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
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
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
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
To drive innovation and rapid
growth in your business,
you need clear, jargon-free
advice on securing the
necessary financial support
hen you’re looking for funding to
take your business to the next level
– whether that’s to accommodate
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
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
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
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
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
Why do you
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
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
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?
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
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
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.
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
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
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
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;
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;
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
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
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
Bring in the experts
The right advice is essential when raising
funds. But where can you go for help?
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
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)
Protect your intellectual property
and other intangible assets, as
they may be important when you
are looking for investment
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
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
what you need
Before seeking finance, it’s important to know how much you require,
your chances of securing it and which source best suits your needs
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
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
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
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
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
is chief executive
of Hampshire bio-
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.
A business plan
to raise finance
Securing funding isn’t easy during
a recession, so getting your
business plan spot on is essential
if you are to convince investors
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,
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
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?
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,
n It is cheaper and easier to obtain than
n You do not have to give up any control of
your business to a backer
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.
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
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
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.
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
business. Remember that
almost everything will be up Adventure Capital Fund www.adventurecapitalfund.org.uk
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.
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?
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
Stuart Dunbar is the
co-founder of Oak
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
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
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
2 Funding options and process
Making use of
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
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
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.
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
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
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
Wright Ltd has built
a solid reputation as
a vehicle diagnostic
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
2 Funding options and process
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
go about securing it?
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
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
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
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
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
and direction, which not all companies
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
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
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
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
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
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.
2 Funding options and process
If you’re looking to raise up to
£10m and are prepared to share
control and equity in your
business, then venture capital
funding may be right for you
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
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
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
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
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
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
where they expect to have an influence.
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
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
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
2 Funding options and process
Should I float
For raising £1m or more, a stock
market listing may be your best
option. It is often the next step after
angel and venture capital funding,
but it can be a complex process
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
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.
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
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.
QuEstIoNs INVEstoRs AsK
1 Are you filling a gap in the market? Who
are your potential buyers, and is there a
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
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.
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
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
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
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
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
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
3 After the event
Funding from angels, venture capitalists or a flotation brings obligations.
By understanding them, all parties can enjoy a rewarding relationship
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.”
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:
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
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
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
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:
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
pursuing other forms of finance
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
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
cross-border collaboration between small
to medium-sized companies (SMEs) that
4 Government resources
dedicate more than 10 per cent of their staff
or turnover to RD. For more on Eurostars,
Grants are available for technology projects
aiming to bring new products to market. To of government
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
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.
For more information about Innovation
Vouchers, visit: www.businesslink.gov.uk n
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.
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,
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
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
4 Non-government resources
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