Funding Options for SMEs

Andy Thomas
Investment Director, YFM Equity Partners

There’s a huge array of funding options available to businesses seeking to grow. The low interest rate environment, increasing regulatory pressures on traditional capital sources, and improving technologies means there are more types of funding solutions on the market than ever before.

Providing choice to entrepreneurs is good of course, though with choice comes complexity, and there is a danger that businesses can get lost in the myriad of options available, or even worse, take on the wrong type of capital or investor for their particular situation.

Over our many years of experience we have been involved in bank lending lines, mezzanine loans, venture capital and later-stage private equity structures. Given the myriad of funding options available today here are the top things for management teams to think about when seeking new capital:

Risk and Reward go hand in hand: Money costs money, and there’s a temptation to go for the cheapest form of capital available, which can often mean the bank. But the cheap price of money is a signal that they are only able to accept a low level of risk. If your business is stable and predictable and you can therefore guarantee your funder a certain level of profits and cashflow, then bank debt may be the best option.   But where your business is less mature, or your future cash flows are less certain, it is unlikely to work for them so you may need to look at funders that can accept more risk, albeit for a higher cost of capital.

Allow plenty of time to raise capital: If you leave yourself with very little time to raise the funds you need then this could risk delaying the underlying project, or reduce your negotiating power with the funder. You always need to plan for the unexpected so start your investment process early, allow for it to take six months not three, and that will give you the best chance of success.

Ensure the funders objectives are aligned to your own: Generally speaking, any provider of debt, mezzanine, or equity finance to your business has a vested interest in its success. However, there is the potential for misalignment. For example, debt instruments that require you to repay capital can cause a business problems if the management team and shareholders would prefer to reinvest that cash in the business to drive future growth. Try to put yourself in the shoes of the investor and work out where there may be a potential for conflict with your own objectives.

Meet the ultimate decision makers: Often the person you meet from any financial intermediary will not be the person that makes the final decision. Where possible, try to insist on meeting at least one of the key decision makers. It helps management teams to understand more about the organisation they’re working with, and their rationale for investing in them.

Don’t let the process distract you from your business: Raising capital takes time, whether that’s through preparing business plans, meeting with potential investors, or navigating your way through important legal documents. If that process distracts you from running the business then it can be counterproductive, and could even mean the financing falls though at the 11th hour. There’s no perfect solution to avoiding this, but taking on some additional professional support from a corporate finance advisor to help you through the process is often a good start.

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