightly higher deposit, because it will reduce the lender’s risk. Where to go next Before striking a lease agreement, it’s vital To decide whether to lease or buy, visit: you’re really sure it’s the best deal for you. If www.businesslink.gov.uk/lease necessary, get independent expert advice from For advice on leasing, visit the Finance and a professional, such as from your accountant, Leasing Association at: www.fla.org.uk who can analyse the figures and compare the 29 www.businesslink.gov.uk/growth
  • 32. sECtIoN 2 Funding options and process Angel finance If you are looking for financial input and guidance from experienced individual investors, angel funding could be for you. But how much can you raise and how can you image: iStock go about securing it? M any people are familiar with angel This may help take your business to the point investing through the Dragons’ at which it will be attractive to a VC firm. Den TV series. This gives a good Investment from angels can be offered as indication of how an angel will test your a lump sum upfront, or in stages. It can be business plan, but unlike on TV, the process dependent on your business achieving specific of investment may take months – and in milestones, such as hitting a sales target or a downturn there are many businesses launching an new product or service. chasing few investors. Angels invest to achieve a financial Angels are usually wealthy entrepreneurs, return, typically in the form of a capital gain and dealing with them is a less formal through an exit. This could be realised by process than with other forms of equity an acquisition of the company or a flotation, finance. However, they are less predictable, although the latter is unlikely at the moment and not mandated to invest. If they think they due to the current economic climate. can get a better return elsewhere – from “Angels not only bring money, but also bonds, for example – that’s what they will do. experience and skills. Many have been Angels tend to offer smaller sums at an through at least one downturn, so can help earlier stage than venture capitalists (VCs). steer your business forward in challenging times,” says Anthony Clarke, IN BRIEF RAIsINg ANgEL FINANCE chair of the British Business Angels Association. Some l Between £10,000 and £2m can realistically be raised will even take on specific from individual business angels or an angel syndicate management roles. l Sourcing angel investors might require more searching Angel funding can come than finding venture capitalists (VCs), but private investors through personal or industry are more prepared to back an early-stage business contacts, as well as suppliers. l Angels may be found through industry contacts, but a However, the most structured more structured approach is via business angel networks way is to approach a business l The process is less formal than with VCs – angels often angel network regionally, know their sector well, and so make instinctive decisions close to your business. Each l You are likely to have a closer involvement with your one represents a group of investor as they look to add value to your business private individuals looking for investment opportunities. 30 www.businesslink.gov.uk/growth
  • 33. sECtIoN 2 In sectors more suited to longer-term ANgEL FINANCE investment, or where the potential for a big return is limited, it may be harder to get PRos angel funding. The current economic situation n Angels often invest smaller sums than means the same goes for businesses working venture capitalists (VCs), so may suit on low profit margins or with no protectable newer businesses intellectual property. This is because, like n As well as funds, they may be able to every investor, angels may currently be less offer skills, contacts and experience likely to take on high-risk investments. n Business angels take much higher risks For more information on alternative sector than other forms of funding angel investment, see page 35. n Investment occurs in most business sectors and at all stages of development What will angels back? n Can be quicker and less formal than VCs Business angels invest in almost all industry sectors, but often prefer ones in which CoNs they have experience. Most invest in n Angels invest in only a very small businesses that are past the ‘proof-of- proportion of the proposals they are concept’ stage, but young and growing presented with – more than 90 per cent firms will also be considered. of investment opportunities are rejected Most angels prefer to invest in companies at the initial screening stage within 100 miles of where they live or n Many angels expect close involvement work. Investors in technology companies, with the business they invest in, which not all businesses find desirable CAsE study n Loss of equity means loss of control of When Eseye co- your business, which won’t suit everyone founder Ian Marsden was looking for investment to expand however, tend to be more prepared to travel his mobile technology longer distances. business, based in Guildford, his priority How much can be raised? was to find an active investor who The amounts involved in angel funding vary could help him grow. So, he opted for a widely from £10,000 up to £2m. However, business angel rather than bank finance most of the deals that are done tend to be or investment from friends and family. between £75,000 and £750,000. “For us, growth is about market focus Most individuals invest £20,000 to and networking connections, and angel £50,000 per deal. Some are happy to put investors are motivated to use their up to £200,000 if they really believe in an contacts to make the business work. organisation, but most of the larger sums “Getting investment was tough, but raised occur when syndicates are formed. it’s impossible to know who will fit your Where larger amounts are invested business until you meet them in person. through a syndicate, you will deal with We now have four potential investors.” a lead angel, who acts on behalf of the other investors. 31 www.businesslink.gov.uk/growth
  • 34. sECtIoN 2 What can the funds be used for? to expect, and you can learn from their Angel investment can often be used to help previous mistakes and successes companies accelerate away from the start-up n Mentoring and strategic advice – Growing phase, while mature businesses sometimes your business will involve making some big use it to launch new products and services, decisions, and the advice an angel can offer open new premises, buy competitors or to you can prove invaluable, so plan to meet take on staff as growth demands it. them face to face occasionally. Angel investment can be useful leverage n Networking – Angel investors typically with which to attract bank loan finance, have useful contacts, which can open all especially if your business has previously sorts of doors to other investors, potential been refused a loan. customers, recruitment opportunities and service providers What else can angels offer? n Direct involvement – Generally, your angel As well as offering the finance you need to will want to take a seat on the board in grow your company in return for a portion order to be involved in decision making of your equity, good business angels offer a (if your investor is a syndicate, the lead range of other benefits, such as: angel will do this). If your angel considers n Sector experience – Most angels will have that you would benefit from a particular a track record of starting or investing in strategic skill, they might take a more businesses in your market. They know what hands-on role – although this is much less common CAsE study In 2006, Bac2, which What to look for in a business angel? had developed a It’s important that the business angel who plastic that was is willing to invest is right for your company. a billion times Before signing an agreement, you must first more electrically ensure that: conductive than n The management team and the business other polymers or resins, wanted to angel are compatible and can work together capitalise on its intellectual property. To n The angel’s skills and experience match do this, it was looking for £300,000 of the needs of your company angel investment. Chief executive Mike Stannard sent his business plan to the What do angels look for in you? London Business Angel Network, which The factors that influence an angel’s decision screens companies for its members. to invest in a business vary greatly from “We pitched to around 60 angels at investor to investor. However, the following once, and raised more than we were issues are likely to be taken into account looking for. We also gained vital skills when angels are deciding on funding: from two angels who took seats on the n The expertise and track record of the board, really strengthening our team. founders and management “We have since raised a further n The business’ competitive edge or unique £2m from London Business Angels for selling point global expansion.” n The characteristics and growth potential of the market 32 www.businesslink.gov.uk/growth
