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Business Finance Options – The Choices

Simplified

Business Link

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Introduction

Mike StutterBusiness Finance Adviser

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Agenda

• Finance - what are the options?• Expectations of funders• Debt and Equity• Government & Regional finance schemes• Preparing for funding & business plans• Conclusions and next steps

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Finance- what are the options?

• Debt and Equity – main concepts and differences

• The affects of equity dilution and the risks of debt to a company

• Financing must be driven by the business strategy, not vice versa

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Types of Finance

• Bank Lending - Overdrafts & Loans• Enterprise Finance Guarantee• Asset Finance• Factoring and Invoice Discounting• Regional Funds & Secondary Lenders

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• Historically provide Overdrafts and Loans

Requirements :-

• Demonstrable ability to repay

• Tangible Security e.g. Freehold Deeds, Life Policies ,personal guarantees etc.

• Financial Viability (Ratios)

• % margin above base rate

• Track record

Banks

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Working Capital

• Debtors

• Stock

• Work in Progress

• Creditors

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Ratios

• Stake

• Current Ratio (Assets V Liabilities)

• Net Worth (Solvency)

• Interest Cover (Serviceability)

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What banks really don’t like!

• Lack of track record• Start ups - no sales yet!• Lack of available security against lending• Poor credit history of the company itself or

its directors personally• Higher risk proposals

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Asset Finance

• Purchase of Equipment• Refinance of existing equipment i.e. buy

back• Security is the asset but additional security

may be required such as personal guarantees or charge over property.

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Factoring and Invoice Discounting -

• Finance is tailored to working capital needs

• ‘Automatic’ support for growth

• Security is the invoice raised

• Leaves other business assets available as security

• Care old perception of factoring is lending of last resort

• Customer relationships may be damaged (factoring)

• If sales reduce , the facility will reduce.

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Enterprise Finance Guarantee (EFG)

– Replaces SFLGS

– Accredited Lenders

– Min £1K –Max. £1m

– Currently 75% of debt guaranteed by Government

– Premium of 2% is payable

– New credit lines & refinancing of existing overdrafts permitted

– Personal Security allowable – but unsupported

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Regional Schemes & Secondary Lenders

• South West Loan Fund- Small Loan Scheme – max £50k- Business Loan Scheme - £50k+- Max 5 years- Solvent growth businesses

• Carbon Trust Loans - Equipment

• Other Locally Based Regional Funders e.g Enterprise Development Funds

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Grants

• R&D Grants

• Grant for Business Investment (GBI)

• Business Link –Web Site-Grant search

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Equity and where to find it

• The nature of company ownership– Must be Limited Company

• Sources– Venture Capital and

private equity– Business Angels– SWAIN– Large accountancy

practices– Beer & Associates– Friends, Family, Staff

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Equity - statistics

• Only 6% of private equity is invested in start-up or early stage companies

• Most equity is invested in more mature, larger companies

• Success rates with applications for funding = 1% with VCs and 5-10% with business angels

• So it’s not that easy to get equity funding!

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Expectations of funders - equity

• Equity investors– Exit strategy - Trade sale, Management Buy

Out, or Flotation in 3+ years– Realistic Valuation– High Returns required

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Equity

– No interest cost– No security needed– No repayment of capital– Potential skills of investors, or strategic partner– Leverage for debt– Dilution of ownership– ‘Cost’ (high returns demanded)– Lead time to obtain it

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The funding process and costs

• How long it takes to raise debt or equity• Negotiation of terms• Due diligence - lots of questions• Legal documents – far more if you are

raising equity• Costs - manage them proactively

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Business plans and forecasts - getting them right

• Contents -10/12 pages +appendices as appropriate

• 2 page Executive summary • Do It Yourself! - must be written by

management, not by your accountant• Use an accountant to help produce the

financial forecasts• Refer to BUSINESS LINK website for

guidance• Be clear on product and route to market

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Conclusions

• Successful debt or equity fundraising depends on the following ingredients:

–    A well defined business strategy

–    A well prepared business plan

–    Robust and deliverable forecasts

–    Firm negotiation of terms

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Questions ?

Presentation available to download:

www.businesslink.gov.uk/southwest/eventspresentations