The finance landscape for growing businesses has changed significantly in the UK over the last decade. It’s no longer a choice between a traditional term loan or equity finance. Lenders, particularly alternative lenders now offer a wide range of flexible, growth-focused debt finance products. Many of these are recommended by equity investors, who know that clever and varied financing can be the lynch pin for successful growth plans. Debt finance can be used together and in conjunction with equity finance to help achieve growth aspirations for businesses across all industries. Read on to find out more.

will join Informed Funding at their upcoming conference - Debt Finance for Growth on 25th May at Glaziers Hall near Bridge.

 

 

The shifting sands of capital finance

Capital is fundamental for business growth and until the financial crisis it was relatively easy to secure. Mainstream lenders offered cost effective finance to businesses to fund their growth, but after 2008 many of these products were heavily curtailed. Ambitions for growth often had to be postponed due to the lack of available finance. Others turned to equity finance, selling an ownership interest to raise funds to support their growth aspirations. Alternative finance changed that and now banks and alternative lenders have a wide variety of finance products available.

Selling equity in your company – pros and cons

A key benefit of equity finance is that investors take on the risk of their investment themselves. So if your company fails, you won’t have to pay the money back. Investors can also provide invaluable advice, contacts, and mentorship to business owners that they have garnered from their investments and careers.

Yet there are downsides. And these often increase as your business becomes more successful.

Investors seek a higher return from their investments than lenders do, and this return will eat into your own profits when ownership is shared. This makes the overall cost of equity much higher than the cost of debt.

Also, when selling equity, you hand over certain rights and decision-making input over your business. More importantly, ownership of the company is diluted.

Debt Finance – pros and cons

Debt finance is a simpler proposition. Provided the repayments are made, there is no interference or involvement in your business from the lender, and future profits do not need to be shared.

Debt finance will generally be cheaper than equity especially for companies that are successful, since the cost of debt is essentially finite. The more profit you make, the more costly sacrificing equity is and the more beneficial it will be to keep the profits yourself and pay interest on a loan instead.

However, while taking on debt can be very beneficial, if a company becomes over-leveraged, the cost of raising additional debt becomes increasingly expensive. Equity investors may also be turned off by an over-leveraged business.

Also, asset-based lenders have claiming rights over business assets should a borrower business go into liquidation. Thankfully, alternative finance providers and business banks have made it easier for businesses to secure the right form of finance to match their specific needs.

 

No longer a choice between equity or debt

Equity finance is often seen as the solution for businesses looking for ‘more than money’, while debt finance has been traditionally chosen for swift, lower-cost projects and expenses.

Yet it’s no longer a case of ‘one or the other’. Many equity-funded businesses also use debt. These ‘blended solutions’ offer businesses the chance to facilitate long-term growth as well as tactical operations. Cash from debt can be available to fund opportunities that form part of a wider, investor-led growth strategy.

The evolving debt finance landscape

Debt finance traditionally meant securing a term loan that could only be used once. A business had to wait until the initial loan was fully repaid before applying for another. However, this kind of loan can inhibit a business’s ability to respond to unexpected opportunity. Businesses with seasonal, inconsistent or cyclical cash flows can also find a rigid monthly repayment schedule restrictive.

Debt finance now comes in many forms. The range of debt finance products now available includes:

• Term loans
• Lines of credit
• Revolving credit facilities
• Invoice finance
• Supply chain finance
• Trade finance
• Export finance
• Merchant cash advances

Invoice finance e.g. raising finance against your customer invoices has created an opportunity for businesses to raise finance in a more flexible way. Businesses can release up to 90% of the cash tied up in unpaid invoices, which allows them to pay for costs associated with fulfilling that order or use it as working capital to pay for other costs. Not all invoice finance is created equally however. You should find out which product will suit you.

The key downside of invoice finance is that a large customer order is necessary to release funds, which is late in the supply chain. It’s also not possible for businesses who don’t raise customer invoices to utilise this product type.

A revolving credit facility to purchase goods and services might be an ideal debt finance product for a growing business. Provided your business remains robust and stable, this facility never has to be renegotiated - which can prove to be incredibly useful.

However, revolving credit facilities, along with lines of credit and merchant cash advances have a reputation for being expensive. Some incur costly setup costs, high commitment fees and also non-usage fees. Moreover there are often minimum notice periods before advances are made, and also limits on the amount that may be drawn at any one time.

Here at Pay4, we provide a revolving credit facility that doesn’t have any of the above.

Like other new and innovative business finance products, Pay4’s revolving credit facility is insurance-backed, and doesn’t take security over any business assets. This means that it can be used in conjunction with any existing or future forms of finance, including equity finance. And with no non-usage fees it can be kept available at all times, ready for use and reuse.

Conclusion

There was a time when business owners had to make a difficult decision when it came to funding their growth. Whether they were going to sell a part of their business, or potentially endanger their assets by exposing them as collateral to large, inflexible loans. Now the landscape of finance has evolved.