  • 35. sECtIoN 2 and direction, which not all companies find acceptable For more on negotiating the terms of a deal, go to pages 46-47. What are my chances of securing finance? Some investors make only one investment a year, while others operate a portfolio of investments. Currently, it is a very competitive environment, so pay particular attention to making sure your business plan is investment-ready. According to the BBAA, between 95 and 98 per cent of applications are turned down. Having a strong business plan is essential – for more on this, go to pages 18-19. You will also have to be able to demonstrate how your business will use image: iStock any funds it raises to achieve specific growth objectives. At the moment, most investors are looking for an idea with strong n The compatibility between the management, market potential, which is scalable, and can business proposal and the business angel’s be protected. If you can demonstrate all skills and investment preferences three, your chances of being funded will n The entrepreneur’s financial commitment be much better. What do angel investors expect? Where can I find business angels Given the strong element of risk involved in The most reliable way to source angels is many angel investments, investors will look to contact one of the many business angel for solid returns: networks, which sift opportunities for their n Most will seek an exit in three to five years pool of investors and arrange networking n They will expect growth of their capital of events for you to present your business. The at least 25 per cent a year, often higher British Business Angels Association (BBAA), n Your management team may need to show the UK trade association for business angel equal commitment to the project, and be networks, at www.bbaa.org.uk, will put you prepared to back the venture with their in contact with your local angel networks. own money as well Networks will have a fund manager who n Market validation of your business through acts as a gatekeeper, and who will direct existing sales or known distributors is your business plan to the most appropriate desirable, although it is not essential individuals in the network. They will also be n Business angels enjoy working with able to give feedback on whether your plan is small businesses, so they expect to bring suitable for angel funding. in their expertise. This means they will With angels currently receiving many wish to contribute to the business’ strategy requests for funding, a personal relationship 33 www.businesslink.gov.uk/growth
  • 36. sECtIoN 2 or introduction can make all the difference Like any investor, an angel will want to and should help you get past the piles of carry out thorough due diligence on your business plans vying for their attention. business to establish its value, and uncover any weaknesses or assets that are not How quickly can I raise funds? immediately apparent. If you are dealing with It’s difficult to accurately predict how long the a syndicate, the lead angel will do this job. angel investment process will take, but three At this time, you must be transparent to six months is typical. about your business, your idea and your finances. Angels ask a lot of questions, CAsE study but this is because they know that their Andy Redfern investment is much more likely to bear fruit is a director of if they have an intimate knowledge of your Newcastle-based company before they fund it. EthicalSuperstore. Ask your potential angels a lot of questions com, which too, because they will expect you to do this. promotes good While this process might seem protracted, causes, ranging it’s a good opportunity to make sure that from local community movements to you will feel comfortable taking investment those seeking global impact, including and advice from them. a website featuring more than 5,000 You should also make sure you have good Fairtrade and eco-friendly gifts. legal advice throughout this process. “We started with the aim of trying out business ideas in the social sector. How to value your business Initial success inspired us to produce a Before marketing the proposition of your cross-brand ethical website to allow company as an investment opportunity to a users to buy from one place online. business angel, be clear about the valuation “We’ve had three stages of funding of your business. using business angels and venture Broadly speaking, this determines how finance. First, we raised £286,000 to start much of the business the angel is buying the idea, with angel investors putting in for their investment. £86,000, while the further £200,000 was For example, if an angel invests £500,000 raised by venture finance from NorthStar at a pre-money (excluding finance or the Equity Investors (NSEI) Co-Investment latest round of funding) valuation of £1m, Fund. Then we went back to the investors they would have 33 per cent of the business, and said: ‘We’ve proved the idea and which would have a post-money valuation need £800,000 to develop it further.’ of £1.5m. Research by The National “Not everyone reinvested, but in the Endowment for Science, Technology and the second round we received £500,000 from Arts (NESTA), which looked at data from 96 the NSEI Co-Investment Fund, with a investments, concluded that the pre-money further £300,000 from angels. valuations of early-stage businesses can be “We have subsequently raised summarised as follows: another £1m to allow the business to n A pre-revenue seed business would keep on growing.” be valued at somewhere between £350,000 and £750,000 34 www.businesslink.gov.uk/growth
  • 37. sECtIoN 2 n An early-stage business with A NEW NEtWoRk oF soCIAL INvEstoRs some revenues (say, under £300,000 per year) would be Supported by the Government, Equity Plus is a network valued from £500,000 to £1m. of individual funders and investors that want to invest Angels are looking for a in social enterprises and social-purpose businesses. realistic chance of achieving It focuses on equity-based investments, looking for a high return on capital. organisations that are interested in partnering with A compound return on an investor to share the potential risks and rewards investment (sometimes known associated with any new venture. For more information as internal rate of return or about Equity Plus, visit: www.equityplus.org.uk IRR) of 50 per cent a year is a good starting point. It may seem high, but it is commensurate with the Ethical angels risk. Investors lose money on around 40 per A trade sale or flotation for a social cent of the deals they make, and need to do enterprise is complex, and hence investment very well on the ones that are successful to by individual angels or groups of them in show an overall positive return. such organisations is rare. Fortunately, some angels are not What are the costs? motivated purely by making a profit. Some Angel finance, especially when sourced ‘ethical angels’ invest largely because they through a business angel network, will have a desire to use their money to help involve costs and charges. improve society, and are less driven by If you deal with a network, there should making a return through an exit. initially be no fee to view your business If you are seeking an investment for an plan. However, networks often charge up ethical business, there are other ways to to around £1,000 (depending on services) to reward them for investment other than a arrange for you to meet their angels. trade sale or an flotation – through a dividend On top of this, there is also a success payment, for example. fee, which averages at five per cent of the While there are growing number of angels funds that are raised. It’s important to ask a who want to invest in social enterprises, the network about its fees at the outset. networks for accessing them are not, as yet, Costs are lower than VC and public market well established. n listings – for more information on these, go to pages 36-43. It is, however, a full-time For advice on pitching your business to activity for one person in your company, often investors, see pages 44-45 the owner-manager, so the cost of time taken out of running the business should be calculated. Because angels are often involved in Where to go next early-stage companies, which are considered For more details about angel finance, visit: a high risk. They will expect you to be www.businesslink.gov.uk/angels flexible and prepared to negotiate to give For more information on business angle them a fair share of your equity in return networks, visit: www.bbaa.org.uk for their investment. 35 www.businesslink.gov.uk/growth
  • 38. sECtIoN 2 Funding options and process Venture capital If you’re looking to raise up to £10m and are prepared to share control and equity in your image: iStock business, then venture capital funding may be right for you C ompanies that harbour ambitious n You don’t over-value your business growth plans often turn to venture n You can demonstrate the market potential capitalists (VCs) to fund their of the product or service expansion strategy in return for a significant n You have a good rapport with them stake in the business. The VC takes some of the risk, has a say in direction, seeks What growth strategies will they back? a high return and usually exits in three to VCs are looking for rapid expansion plans seven years, often through a trade sale or that can deliver the required returns, market flotation. such as an acquisition, product or service launches, new markets, or the establishment What do VCs look for? of a chain. Increasingly, VCs are wary of Proof of concept and maturity will be businesses that use a lot of working capital expected by VCs, unless you are running a with low margins. In a downturn, these new business with a proven management can quickly slip from profit to loss, and team, or, following a period of research and find it hard to recover. VCs currently favour development, you are about to launch a businesses with some type of protectable new product or service. asset, such as intellectual property that VC’s generally prefer it if: can be exploited. n You are near to profit already They are also looking for businesses n Your overheads are tight in areas that show growth potential. For example, technology IN BRIEF RaIsINg VENtuRE CapItal companies, particularly those that are involved in l It usually takes between three and eight months to raise the fields of biotech and funding, sometimes longer ‘cleantech’, stand a far better l Owner-managers will often be expected to give up at chance of investment in the least a 20 per cent stake in their business current economic climate. l Venture capitalists back high-growth strategies, such as: So do the creative industries, acquisitions; product or service launches; new premises; involving design or software or national, European or global business expansion development. They use less l An exit through flotation or trade sale is expected operating cash, have the within three to seven years potential for high growth, and often have intangible 36 www.businesslink.gov.uk/growth
