|
|
Friday 16th September 2005
Debt v Equity
Entrepreneurs have largely two expansion fund options: debt, where you take out a mortgage on the future; or equity, where you sell a portion of the family silver. Choose the right one, structure the deal appropriately, and your venture will thrive.
How you raise money to fund your business can be as important as the projects and strategy for which you want the finance. Equity, where you surrender some ownership but do not have to pay interest, or debt, where you keep your hands on the whole of your company but must pay regular interest in good times and bad, are the principal alternatives. Each has its attractions and drawbacks, which can vary according to the type of business you are running.
Winning support from an equity backer, whether an individual ‘business angel’ or a specialist equity company, can be time-consuming and expensive and means giving away part of what you have sweated blood to create.
Loan finance is usually simpler, quicker and cheaper to obtain, provided your business has assets and/or cash flow on which to raise it or you are in a position to supply the necessary assets and guarantees yourself.
On the other hand, the primary concern of lenders is ensuring you deliver steady payments of principal and interest. They are therefore unlikely to have the same commitment to seeing your business through tough times and key milestones as equity backers whose interests are – or should be – essentially the same as yours, and are therefore keen to supply advice and practical help.
An array of options
A range of financial tools is on offer for companies wishing to grow. Banks and other lending institutions will provide asset-based loans and facilities to established businesses with a track record.
They, and specialist finance groups, will also provide funding on the security of cash receivables or invoices or, at a price, ‘mezzanine funding’, advanced on expected cash flow and prospects, which ranks behind asset-backed lending in the creditors’ queue and charges more. Specialist private equity firms, individual business angels and others will take direct equity stakes.
It is a case of matching the type of financing you seek with the type of business you run. As Russell Warner of Eurofactor puts it, ‘if yours is a business with a high element of technology and intellectual property, involving research and development, then it is appropriate to use equity finance.
‘It is different with a sales-led operation, with a sales growth plan. Then you can use the assets in the balance sheet to raise debt.’
Many private equity specialists shun deals below £5 million, though private angels do not, and often insist on set minimum internal rates of return, such as 15 per cent. If your business is robust enough, raising smaller sums on the AIM junior stockmarket or the OFEX private share market is possible in the right financial climate.
Of course, equity investors need the prospect of eventually cashing in their chips through some kind of exit. This could be selling to new investors – easier if the company is publicly quoted somewhere – or a trade sale to another company.
Some equity providers will include a convertible loan in the financing package they offer, thus obtaining a ready income from the outset, which can be turned into an equity stake if the borrower achieves the hoped-for growth. These convertibles can carry high rates, such as seven per cent over base rate, currently 4.5 per cent.
Robert Tyerman
Comments [0]
User Comments
There are currently no comments on this post.
Related Articles
People who read this article also read ...
Related sections
Interesting links
|
VCT’s fundraising falls short
Close Enterprise VCT plays it slow
Brickles foresees end of LSE era
Bank holds interest rate at 5%
Editor's Pick
As entrepreneurs like Reggae Reggae sauce founder Levi Roots have discovered, getting your product into supermarkets can turbo-charge your sales. GrowthBusiness talks to Roots and other business owners about how it's done.
How to float on AIM
Corporate hospitality
Managing your wealth
Delisting: the great escape
Doing business in Russia
UK businesses in India
Cash shells’ resources multiply
Powering a renewable revolution
How to improve your year-end numbers
|
