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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