  • 39. sECtIoN 2 assets like intellectual property, which CasE study can be licensed. London-based No business will be funded, however, managing director without solid evidence that there is growth and co-founder potential and a strong market. When of Latin America- pitching your growth strategy, you will need themed restaurant evidence that this is the case. chain Las Iguanas, Eren Ali, raised £27m If your business is selling to sectors through a combination of venture or markets that are relatively robust in a capital (VC), debt and equity. downturn – such as telecoms and technology “This was a very different round of businesses – it may stand a better chance fundraising from the £3m that we were of gaining funding. able to secure back in 2002, which VCs will look to see how you have was composed of part VC funding protected your assets, and will want to see and part bank loan. a realistic plan for exploiting them. Many “The deal was agreed with Bowmark will be able to help with advice, but you Capital, and was made up of £10m of need to have the basics in place before equity, and around £8m of bank debt. you attempt to get funding. VCs do not Myself and another co-founder also invest in hope. rolled out £9m of equity between us. “For this stage of our brand roll out, How much can be raised? Bowmark Capital was a more suitable Companies that are looking for venture partner and more accustomed to doing capital for the first time can raise up to deals of this size.” £5m, although some smaller regional VCs and VC Trusts (VCTs) will make investments from £50,000. If your business is a start-up, or needs However, remember that if you are investment to get off the ground, you raising money from VC structures that should also consider angel investors. feature tax incentives for investors – For more information about business such as the Enterprise Investment Scheme angels, see page 30. (EIS), VCTs and the Corporate Venturing Be aware that VCs have other demands Scheme (CVS) – you are limited to raising on their cash, and that you might have to £2m in any 12-month period. See over wait for investment. They might also need the page for more information about VCTs cash to support existing investments while and the EIS. they wait for an exit. VENtuRE CapItal FINaNCE pRos CoNs n Investors can add valuable skills and n VCs reject 95-98 per cent of prospects, open doors for your business and are currently particularly cautious n Investors may provide follow-up funding n Medium-sized to large investments are as your business grows more attractive than smaller ones 37 www.businesslink.gov.uk/growth
  • 40. sECtIoN 2 businesses in your sector, or negotiations with potential partners. Where can I find VCs? The British Venture Capital Association (BVCA) is a good source of VCs, and has a full list of members at www.bvca.co.uk, with details of their preferences. Accountants, lawyers, and corporate finance and business advisers should also be able to introduce you to potential investors. Other routes include: business contacts; events matching image: iStock investors with ambitious businesses; and investment-readiness programmes run by VCs, accountancy firms and corporate How will the business be valued? finance specialists. Some VCs ask for A standard way for VCs to value a more enquiries through their websites, although in established company is a multiple of the the current market, a personal introduction profits or earnings ratio – usually four or five has much more chance of success. times. It is important to be realistic about the valuation you give your business. VCs What are the costs? may seem to be undervaluing it, but they VC is more expensive than angel finance. are using criteria based on their experience. Advisers’ fees are the main cost to consider: If you disagree with their valuation, use n Corporate finance advisers usually take at evidence that they might not have, such least five per cent of the money raised as sales data, the performance of other n Typical legal fees are £20,000-30,000 tHE ENtERpRIsE INVEstmENt sCHEmE Designed to encourage venture capital (VC) no protection from risk or preferential investment from smaller investors, the treatment for dividends and assets Enterprise Investment Scheme (EIS) offers n Income tax relief for investors would be a number of tax breaks, including income 20 per cent for the value of the shares tax relief, on investments of up to £500,000. n Investment must be long-term – for at If you’re looking for growth capital, but least three years. small amounts of VC are too expensive, n Investors cannot be ‘connected’ to the attracting EIS investment from a private company, such as a director, someone investor might help bridge that ‘equity gap’. with more than a 30 per cent stake, or an Here’s how the scheme works: employee. But, under some conditions, n The investor buys shares in a company, they can be an existing angel investor investing up to £500,000 in any year For more details on EIS and the reliefs n The shares must be ‘ordinary’, with available, visit: www.hmrc.gov.uk/eis 38 www.businesslink.gov.uk/growth
  • 41. sECtIoN 2 n Specialist accountants usually charge a VENtuRE CapItal tRusts percentage of funds raised or an hourly rate of between £200-400 in London, or Established to encourage venture £175-300 outside capital (VC) investment in small You also have to pay the VC fees and companies, Venture Capital Trusts due diligence costs. The VC’s percentage (VCTs) are listed investment vehicles. is usually higher for smaller fundraisings, VCTs invest in unquoted businesses as they involve a similar amount of work to or those listed on the Alternative raising larger amounts. Investment Market (AIM). Instead Overall costs vary widely, but are typically of investing directly in companies, eight to 15 per cent of the money raised. investors buy shares in the VCT, Some advisers may take part of their fees as which then invests the money in equity options, or be happy to only get paid if various companies. the fundraising is successful. Investors are elligible for 30 per Raising VC is still cheaper than going cent tax relief on investments under public, where issuing a formal prospectus for £200,000 in any one tax year, and a flotation through a nominated adviser could capital gains tax relief on disposal of cost £100,000-500,000. those shares. Plus, VCT dividends are For more on the costs and expert advisers, exempt from income tax. go to pages 10-11. In addition, VCT strategies vary. Some trade on AIM, some are generalists, How quickly can I raise VC funding? some prefer technology investments, It may take as long as six months or more while some are environmental funds. to complete the VC funding process, so you Appetite for risk and willingness to shouldn’t embark on fundraising without invest depend primarily on their enough cash in reserve. It can involve strategy, not on business plans. months of preparation, many visits to Only from one in 20 to one in 50 of investors’ offices, detailed due diligence and the business plans that VCTs evaluate some knock-backs. actually gain investment. It’s better to start early, as investors For information about the VCT will not participate until the necessary investment regulations, go to due diligence has been done. Also in a www.hmrc.gov.uk/guidance/vct.htm volatile market, some will prefer to wait until they have more assurance over economic conditions. making an acquisition, or progress relating to products or services. How does the investment work? VCs will often expect to agree a mix of You’re unlikely to get funds from a VC all debt and equity, to ensure investee in one go, unless you’re prepared to give companies are paying something back up far more equity. VC investors prefer to over the duration of the investment. provide finance when you have achieved pre-agreed milestones. These could be set What rights do VCs expect? as a particular level of turnover growth, or In a typical deal, VCs will be looking to the delivery of a certain target. This could be agree certain rights of veto, or for areas 39 www.businesslink.gov.uk/growth
  • 42. sECtIoN 2 where they expect to have an influence. These include: n Significant items of expenditure n Hiring and firing key staff n Major acquisitions, disposals or strategic alliances, and any fundraising strategies involving giving up equity n Significant changes in business strategy n Control over key staff members’ and the management team’s remuneration n Dividend payments image: Shutterstock There will also be restrictions over what management are able to do if they leave the business, such as being barred from forming a competing company, working for a competitor or poaching staff for a set period. bear your investors’ interests in mind, too, While some of your autonomy may be the relationship can run smoothly. lost, VCs expect to work with you and share For more information about negotiating a common interest – growing the business. the deal, go to pages 46-48, and for more Providing that you communicate well and on investor relationship management, go to pages 49-50. CasE study After raising three rounds What returns do VCs expect? of funding in two VCs will be looking for a significant return years, Simon Ball, on their investment, and they will be London-based chief more interested in facts and figures than executive at online projections and promises about how you business insurance will achieve this. marketplace Coverzones, recommends You may have to deliver the required telling a simple business story in your return within three to seven years into an pitch. He also says statistics are key and agreement, depending on the investor and advises flexibility over equity. the condition of their portfolio. Others may “You can never do enough research wait eight to 10 years. on your market or your competitors. To boost the chances of achieving a sale Also, be prepared to give up the or eventual flotation, VCs will scrutinise majority of equity in your business your procedures, management team and if you want to grow quickly. It accounting systems. This can include your isn’t necessary to have a majority investor joining the board, appointing an shareholding to keep your autonomy in independent chairman or bringing in a management decisions. Ask yourself finance director with VC experience. whether you want 50 per cent of a £1m business, or a smaller percentage of What about social enterprises? a £1bn business?” VC is open to social enterprises, but it may not always be appropriate, or they may 40 www.businesslink.gov.uk/growth
