Looking to Grow: 3 Ways to Fund your Business in the UK

Posted on: May 12th, 2017

Acquiring the right finance option is essential when it comes to launching your growth expansion plans. We bring you three different ways by which you can fund your business in the UK.

1. Bank Loans

The most common form of financing, bank loans are usually the first option sought by entrepreneurs. Bank loans come with several advantages.

They offer lower interest rates compared with other commercial lenders. Banks generally want to grow with your business should you require more capital. Bank loans, however, come with their own set of
disadvantages.

They require collateral, which can be difficult for start-ups or service oriented businesses. If you are not in the right business or do not have a good balance sheet, you will likely struggle to attract bank loans.

Additionally, UK banks are not focused on middle market companies, as they’d prefer to lend to larger enterprises.

2. Venture Capital and/or Angel Investors

Angel investors are generally wealthy individuals that provide capital for start-ups. While open to high risk, angel investors tend to invest smaller amounts between £10,000 and £200,000.

Opting for angel investment requires giving away equity, however, no loan repayments have to made. Angels are usually the first step in the capital journey for a young company.

It is not a solution that will provide large sums of money that you can scale with. Venture Capital is private funding provided to early-stage businesses.

VC’s target businesses with high growth potential, with the aim to recoup cash on the original share value through an initial public offering or acquisition by another company.

VC’s typically receive more proposals than they can accommodate, and can prove to be hard to find and convince. VC’s are very particular about the sector, the growth rate and the management team. It is a long process to attract funding from a VC investor.

3. Mezzanine Financing and/or Venture Debt

Mezzanine finance, a hybrid of debt and equity financing, is an attractive alternative for businesses who are not able to raise enough through a traditional loan and yet wish to retain control of their equity.

Since the loan is often based on the cash flow or equity value, mezzanine financing is a good option for businesses that lack collateral. Banks in the UK used to provide this layer of financing as part of a stretch piece, but have long retreated from this practice.

There are other lenders such as venture debt lenders as well as unitranche lenders that use a similar approach. These loan forms are based on cash flow growth for repayment. They provide larger check sizes than bank loans and do not hold shares in the company, unlike an investor.

They allow a company to raise capital without giving up control. They fund the gap and eliminate capital availability as a barrier to business growth.

The specific needs of your business should determine which mode of financing to seek. Consult a financial expert and evaluate the pros and cons of the different types of financing before reaching a decision.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.