Future 50: Finding the right finance to enable growth
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Understanding what’s involved in raising funds for business growth can help make better choices on future finance.
Capital is the lifeblood of business – and for companies that are expanding, securing the finance needed to enable growth is vital. But where can the money come from? Members of the Future 50 programme came together for a webinar led by Foresight Group, looking at the ways businesses can get the funding they require.
This is a live issue for companies in this year’s Future 50 programme: while 18% of them have received some form of additional funding in the past year, 37% of them say they are currently looking for investment. While the majority of them (55%) say they’re looking for less than £100,000, 17% of the businesses are looking to secure more than £500,000. So, what are the options?
Matt Smith, a partner in the private equity team at Foresight, provided the overview. Foresight has more than 35 years’ experience of investing in SMEs across the UK, in all sectors - from hospitality and childcare to professional services and manufacturing. With one of its regional offices located in the heart of Cambridge and the evergreen Foresight East of England Fund focused on investing in the region, Foresight understands the needs of companies like the Future 50 members.
“In terms of sourcing finance for the business, always start with the plan,” Mr Smith advised. "The right source of finance should meet the requirements of the plan. Don't let it get overcomplicated. Use the right tool for the job... And don't try to bend the wrong source of capital into the plan for short term gain because it’s cheaper.”
Whatever the source of finance, Mr Smith stressed the importance of making sure both company and investor objectives are aligned. This can determine what the appropriate source of funding should be, whether it is short- or long-term and secured or unsecured - with unsecured options including fixed-term bank loans and overdrafts for the short-term.
Some companies may be able to secure grants or investment loans through their local enterprise partnership (LEP). While the Coronavirus Business Interruption Loan (CBIL) scheme has ended, some firms may be eligible for other schemes accessed through their LEP.
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Businesses looking to raise secured finance may have more options, including mortgages and asset-based lending (ABL) stock finance facilities.
Working together – and aligning goals with those of the business - is crucial when looking at equity-finance options; where an investor takes a share of the company in return for the funding.
For those looking to raise relatively small amounts of capital, angel investors - rather than institutional investors - may be able to provide all the necessary funds. The LEP can often introduce angel investors.
“The appetite for risk of an investor varies according to the life stages of a business,” Mr Smith said. “Generally, the earlier the life stage of a business, the higher risk/return profile the investor is looking for... That feeds through into the way they think about providing finance, and then the legal structuring and everything that supports it.”
Venture capital funds can provide early stage or start-up finance, but also move through to more established businesses. Generally, venture capital will be provided over a two- to three-year timeframe (though it can sometimes be longer).
“These investors are looking for that higher-return profile,” explained Mr Smith. “On average their funds will probably have a number of assets that don't make it. They'll have a number that return a pound... but the ones that work are looking to make 10 to 30 times their money.”
Private equity funds are typically looking to invest in mature and profitable businesses – possibly those looking for a management buyout or an equity-release transaction. The investment is generally over a longer term than venture capital.
Private-equity funds will work with the companies they invest in. "We look to drive a structure which aligns around management, on a two- to six-year view,” says Mr Smith. “We'll support management teams with building out their expertise, as the company develops, particularly with non-executive directors and other people we can bring from our network.”
Foresight Group LLP is regulated by the Financial Conduct Authority (FRN 198020). Capital at risk.
For more information, see www.foresightgroup.eu