  • 43. sECtIoN 2 find it difficult to access. VC investors that ExIt stRatEgIEs operate in the social enterprise arena still want to see the same commitment and Venture capitalists (VCs) want their good management as their counterparts investment to grow, but they also want working with purely commercial businesses. to get their money back. Therefore, to However, they may also be interested in attract venture capital (VC), you need social returns. a plan for returning the investment According to ethical bank Triodos, social at the end of the agreed term – known investors look for the following qualities in a as an exit strategy. business when considering funding: You will not be able to precisely identify n An experienced and well-balanced team the exit, but you must plan for it from day with a good track record one in order to secure VC investment. n A strong idea that meets potential demand The most common exit option is selling within the market your business to another company – n Strong growth potential in the relevant known as a trade sale. This could be your target market entire business or part of it, and it can n A sustainable competitive advantage over be the best way to generate the biggest rivals in the sector return on the VC’s investment. n A financial position that’s close to breaking You could also consider a merger even or making a net profit with another company, although this n A desire to share ownership of the would probably mean remaining with business with an investor that can bring the business for longer than if you make more than just money a straightforward trade sale. n Potential exit routes identifiable at the time Meanwhile, floating your business of investment allows you to realise your investment by making it easier to sell all or part social enterprise exit options of your stake, but this is currently very One reason that may discourage VCs from difficult to achieve. investing in the social enterprise sector is a perceived lack of exit options. Social enterprises can place a limit on the once the business is in a stronger position proportion of their shares that can be with respect to cashflow. n traded publicly on the stock markets. They can also restrict how many shares For advice on negotiating with investors, one investor might hold, or allow founders see pages 46-48 to issue and retain a golden share. It can then be harder for a social investor to find a willing buyer for its stake in the Where to go next business, once it is ready to realise its For more on equity funding options, visit: investment. However, one way that this can www.businesslink.gov.uk/equity be achieved successfully is by giving the For a directory of all UK investors, visit management of the social enterprise the the British Venture Capital Association at: opportunity to buy back the shares from the www.bvca.co.uk outside equity investor. This can be done 41 www.businesslink.gov.uk/growth
  • 44. SEctIoN 2 Funding options and process Should I float my company? For raising £1m or more, a stock market listing may be your best image: iStock option. It is often the next step after angel and venture capital funding, but it can be a complex process F or businesses that want to grow rapidly PLUS is a fully competitive UK stock and raise their profile, a flotation on the exchange, focused on small and mid-cap Alternative Investment Market (AIM) or companies, offering the complete range of PLUS is worth considering. Typically, you can stock exchange activities. For more details, raise far more money through an initial public visit: www.plusmarketsgroup.com offering (IPO) than by other means. What can you use the markets for? What are AIM and PLUS? The main purposes of a stock market AIM is the London Stock Exchange’s (LSE’s) flotation are to raise money, establish a clear junior market for growing companies, and value for the company’s shares and improve provides a regulatory framework to allow for its profile in the public eye and media. both the flexibility a growing company needs, AIM is home to more companies than and the appropriate levels of protection. For any other growth market, but has not been more information on the listing process visit: immune to turbulence in the global economy. www.londonstockexchange.com/AIM Today there are around 1,500 companies on AIM, with UK incorporated AIM quoted IN BRIEF FLotAtIoN companies employing over 260,000 people. PLUS has positioned itself as an l PLUS is good for raising sums in the alternative to AIM with its PLUS-quoted lower millions, AIM for larger amounts. market. PLUS has grown steadily and Strong growth potential is necessary, attracted some entrepreneurial businesses, and a track record of profit is helpful as well as encouraging a few AIM-listed l Fees account for seven to 10 per cent companies to also list on PLUS. of finance raised on AIM. This can be less for PLUS, but the ratio of fees to funds How much can I raise? generated can be more for smaller IPOs At the moment, it is very difficult to raise l Flotation takes up to six months – you money as the economic climate has made must be prepared to share some control investors more risk averse. Investment and be strictly regulated from venture capital trusts (VCTs) has largely disappeared because rule changes 42 www.businesslink.gov.uk/growth
  • 45. SEctIoN 2 introduced in 2006 mean cASE StUdy Janine Woodward is that they cannot invest in the Bristol regional manager at The businesses with assets Ethical Property Company, a social worth more than £7m, or enterprise that buys properties and that employ more than 50 develops them as centres that bring people. Both factors have charities, cooperatives, communities led to companies getting and campaign groups together under far less investment, and one roof. She explains how the share price liquidity has business has handled flotation. seriously suffered. “A bank specialising in funding To join AIM, companies social enterprises acted as lead adviser do not need a particular for two of our share issues in 2001 and trading history and 2003, raising a total of almost £6m. While the offerings were there is no minimum successful, we realised that our shareholders needed to be able requirement in terms to buy and sell shares in order to maintain liquidity. of size. PLUS caters for “Potential shareholders were worried about liquidity, so we’ve smaller entrepreneurial worked hard to find ways to get it. As a result, we now use companies looking to Brewin Dolphin to run a matched bargain market, which helps raise sums in the lower us to provide the liquidity our shareholders want.” millions, although there were exceptions that raised far more. If you’re considering floating on the junior You will also need to take into account stock markets the costs can be considerable, the cost of the time and resources that your and there is a shortage of liquidity, which management team will have to put into the limits the funds available for investment. IPO, which is likely to be considerable. What are the costs? How quickly can I raise funds? Fees are made up of adviser’s costs and Typically, it takes five to six months, although the broker’s commission, which is a this varies according to the complexity of the percentage of funds raised. Adviser fees flotation. Sometimes, to make the process vary considerably and depend on the size of faster, companies start with an ‘introduction’ the deal. However, small and medium-sized to one of the markets, which involves joining companies can expect to pay £500,000 or without raising funds. This also helps more for an AIM flotation, and in the region investors assess your management team and of around £200,000 or more on PLUS. its ability to perform in the public arena. n On both markets, a company requires specialist help in the form of a nominated For advice on finding the right advisers, adviser (NOMAD) on AIM, and a corporate see pages 10-11 adviser on PLUS. These advisers orchestrate the listing process, linking your company, the City, your accountants, lawyers, brokers Where to go next and a financial PR firm. For more details For more advice on AIM and PLUS, visit: on choosing the right financial advisers, www.businesslink.gov.uk go to pages 10-11. 43 www.businesslink.gov.uk/growth
