Growth finance: the options
If your business wants to grow then you need to look at finance
to help fund its development. This guide outlines the main growth
finance options available to your business.
Growth finance
- Your profits may not be enough to cope with the financial
commitments of growing your business: that's where growth
finance figures
- If you need additional finance, you must first budget for
all the costs and consequences of accessing this
finance.
- You have to accept that arranging the finance will take
time out of your day-to-day business operations.
- New finance can ease strain on your working
capital when you look for growth
Debt finance
- Short-term bank loans and overdrafts are suitable only for
short-term planning
- Long-term bank loans from high-street banks are an option to
consider: they are an expensive way of acquiring
finance, though
- You must budget for the regular repayments you
have to make
- In the current climate, you may find it quite difficult
to secure debt finance
Equity finance
- Investors will get involved if they believe you are a business
with the potential for significant growth
- Venture capitalist firms look to buy a minority
stake in your business. They offer unsecured finance, management
expertise, increased credibility and business contacts.
- You have to give up part of your business and the
VCs will expect to place a member on your board.
- Business angels are wealthy individuals who invest
their own funds in your business for equity. They also offer
mentoring and advice.
- They tend to invest smaller sums and take less time to
complete a deal than VCs
- Banks also offer direct equity investments with
the promise of non-interference in day-to-day operations
- Private equity firms are another option but are
more likely to want a change in management
Flotation
- Floating on the PLUS or Aim markets will raise your
profile and credibility as well as finance
- It will bring in more funds than debt finance or
business angels
- It is expensive, however, and there are many rules
and regulations to follow and you have to announce every key
decision to stakeholders
- Assess whether you could cope with the obligations
of being a public company
Pros and cons
Debt finance
- Interest paid on debt is tax-deductable - so you're not
spending as much as you think
- Debt finance is subject to rising interest rates
- It can be difficult to secure, particularly if your business is
research-and-development heavy
- You may be required to offer personal guarantees
Equity finance
- Not every business will attract equity finance: only high
growth businesses with attractive prospects can secure this kind of
investment
- You will have to give up a portion of the business and you must
grow and operate to a fixed schedule
- Equity is better respected than debt and can confer a certain
credibility and prestige on your company
- Securing private equity is time-consuming: it can take around
18 months
Flotation
- As securing debt finance becomes increasingly difficult, many
firms consider floating on PLUS or Aim: this has the added benefit
of raising a business's profile
- Flotation can increase liquidity, and could help you win
business
- The admissions process is straightforward, but annual listing
fees can cost many thousands of pounds
- There are benefits but also serious pitfalls, so flotation is
not a decision to be taken lightly: secure professional advice
first
Checklist
- Assess the growth needs of your business and the kind of
funding you'll need to feed it.
- Research all the funding options open to you, from debt or
equity finance to flotation
- Speak with a professional to get advice tailored to your
business
FAQ
How do I decide which kind of growth finance is best for
my business?
Determine how much investment you need to enable your company to
grow: depending on the sum, one or other option may be better
suited to your needs. You may find giving up a piece of your
business objectionable, or have difficulty obtaining debt finance.
Or you might find the risk of flotation too great. Every business
is different, and even if the figures add up, you may find yourself
shying away from particular forms of finance. The best way to get
advice specific to your venture is to consult with a
professional.
Jargonbuster
AIM: the London stock exchange's international
market for small growing businesses
PLUS: specialist British market for stocks with
relatively small market capitalisation value
Resources
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