A game of thorns: funding business growth

If you are a rapidly growing business or are planning for a large growth phase, sourcing of capital is paramount to your success. Unfortunately, there are more thorns and thrones in the finance world then there are in the hit series “Game of Thrones”. The purpose of my article is to help you put capital funding contingencies in place, to realise the opportunities that will come your way.

Debt or Equity?

Growth can be fuelled through debt or equity capital (selling of company shares). Debt capital is by far the best option for a growing business, providing it can easily be serviced. That means having a high degree of long-term co-alignment with the financial intermediary of choice.

Co-alignment with your capital provider is the single most important thing! If it doesn’t exist it will be costly, whether it be through terms that hinder growth or lawyers being paid. Capital that is injected via equity, should be a last resort if a business is at an early stage of its growth (otherwise equity will be sold at a discount relative to future value). This is also known as unnecessary shareholder dilution. The last thing you need is undue influence from investors, your self-sovereignty is of importance!

Most investment firms would hate me saying that, as they often aim to prey on business owners that are desperate. In my mind that isn’t true co-alignment. There is another way.

Co-alignment

You need to be aware that the nature of investor capital of the financial institution you select, will determine the degree of co-alignment they have with you.

A growing business requires what we refer to as “patient long-term capital.”  Intermediaries that deal with family office clients that are of high net worth are the best ones to provide this! I’ll provide the evidence in future.

De-Risk Your Business Profile.

It is imperative you de-risk your business to receive a lower cost of capital. You can do this in a few ways;

1. Ensure you are cashflow positive/neutral
2. Provide evidence of your future demand (a view of your pipeline of work, that is confirmed). This greatly reduces risk for any capital provider.
3. Offer security as much as possible, whether it be through business assets or personal.

Blended Solutions (polygamy is legal here)

The type of capital you require and the instrument used to provide it will vary on a number of factors.  The reality is that most growing businesses will have a blended solution.

Below is a list of some solutions:

1. Bank funding: The cheapest but limited in terms.
2. Convertible Notes: Convertible notes are treated as debt instruments at first. On maturity and subject to terms, the principal amount can be converted to equity, generally when the business has a higher valuation.
3. Invoice financing: Using debtor invoices as security to get funding.
4. Private Business loans: Putting business or personal assets as security for a loan.
5. Asset finance: This includes equipment, machinery and vehicles.
6. Fit out finance: Finance to do a store fit out.
7. Purchase order finance: Funds to purchase goods on order.
8. Unsecured loans: These incur a higher interest rate but do require good financials.

Alternative sources of funds are:

1. Government R&D Grants: You can receive up to 43% of expenditure. I would also recommend you couple this with R&D grant financing.
2. Export Market Development Grant: Great for exporters.
3. Government employee training incentives: $2 to $4K per employee involved in select training programs.

Tarek Omar, Head of Strategic Ventures Royce Stone Capital