  • 46. sEctIoN 2 Funding options and process Making the perfect pitch Whether pitching to angels, venture capitalists or investors prior to a float, find out how to structure your presentations and which tools to use I f investors have seen your business plan cAsE study or executive summary (for more details, Hugh Scantlebury go to pages 18-19) and want to hear more, is the co-founder of it’s time to hone your pitch, as it will be crucial London-based online to securing the investment you need when you accountancy service meet up. But there’s no point pitching unless Aqilla. His business your company is properly prepared. raised an undisclosed sum from private investor Bob Morton in January 2009. Are you investment ready? “We wanted funding to create a sales There are lots of programmes that specialise and marketing infrastructure for our in preparing businesses for investment. business, spending six weeks preparing They help to align your company as closely a prospectus before sending it out to as possible to the interests of potential 21 investors. We followed up with email investors, as well as refining your business and arranged a number of meetings. plan. Regional Development Agencies (RDAs) “There’s no point pitching to someone provide Understanding Finance for Business, who doesn’t invest into your area. Try to a Solutions for Business product, which meet people through referrals, as they includes advice on investment readiness and will always be more responsive.” can be accessed via Business Link. Once you’re ‘ready’, its time to prepare your pitch. to see your business and its processes. An investor may provide guidance on the What format does a pitch take? presentation format, so ask first. Otherwise, First meetings generally take place at the after the introductions, you set the agenda. investor’s offices, although some prefer You are typically expected to make a formal pitch, although some investors IN BRIEF thE pItch encourage informal discussion. Plan to talk for about 30 minutes, covering the key l Details of your management team are points, using slides where appropriate. as important as your business concept Backers may interrupt with questions and l Take a team of around three hold a more detailed, and potentially lengthy, l Aim to present for around half an hour QA session at the end if they are interested. l Cover history, products, finances, the “Have as many back-up slides as required. growth opportunity, market conditions, If the investor is interested, he will ask to and a SWOT analysis drill down in certain areas, so ensure the l Anticipate tough questions, and think slides are clear and to the point,” suggests about how you will answer them Jamie Davies of the Business Advice Bureau. Meetings can last from one to three hours. 44 www.businesslink.gov.uk/growth
  • 47. sEctIoN 2 QuEstIoNs INVEstoRs AsK 1 Are you filling a gap in the market? Who are your potential buyers, and is there a image: iStock broad spread or small concentration? 2 Do you know your market. Is it growing or shrinking? What are the constraints? What should the presentation cover? n Any developments since your submission 3 What barriers face market entrants, and n The quality of your team – it’s often more is the product easy to reproduce? Are important than details of your products there any copyright or patent issues? n Relevant industry experience and expertise 4 Have you suffered difficult trading n A précis of the business’ history, progress patterns or loss-making periods? and financial performance to date n Market opportunities, who your customers 5 Which staff are critical, and how can are and why your product or service will you encourage them to stay? appeal – see the investor’s viewpoint by focusing on the business opportunity n Your balance sheet, cashflow, historic What presentation tools should I use? profitability, trends and projections – justify Any you’re confident with. PowerPoint is targets with graphics, such as pie charts popular, but ensure the necessary equipment n Realistic figures – a common mistake is to is available, and take a back-up paper copy. exaggerate demand, sales, etc Use graphics, but keep demonstrations short. n A Strengths, Weaknesses, Opportunities For top presentation tips, visit: and Threats (SWOT) analysis to show www.businesslink.gov.uk/equitypitch that you have studied any potential flaws. For presentation courses visit: For more on SWOT analyses, visit: www.businesslink.gov.uk/training www.businesslink.gov.uk/swot n A best and worst-case scenario of how should I rehearse? your business may perform Do at least one practice run with your team, n A summary of key points and read through your proposal, so you The aim is to present the necessary details don’t contradict what’s written in your plan. that will help to solidify the investor’s interest Agree key details to avoid quoting conflicting in your company. So avoid discussing the figures, and swot up on financial jargon. n terms of the deal, as this will come later, and the investor will not consider it appropriate. For advice on how to negotiate with investors, see pages 46-48 Who should present the pitch? Around three people, with the owner-manager covering the areas above, your sales specialist detailing the opportunity, and your Where to go next finance manager presenting the figures. Also, Further advice on pitches can be found at: gauge your audience. A few light-hearted www.businesslink.gov.uk/equitypitch comments may help, but jokes can backfire. 45 www.businesslink.gov.uk/growth
  • 48. sEctIoN 2 Funding options and process Agreeing the terms of the deal Interested investors will issue a provisional contract called a term sheet. Be prepared to ask some probing questions to ensure it’s acceptable to you A fter a successful pitch, investors will Deals are often a mix of equity (finance for send you a document stating the ordinary shares) and debt (a loan arranged by conditions with which they expect to go the investor). If you have a choice of backers, ahead. Known as a ‘term sheet’, it will set out the term sheet will help you decide who to go the key points of the final contract, including with and what terms to accept. By signing it a description of what is for sale, the amount you will have agreed to deal exclusively with they propose to invest, the funding method, that investor. The deal must work for both their expected return and an exit plan. It is parties, so consider the following: not legally binding and is open to negotiation. Your legal adviser should help you with Is the investor offering enough? any jargon (for tips on finding a solicitor Be clear about this. You’re selling part of your visit www.businesslink.gov.uk/solicitor), business and its value will be key. There is no and a corporate finance adviser or specialist right price and no set way to value it, which accountant can identify key points for often leads to disagreement. Valuations negotiation. For more on professional depend on what the buyer will pay and what advisers, go to pages 10-11. you’ll accept. However, the present value of expected future cashflow is one figure often used. For other ways to work out the value, IN BRIEF NEgotIAtIoNs visit: www.businesslink.gov.uk/valuations l Businesses needing immediate capital You are in a stronger position if you’ve had will start from a weaker position more than one offer. Be confident, as this is l Make sure that the investor is offering a meeting of equals. You’re not asking for a an adequate level funding handout – you have something they want. l The right chemistry between you and your investor is often more important How does the investor assess their risk? than raising the full amount During the due diligence process, where l Younger businesses, or less profitable investors scrutinise information about your companies, may have to give up more company’s past, present and future status, equity to seal the deal you will need to hand over a lot of intimate l Exits can often be determined by the knowledge about your business. This comes investor, so try to make sure that you under the warrenties contract, which retain your rights on this issue and have requires the business owners to provide some input into the decision any and all pertinent information on the l You have a right to know who your business. This helps investors assess the investor wants to place on the board and risk of investing, which is hugely important what powers they expect them to have and depends on a series of factors. These include the overall state of the market, the 46 www.businesslink.gov.uk/growth
  • 49. sEctIoN 2 unacceptable terms. Personal relationships are key, as you’re going to be working closely, so you should like and trust each other. Will they offer further fundraising? Investors may not like companies asking for more money without prior warning, so if you plan to seek second-stage funding, address this in advance. Also discuss bringing in other backers at a later date, what kind would be appropriate, and how to prevent the image: iStock original investor’s stake being diluted. Try to retain as much flexibility as possible. VCs may even agree to provide further maturity and financial track record of your finance in the future without taking more business, and the ability of your management equity, according to Baker Tilly’s head of team. This can be a daunting task, and MA and private equity, Rob Donaldson. business owners may want to get a lawyer to “Where the VC is a big shareholder, they explain why this is done and how it can help won’t want to dissuade the management push negotiations along. team by diluting their stake more, and “Due diligence was tough. We faced a funding to accelerate growth may be in their barrage of questions for six months,” says interests to hasten their exit,” he says. Eren Ali, managing director of restaurant chain Las Iguanas, which raised £3m in How long should the exit period be? venture capital (VC) and bank debt. Investors will typically look for an exit in It is important to be upfront and honest three to five years. Some may want a clause about potentially deal-breaking issues, in the contract to force an exit, while others such as lawsuits, tax investigations or are happy to wait until the most appropriate simply unexplained gaps in accounting or moment for both company and investor. management. If they unearth things they feel Ensure you have similar ideas of how to increase their risk, you may have to accept realise value in the business, then work less favourable terms or lose the backer. towards that target. For more on investors and exit strategies, see pages 36-41. Are they the right investor? No investor is perfect. The one you feel most What is their track record like? comfortable with may not be offering enough, Every investor has a different style, and it’s while another may want to back you, but on useful to know what this is. Ask to speak to 47 www.businesslink.gov.uk/growth
