How to Grow Your Business

“Funding for Small and Medium Size Enterprises”

One of the major factors affecting any growing business is funding. It is an acknowledged fact that without the ability to grow and develop, most businesses will stagnate and potentially fail. Equally, however, it is vitally important that a business considers carefully what type of funding is appropriate and whether it can afford to service the eventual repayment of that funding. As any insolvency practitioner will acknowledge, the inability to service debt and a failing cash flow are probably the two biggest factors resulting in business failure.

Another of the major hurdles faced by small and medium size enterprises (“SMEs”) is the lack of options in funding sources. Beyond traditional bank lending, it has often been difficult for SMEs to tap into the other sources available. Bank lending, whilst obviously useful, can have its limitations in that a company will need to make interest payments (and potentially capital repayments) immediately. This limits many long term objectives which may suffer from short term cash flow problems or simply be too uncertain or pioneering for a bank to consider.

An alternative source of funding is through private equity investment. This can be best summarised as an investment by a third party into a business, in return for a percentage of the business itself. This may be immediate or may be contingent of some future event or a mixture of both. In this way, the investor benefits from the eventual success of the company rather than through immediate interest payments. Clearly, the strategy is riskier and, thus, as a result, the returns tend to be higher. Historically, however, private equity funding has not been available to SMEs because any investment of less than £2million could not be justified, in terms of cost, by more traditional venture capital funds. The problem has now been formally recognised and a number of specially tailored investment funds have or are being created.

So just where does one find this sort of investment?

Private equity finance can be divided generally into two sources; business angels and venture capitalists. Business angels are individuals looking to invest in other people’s businesses and tend to invest in the lower end of the market, that is up to £250,000. As individuals who are often experienced business people in their own right, they are often more open to the higher risk investments. Equally, they may be looking to invest in specific industries they have wide experience of and, as they tend to look for some sort of hands on involvement, can provide an additional source of advice and mentoring to, say, a new business. The downside is clearly that mentoring can turn into interference so the choice of a business angel is one that must always be considered carefully, in light not only of the economic issues but also of the more personal interaction aspect. The option of funding via a business angel has been available for some time but one of the major difficulties has been sourcing them. Business angels can, however, be sourced privately through a company’s professional advisers, such as your solicitor or accountant, or through the growing number of agencies and networks who can assist with finding the right person.

Venture capital funds have come a long way from the more traditionally structured funds referred to earlier. There are now a developing number of purely private venture capital funds which are aiming themselves at the SME market. As entirely privately backed funds, investment decisions will tend to be based on commercial risk and the likelihood of returns which may make them more flexible than some of the government supported schemes but they do still tend to operate in the top end of this market. By contrast, however, Government support has, however, seen the development of a number of very successful funds which can offer funding at all levels. For example, EU funding in the South West has seen the establishment of Finance Cornwall as well as its new sister fund, Finance South West.

The Government has also been developing regional venture capital funds and the new enterprise capital funds. These regional venture capital funds cover the nine regions of England and have been established to support investment in businesses in each area. Their initial investment is limited to £250,000 but there is scope for further supportive investment of up to £250,000 if the initial investment has proved successful. The new enterprise capital funds will not be specific to any one region (although the investment will be limited to the UK) but they will be able to offer funding from £250,000 up to £2milllion and will only be able to invest in private SMEs. It is hoped this latter funding source will be available later this year, providing South West based SMEs with a further option when considering expansion.

Katie Ashworth