At Dartcell, we regularly help companies source and secure the corporate funding they need to meet their growth goals. With support from our fundraising expert, Rich Olsen at Pegasus Funding, we introduce our clients to finance vehicles to facilitate their short- and long-term aims, whether that’s to improve cash flow for greater business stability, or navigate a large new acquisition.
We asked Rich for his insights into the common fundraising methods that are available for ambitious businesses of all sizes. Rich has extensive experience in helping companies find finance for any eventuality; in fact, there’s not much he hasn’t seen or dealt with.
When might companies seek finance?
There are three main reasons why businesses might look for funding opportunities:
- For launch – Start-ups usually need a significant cash injection if they want to begin sharing their products or services with the world. The owner/founder will often invest in their own vision – but sometimes, extra capital is needed to get their idea off the ground, and this can come from a range of vehicles, as we’ll explain later.
- For expansion – Whether the company needs to invest in new staff, new equipment, new premises, or wants to acquire part or all of another business, all these moves will require external funding to ensure they don’t put too much strain on the company’s cash flow.
- For expertise – Strategic business partnerships can help organisations grow in new and exciting directions. Investors must be willing to not only part with their money, but contribute their time, energy, and skills to the project to ensure it is a success.
What are the options?
When it comes to raising funds for your business, the question is often whether you would prefer to give up equity in return for support from an investor(s) with relevant skills and expertise, or arrange a finance deal with a lender or finance provider that will provide you with the capital you need to achieve your goals faster.
Here, we’ve outlined some traditional routes to corporate funding that don’t require you to surrender a share in your venture, such as business loans, invoice financing, trade financing, and leasing and hire purchasing.
Loans
Loans offer businesses a tried-and-tested means of raising cash to bridge financial gaps and fund new growth opportunities. Deals are available on fixed and variable rates, and business loans can be taken out on a secured or unsecured basis. Finance can be sourced from High Street lenders, alternative lenders, peer-to-peer platforms, and with help from government-backed initiatives.
Most suitable for: Companies in any sector, at any stage of growth, with a good credit history who are typically happy to enter into a loan agreement for between 2 and 5 years. Unsecured loans can be applied for and granted quickly – often within a matter of days or weeks – as long as you fit the lender’s criteria. Schemes like the Recovery Loan Scheme provide additional support and security for providers that are lending sums of up to £2m to smaller businesses, so size or previous credit experience is not necessarily a barrier to securing finance in this way.
Beware: If your situation is high risk, you won’t have access to the most competitive rates. Similarly, if your company does not have a strong credit history, your monthly repayments will be higher, and/or you may struggle to find a lender who will be willing to consider your case.
Peer-to-peer (P2P) finance
Peer-to-peer financing matches lenders (investors) with potential borrowers via online platforms. Investors can be businesses, individuals, or perhaps even a mixture of both. Peer-to-peer arrangements are loan based, so no equity in the business will be given away; investors make their returns through interest repayments instead.
Most suitable for: Companies that require a more accessible means of raising money than traditional bank loans. Because of the level of competition in the peer-to-peer finance space, interest rates are still at a higher level than High Street banks – and agreements can often be reached in a matter of days or weeks. As no third party intermediary will be securing the loan, the investor shoulders most of the risk.
Beware: P2P lending is not an effective option for start-ups, as potential investors will want to look at your company’s profile and history when assessing your suitability for a loan, and there will be higher fees to pay for accessing the platform.
Invoice finance
This involves borrowing cash against the money that your customers owe. There are two main approaches to invoice finance: invoice discounting, which keeps your arrangement with the invoice finance provider confidential and allows you to continue managing your credit control processes in-house, and invoice factoring, which enables the finance provider to take payments directly from your customers and manage the credit management process. Agreements are flexible and the funding available to you will increase in line with your turnover.
Most suitable for: Growing companies with reliable, reputable customers that require a fast, convenient, and fuss-free way to raise cash right away. It will also work for start-ups in the B2B arena.
Beware: Invoice finance can be a cost-effective means of raising capital. The invoice finance company will typically charge between 0.2 and 1% each invoice for their service based on the turnover of the business plus interest on the funds whilst being used. It is a more affordable short-term option than going into an overdraft. Invoice finance can only be used for B2B invoices and not consumer sales.
Trade finance
Buying and selling comes with its challenges, particularly if these trades are taking place between different countries. Trade finance financiers help to support smoother transactions between importers and exporters by funding the purchase of materials or stock before payment is received from the buyer. (Essentially, it closes the funding gap between a confirmed purchase order from a UK-based customer, and the payment that is being demanded by the overseas supplier.)
Most suitable for: Companies that trade internationally and are keen to ensure delivery timelines are streamlined and that full payment is received at the point of supply. Working capital is more accessible, even without asset security.
Beware: It can be difficult to get approval for trade finance, as financing companies will need to carry out comprehensive risk assessments of your processes. Fees and interest costs can stack up and impact your bottom line, so read the fine print and make sure these expenses won’t put too much pressure on your profit margins.
Leasing and hire purchasing
These agreements allow companies to spread the cost of larger purchases (for example, plant and machinery, business vehicles, or IT infrastructure). Leasing involves renting your required asset over time with regular payments, while hire purchasing enables you to take ownership of the equipment once all payments have been made to your lender. In either scenario, the asset you are investing in will act as the security on the agreement.
Most suitable for: Any company that needs to invest upfront in equipment in order to complete their business tasks. Ideal candidates for leasing and hire purchasing agreements are firms in the construction, manufacturing, transportation, and engineering sectors.
Beware: With these types of arrangements, you are only deferring payment for the goods. You will need to make sure the specified monthly repayments are affordable (and will remain affordable).
In part two, we’ll cover angel investing, crowdfunding, and venture capitalism, whereby you as a business owner will be expected to give up a share of your company in return for support, and the experience, behaviour, and expectations of the investor(s) will have a bearing on the project outcome.