  • 50. sEctIoN 2 BEFoRE you jump HEAdloNg INto NEgotIAtIoNs… A pproach the discussions over the deal with caution. The small print is arduous and designed to dilute the risk n How badly do you need the money? n What terms would you accept? n Could the company survive without for the investor, which may propose to investment and, if so, could you structure a deal in an unexpected way. So, grow it at a slower rate and seek before you enter negotiations, ask yourself finance at a later date when better the following questions: terms can be agreed? other companies in their portfolio, as they will skills, contacts and knowledge they can know how the backer works. Find out the type add; and their intended role as a board and frequency of reporting they expect and director – will they be hands-on? how involved they like to be in the business. Don’t assume that it’s down to the investor to suggest a non-executive director. You What is negotiable and where are the may know the industry better and be able to potential pitfalls? recommend a candidate who will add value The value of the business, how much equity to the business – although investors will still you give up, or the interest on any debt and appoint one of their own, too. legal issues are key areas for negotiation. Ask how you’ll be able to access funds, if they will How serious are they? be structured and released in tranches, and Before you sign the term sheet, you need what conditions are attached? Also, find out in to be convinced the investor is committed what form the funds will be offered. to the deal and will complete the process. “Nine times out of 10, investors will Serious investors will start due diligence structure their investment (or much of it) the day after you sign. as a loan, leaving you having to pay interest, “Be warned, some hand out a term sheet but still giving away equity. However, earlier to knock out the competition, but will then stage companies are less able to service slow the process, which could weaken debt, so are more likely to get pure equity. But your hand in future negotiations. It’s not they’ll have to sell more of the business unreasonable to make them show they are in return,” says Donaldson. serious,” says Donaldson. Make it a condition He adds that interest on a loan note can of signing that they immediately start due range from three to 15 per cent and is an diligence in return for exclusivity. n area to negotiate on keenly. If you have more than one offer, ask your corporate finance For advice on managing your relationship adviser to run a financial model for you to with investors, see pages 49-50 see which method will cost you more. can you vet a proposed board member? Where to go next VCs are reluctant to impose someone on a For more on agreeing the terms of a deal, business. So ask about: their background visit the BVCA website: www.bvca.co.uk and why the VC has put them forward; what 48 www.businesslink.gov.uk/growth
  • 51. sECtIoN 3 After the event Managing investor image: Shutterstock relations Funding from angels, venture capitalists or a flotation brings obligations. By understanding them, all parties can enjoy a rewarding relationship O nce you secure finance, you’ll need What information do backers expect? to manage the relationship with the n If you have taken on debt, backers will backer according to the terms agreed. want to see monthly management Most expect regular reports, such as monthly accounts and audited annual accounts. accounts. Equity investors may ask for the They may also want aged-debtor analysis minutes of board meetings and input into your – not only details of what you are owed, but business, including the right to veto decisions. also how long you’ve been owed it. For more on the typical rights investors expect, go to pages 36-41. In return, investors will offer financial advice, strategic guidance CasE study and help recruiting management, as well as Bob Jones, chairman contacts and market information. of Swindon-based IT Delivering on profit and sales forecasts is business Equiinet, crucial to forming a successful relationship managed to raise with your backers. It builds their confidence £2.75m from venture in your organisation, and, if you have floated, capitalists (VCs), your share value will depend on it. business angels and trade investors. “VCs and private investors have had a positive impact. Monthly reporting is a IN BRIEF INvEstoR RElatIoNs good discipline that helps us focus. l Keep communication personal, “However, they shouldn’t interfere whether face-to-face or by phone. A too much. You know your business good relationship can benefit you both better than they do. l Ask your backers what information “Private investors sometimes want will be required, how often, in what to get involved in the business, but format, and by whom that can cause confusion over who’s l Funds can boost your business, but running things. Our VCs appointed a may be withheld if targets are not hit, non-executive director who attends and deals can even be vetoed the monthly board meeting. We report l Make realistic projections; be honest figures and he asks probing questions about bad news and gives advice.” 49 www.businesslink.gov.uk/growth
  • 52. sECtIoN 3 MakE youR INvEstoR RElatIoNsHIp WoRk By askINg kEy quEstIoNs 1 What information do you require us 4 In what format do you expect it – as a to provide – accounts, forecasts, Word document, PDF, Excel or other analysis, commentary, etc? spreadsheet, PowerPoint presentation, 2 What areas do you expect to have or a perfect-bound document? input on – management pay rises, 5 How do you like to receive it – by email, acquisitions, appointments, new post, phone or face-to-face? service, product launches, etc? 6 Who should provide our business 3 How often will we need to provide information and manage the you with the required information relationship – another board member, – monthly, quarterly, annually? the owner-manager or someone else? n Venture capitalists (VCs) will also expect sharing key decisions with lenders, as they in-depth coverage of your profit and loss, will offer as much input as possible. “The balance sheet and cashflow. An analysis lender can act as a useful sounding board, of your company’s performance compared and it is important they understand why you to budget is often required, as well as have taken certain decisions,” he says. commentary on progress made against VC firms, however, typically expect a seat on stated goals at the point of funding, and the board, usually as a non-executive director. the forthcoming year’s budget Some angels want occasional contact, others n Active business angels may want similar daily. The input you accept largely depends levels of information; passive ones will be on their stake. “You should listen to minority happy with monthly or quarterly reports shareholders, but you don’t necessarily have n Quoted companies’ shareholders must to follow their views,” says Donaldson. “Those have equal access to formal information, with a larger stake have more influence.” such as trading updates, profit warnings Like you, your backers’ want a healthy, and information on takeover talks profitable and well-run business. Keep n Expect frank questions from institutional them on-side early on, manage expectations shareholders, and answer them honestly. effectively and the level of influence expected Investors will be far more supportive if you will gradually diminish as their trust grows. n do, and may be able to offer good advice For advice on business angels and venture How should information be provided? capitalists, see pages 30-41 The more detailed and personal the better. Try to combine sending it with meetings or phone calls. In general, management and Where to go next annual accounts are sent as Excel or PDF For further advice on financial documents, but find out the preferred format. and management accounts, visit: www.businesslink.gov.uk/equityfinance How much input should be expected? For more on investor relations, visit: Advisory firm Baker Tilly’s head of MA www.bvca.co.uk/publications and private equity, Rob Donaldson, advises 50 www.businesslink.gov.uk/growth
  • 53. SEctIoN 4 Government resources Help for growing businesses There are a number of schemes run by the Government to help businesses grow. The kind of support your company is eligible for will usually depend on your location, the type of business or the specific project you’re working on A s part of its commitment to helping businesses, the Government provides support through grants, tax credits and allowances, loans, training and events. Until recently, this help was provided by several bodies, but under the Business Support Simplification Programme it has become much easier for businesses to image: iStock access the help they need. Solutions for business Now, nearly all the brought together in Solutions for Business, government-funded support a single portfolio of around 30 products. programmes available to While these are administered and delivered businesses and entrepreneurs have been by a number of organisations, Business Link offers a single point of access. Business Link advisers can provide an IN BRIEF govERNmENt SuppoRt overall view of the help available and identify l The Government has a range of the most appropriate schemes for your schemes to support companies. These company. They will then broker the service, include grants, loans and allowances putting you in touch with the relevant body, l Grants might sound ideal, but which may be a local authority or a Regional eligibility criteria are stringent and the Development Agency. application process can be long The process of migrating government l Grants are usually only allocated for a support into the Solutions for Business specific project or purpose portfolio is scheduled for completion l Regional Development Agencies run by March 2010. The products available schemes, often focused on innovation, to include: advice on starting a business; support local businesses structured coaching for managers of l Businesses can also make use of fast-growth businesses; and understanding subsidised consultancy offered by finance for business. There is also a lot experts in given fields of help available to support innovation, l Some private firms may also offer including grants for research and awards and loans to businesses at development, and collaborative research. preferential rates For more information, please visit: www.businesslink.gov.uk/solutions n 51 www.businesslink.gov.uk/growth
