Posted on 26/11/2015, 10:22
Cash is the life-giving fuel of every business, regardless of its size. Cash inflows, just like filling your tank with petrol or diesel, fuel strength and growth, while cash outflows are the necessary expenditures related to that growth effort.
What options are available to a company looking to grow or to get on the fast track to high growth? Well, surprisingly the options are many and varied, but the vast majority of SMEs seem to be unaware of quite how wide the range of options is. As a result, they often limit themselves to borrowing money from their bank or selling shares to potential investors when there are much cheaper and less onerous options available to them.
There are two main sources of Capital: Internal and External. Internal capital, money raised through company savings or personal debt, is self-explanatory, so we will look briefly at External Capital.
More often than not, a company’s growth requires a larger investment than can be achieved via Internal Capital sources. There is a simple mantra which states that the estimated return on the project must meet or exceed the cost of the capital raised, otherwise the project is not worth starting.
In the simplest terms, there are 3 types of External Capital – Debt, Equity and ‘Other’. Equity is a cash investment by a third party in exchange for a percentage ownership of the company. The amount of the ownership percentage depends on the amount of the investment relative to the value of the company.
Common forms of equity investment are “friends and family”, angel investors, family offices and venture capital. Friends and Family investments can range in size from a few thousand pounds to several thousand pounds. Angel investments generally refer to contributions of £50,000 or above and are often referred to as “seed” investments while venture capital investments generally involve sums of £1 million plus. However, there are a wide variety of other sources of investment that you need to be aware of such as peer to peer lending and crowd funding, to name a few.
Long-term debt, or “term loans” are the most common type of debt and the loan is granted in an agreement to repay fixed monthly, quarterly or annual repayments of the capital borrowed plus interest. However, there are a host of other loans that you need to be aware of at very realistic rates from sources such as the Start Up Loan Company and the British Business Bank, to name a few.
Debt and equity are the two most common and well-known methods for funding a company using external sources, but there are a host of “Other” sources of funds that do not involve you borrowing any money or having to give up shares in your company. In the next article we will concentrate on these, but for now, we will just let you know that they include such diverse elements as Research & Development Tax Credits (the average claim for an SME is £46,000!), Capital Allowances on buildings, grants from various government and European Union sources, Invoice Financing, Asset Financing and heavily subsidised, tailored growth programmes such as the Business Growth Service.
If you would like us to carry out an assessment on what forms of funding you are likely to qualify for, please call us today.
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