  • 54. SEctIoN 4 Government resources getting a grant Your company may qualify for government funding, which could mean you don’t need to get into debt or give up equity to raise the money to grow. So check before image: iStock pursuing other forms of finance M ost business grants sound appealing Strict terms and conditions are applied because your company will get an to grants, and you may have to pay the money influx of cash that you probably back if they are not followed. won’t have to repay. However, applying for Grants rarely meet the full costs of a a grant is not something to be taken lightly. project. You can expect to receive 15-50 The application process can be slow and per cent of the money, so you’ll need to will certainly be rigorous. To succeed, your find at least half of the required funds from company will have to meet stringent criteria. alternative sources to cover the shortfall. Who hands out the money? Applying for grants Business grant schemes are available Your local Business Link office will be from the Government, the European Union, able to help identify relevant products or Regional Development Agencies, local support under the Solutions for Business authorities, Chambers of Commerce and umbrella, together with relevant European County Enterprise Boards. By March 2010, grant schemes. all government grants will be accessible Before you apply for a grant, you will need through the Solution for Business portfolio, to have the following: with information available from Business n A detailed description of the project Link at www.businesslink.gov.uk/support n An explanation of its potential benefits n A detailed work plan and full costings Which companies are eligible? n Information about your relevant experience Grants are almost always for proposed and that of other key managers projects, not activities already underway. Your proposal will be assessed on its These may include opening up a new division relevance to the grant’s aims, your approach or branch in an area in need of economic and your expertise. regeneration, or could be tied to new activities Applications usually fail if the business in existing businesses, such as exporting plan is unrealistic, if the funds requested or development. There are even grants to aren’t matched adequately by the applicant, help companies benchmark their business or if it’s unclear how important the required against their competitors. A grant will often finance is to the project’s success. go towards covering the cost of bringing in a For more details on grant applications, consultant to help with these projects. visit: www.businesslink.gov.uk/grants n 52 www.businesslink.gov.uk/growth
  • 55. SEctIoN 4 types of grant and cost involved, and also whether the intellectual property will be defensible. If the idea proves to be viable, the company There are a variety of government can then apply for further research grants usually of up to £100,000 (but higher for funding schemes available some sectors) and development grants of up depending on what you need the to £500,000. This funding is intended to take money for, all with different terms a company up to the stage of pre-production prototype or small scale demonstrator. It Investment and research can also fund pre-clinical research and Regional Development Agencies (RDAs) intellectual property protection. administer Grants for Business Investment Businesses receiving support through (GBIs), a Solutions for Business product. GRD may also be able to access specialist These are available for a number of purposes, RDA-funded facilities, such as business including the acquisition of buildings, incubators and science parks. Businesses machinery and equipment, and programmes that are successful at the proof of concept that will help create or safeguard jobs. stage may also benefit from help becoming RDAs have also traditionally played investment ready (see pages 44-45). a hugely important role in promoting For more details on these types of grant, innovation. They provide support for proof of visit: www.businesslink.gov.uk/solutions concept projects under Grant for Research and Development (GRD), a Solutions for collaborative RD Business product. If your business is working on an RD project At the early stage of a research and with another company or a university, it may development (RD) project, sums of up to be eligible for a grant under Collaborative £20,000 are available to help companies RD, a Solutions for Business product, prove there is a market for a particular idea. delivered by the Technology Strategy Board For instance, before launching an (TSB). To qualify, the project must involve two expensive research programme, it is or more collaborators, with one of those being essential to know whether there is a a business. The grants cover from 25 per cent sufficient customer base to justify the time to 50 per cent of the costs of the project. European cross-border collaboration is fostered through the European Union’s (EU’s) Seventh European Framework Programme (FP7), which runs until 2013 and has a budget of more than €50bn. FP7 funds a variety of leading-edge RD and support activities with grants of up to 75 per cent. It’s open to all types of organisation and usually requires at least three partners from different countries. For more on FP7, visit www.fp7uk.dti.gov.uk The Eurostars programme benefits image: iStock cross-border collaboration between small to medium-sized companies (SMEs) that 53 www.businesslink.gov.uk/growth
  • 56. SEctIoN 4 Government resources dedicate more than 10 per cent of their staff or turnover to RD. For more on Eurostars, visit www.innovateuk.org other sources Grants are available for technology projects aiming to bring new products to market. To of government finance qualify, at least half of the work must be done by an SME, and the research should involve participants from at least two EU countries. You can also get finance through FP7 for Alternative sources of public support Joint Technology Initiatives. These are public/ private partnerships bringing businesses and and funding for growing businesses public research bodies together to develop cutting-edge technology in specific areas. Loan guarantees For more on the Technology Strategy If you’re having trouble providing security Board, visit: www.innovateuk.org for a bank loan, you should investigate the Enterprise Finance Guarantee (EFG) scheme, Additional expertise a Solutions for Business product, offered The Government also provides funding to jointly by the Department for Business, help small companies work with Enterprise and Regulatory Reform, banks and knowledge-based institutions, such as other financial institutions. Under the scheme, universities and colleges, in the development which is open to businesses with a turnover of of new products and services. £25m or less, the Government will underwrite The process is run through Innovation up to 75 per cent of loans from £1,000 up Vouchers, a Solutions for Business product, to £1m. The EFG can cover new loans, the which is being rolled out in England by RDAs. refinancing of existing ones and the conversion The vouchers provide small companies with of overdrafts into term loans. Replacing the grant finance to purchase the necessary expertise from the relevant educational or research institution. The concept underpinning the scheme is simple. A company identifies a short-term problem that can’t be solved internally, and finds an institution that can help. The business can then apply for a voucher, which will buy specialist support from the institution. Support worth up to £10,000 is available, but typically the amounts involved are between £3,000 and £7,000. In addition to providing help to resolve a specific issue the Innovation Voucher scheme aims to encourage further collaboration between the knowledge base and business. image: iStock For more information about Innovation Vouchers, visit: www.businesslink.gov.uk n 54 www.businesslink.gov.uk/growth
  • 57. SEctIoN 4 Small Firms Loan Guarantee scheme, the EFG runs until March 2010. While it is not sector cASE StuDy specific, European Union rules prevent it being Newcastle software extended to certain sectors. Your lender can developer Nonlinear assess your eligibility. Visit Business Link, Dynamics has at www.businesslink.gov.uk/solutions, for claimed 24 per cent more information. of its qualifying Funded jointly by the European Commission research and development (RD) costs and the European Investment Bank (EIB), from HM Revenue and Customs under the Risk Sharing Finance Facility (RSFF) the RD tax credit scheme. CEO Will is primarily aimed at large companies, but Dracup explains the process: smaller businesses can also benefit. It “We spend a lot on RD. For instance, involves loans and loan guarantees linked in the 2004/2005 tax year, RD costs to research and development (RD) that were nine per cent of turnover and 30 per either forms part of a Seventh European cent of sales. But annual claims under Framework Programme (FP7) or are the RD credit tax scheme have clawed compatible with FP7 objectives (see page 53). some of this back. Initially establishing If the loans amount to less than €7.5m, the the basis of the claim and setting up the scheme is accessed through participating necessary audit trail was hard work, and banks. Above this, interested companies go needed good management information direct to the EIB (www.eib.org/products/ systems. Since then, claiming has been loans/special/rsff/index.htm). With EIB, the straightforward, and has provided real Government has helped UK banks to negotiate motivation to keep investing in RD.” credit lines of more than £1bn to provide loans to small and medium-sized businesses. SBRI contracts Research and Development tax credits Public sector development contracts are Tax relief is available for RD that aims to available through the SBRI programme, achieve a scientific or technological advance. where companies can bid for technology- This scheme applies to companies with less based RD contracts. The tendering process than 500 full-time staff or equivalent, and is designed to appeal to small and medium- the rate of relief is 175 per cent of qualifying sized companies. RD expenditure when calculating profit for Several government departments plan to tax purposes. Businesses not in profit may hold competitions in 2009 to seek innovative be entitled to a 24.5 per cent cash payment solutions and products for specified problems for every pound spent on RD. From 1 April and unmet needs. For example, one of 2008, larger companies can claim relief of the pilot competitions invited proposals to up to 130 per cent of qualifying expenditure. help improve hand hygiene in hospitals. Other tax breaks available include capital Successful companies will be awarded a allowances for investment in equipment contract to prove the technical feasibility of and premises, plus stamp duty relief in their proposals usually within six months disadvantaged areas. and for up to £100,000. The most promising For more information on RD Tax Credits, technologies will get a further contract visit: www.businesslink.gov.uk/taxbreak for demonstration of product capability, 55 www.businesslink.gov.uk/growth
  • 58. SEctIoN 4 Knowledge transfer Networks Funding is also available for Knowledge Transfer Networks, part of the Solutions for Business Networking for Innovation product, to bring together businesses, academics and the Government to share knowledge in emerging technologies. There are currently 25 networks operating, funded by participating businesses, educational institutions and the image: iStock Government’s Technology Strategy Board, which provides grant support. For more information, visit: www.innovateuk.org to be completed within two years, and for Real help for businesses now up to £1m. As distinct from a grant, the Further support is available to companies Government is a customer rather than the through the Government’s ‘Real help for provider of funds. If the technology is proven, businesses now’ initiative. there is the prospect of a full supply contract. This includes: The intellectual property will remain with n Help with business funding, including the company, although the Government further details on the Enterprise Finance may retain certain rights. SBRI is being Guarantee and regional loans, plus free championed by the Technology Strategy guides on managing company finances Board, and details of current competitions n How to reduce waste and save energy can be found at www.innovateuk.org/sbri n Dealing with staff restructuring and major business change Knowledge transfer partnerships n Advice on alternatives to redundancy Like Innovation Vouchers, Knowledge n Funding for skills development, plus free, Transfer Partnerships (KTP), a Solutions for independent advice through Train to Gain. Business product, fosters cross-fertilisation For more information about ‘Real help for between education and business. Under businesses now’, visit www.businesslink. KTP, funding is available to bring a recent gov.uk/realhelp or call 0845 600 9006 graduate in to help businesses provide an answer to a problem they cannot solve Helplines themselves internally. The Government will n The Capital for Enterprise Fund provides provide up to 67 per cent of the cost. equity investment to pay off existing debt or Funding is currently provided for projects grow your business. For more information, lasting one to three years, but a short see page 33 or call 0845 459 9780 scheme of 10-40 weeks is being rolled out. n For help with exports, visit the UK Trade The scheme benefits the institution (through Investment website at www.uktradeinvest. research material), the graduate (through gov.uk or call 020 7215 8000 gaining experience) and the participating businesses. For more information on the For details on more support, including help Knowledge Transfer Partnership scheme, with finance, premises and manufacturing, visit: www.KTPonline.co.uk visit: www.businesslink.gov.uk/solutions n 56 www.businesslink.gov.uk/growth
  • 59. SEctIoN 4 Non-government resources 5 Additional funding opportunities image: Shutterstock It’s not only the public sector that provides support and grants for businesses. Many private organisations also offer awards and assisted loans that may prove invaluable the carbon trust and public sectors) between 2008 and 2013 Companies working with technologies that on technology projects to help elderly people. could cut carbon output may be eligible for In addition to engaging on research that financial support from the Carbon Trust. meets the necessary criteria, applicants must Carbon Trust Investments funds low-carbon be involved in cross-border collaboration. For enterprises that show commercial potential. more information, visit: www.aal-europe.eu To date it has co-invested £10.8m across 12 companies, which together have raised NEStA invention and innovation scheme £110m. For instance, the trust has recently The National Endowment for Science, invested £1m into 4energy, an innovative Technology and the Arts (NESTA) runs an cooling system developer. For more invention and innovation programme that information, visit: www.carbontrust.co.uk/ supports people with outstanding ideas for investments/venturecapital/ new products or services, often at a much Through its Innovations programme, earlier stage than other funders. For a the Trust also helps develop commercially directory of schemes available in your viable, low-carbon technologies through area relevant to your business size, visit: partnership, funding, expert advice and www.businesslink.gov.uk/support large-scale demonstrations. Many promising low-carbon technologies are still in their community Development Finance infancy, and by providing support, the Trust Providing funding services to generate both aims to bring them to market more quickly. social and financial returns, Community Applied research funding of up to £500,000 Development Finance Institutions (CDFIs) is available for business and academia. For lend and invest in deprived areas and more details, visit: www.carbontrust.co.uk/ underserved markets that cannot access technology/appliedresearch/ mainstream finance. Average loan sizes The Trust also runs an incubator scheme range from £5,000 to £50,000, with larger and investment-readiness workshops. For loans available for social enterprises. more information, visit: www.carbontrust. For details on CDFI’s that lend to social co.uk/technology/incubator/ enterprises, visit: www.cdfa.org.uk. The Community Development Venture Ambient Assisted Living programme Fund (CDVF) invests from £150,000 to £2m Part-funded by the European Union, the in businesses located in the most deprived Ambient Assisted Living Programme plans parts of England. For more information, to spend €600m (split equally across private visit: www.bridgesventures.com n 57 www.businesslink.gov.uk/growth
  • 60. Think your business needs finance to grow to the next stage, but not sure where you can find it? If you run a successful business and are looking to expand, there are a range of potential finance options. The No-Nonsense Guide to Finance for High Growth and Innovative Businesses can help you locate the most appropriate one for you, and advise you on the best way to secure it. This guide includes: l Working out how much funding you need l Funding options and how to secure them l Getting the most from your relationship with your investors l Government schemes to help innovation and encourage growth Business Link This guide is brought to you by Business Link on behalf of the Department for Business, Enterprise and Regulatory Reform and the Department for Innovation, Universities and Skills. Contact Business Link for a wealth of information and support services to suit your individual needs: Tel: 0845 600 9 006 www.businesslink.gov.uk Other No-Nonsense Guides available from Business Link include: The No-Nonsense Guide to Small Business Funding The No-Nonsense Guide to Government Rules and Regulations for Setting Up Your Business For business support and advice: l In Lowland Scotland, contact Business Gateway; (Scotland) 0845 609 6611; www.bgateway.com l In Scottish Highlands and Islands, contact Highlands and Islands Enterprise; 0845 609 6611; www.bgateway.com l In Wales, contact Flexible Support For Business; 03000 6 03000; www.business-support-wales.gov.uk l In Northern Ireland, contact Invest Northern Ireland; 0800 027 0639; www.nibusinessinfo.co.uk The material in this guide is for information purposes only and is not intended to be, nor does it constitute, legal and financial advice. No user should act or refrain from acting on the information in this guide without first verifying the information and as necessary obtaining legal and/or other professional advice. Users are recommended to consult their own independent advisers in relation to their own circumstances. Every reasonable effort has been made to ensure the information contained in this guide is accurate, but neither the BERR department, DIUS nor Business Link accept any responsibility for any errors or omissions. First published January 2005. Department for Business, Enterprise and Regulatory Reform. www.berr.gov.uk © Crown Copyright. BL/Pub URN 09/RDA654