Date 1 June 2005
One of the most difficult hurdles for any ambitious start-up company is the securing of appropriate finance. Established companies can face similar problems when attempting to raise additional finance for expansion or diversification. Although many different options exist, the size and profitability of your organisation will dictate which are most suitable.
Banks
Banks primarily deal in overdrafts and loans. These require interest to be paid and security on the amount borrowed – the amount you are entitled to being limited by the level of security you can offer. In some cases, this can even require the use of personal guarantees from the company owners. Banks nearly always ensure that risk is low for them, which invariably results in the risk being higher for your company.
Private Equity Finance
To reduce the level of risk, you can seek finance from private investors. Venture capital firms and business ‘angels’ (individuals looking for investment opportunities) can be a more attractive source of investment as they share more of the risk in the event of business failure. Money is invested in return for a share of your company and its profits – venture capital firms usually dealing in larger investments. One disadvantage is that a business angel will almost always want special rights with regard to voting, dividends and even capital as he will want to protect his interests. An advantage can be that such an investor will be experienced in business and, through board representation (which will also usually be required), will be able to bring that experience to the company.
Public Equity Finance
Public equity finance is where a company raises capital by issuing shares to the public and/or financial institutions. The fundraising will usually take place by way of a private placing or an ‘offer for subscription’. A ‘private placing’ involves the issue of shares to carefully selected individuals and/or financial institutions. These ‘places’ make an investment in the company in return for the shares. An offer for subscription is similar but is made to the general public. This tends to be more expensive as it usually requires significantly more investors and a campaign to raise investor awareness.
A further option for the company is whether or not to undertake a flotation – the process of applying to have your securities (usually shares) admitted for trading on either the Official List of the London Stock Exchange (Official List), the Alternative Investment Market of the London Stock Exchange (AIM) or OFEX which is ‘off-exchange’. The choice of which market to opt for depends on many factors but, generally, AIM and OFEX are beneficial for smaller companies as the costs, amount of regulation and continuing obligations are considerably lower.
The most obvious benefit of going public is that it provides access to a large pool of investors with the ability to inject additional capital into your business. However, this comes at a price – preparing the company for flotation and complying with regulatory requirements is costly. There are onerous financial reporting and disclosure requirements. Directors must also be prepared to be subjected to far greater scrutiny.
An Attractive Investment
Attracting venture capital firms, business angels or public shareholders is not an easy process. To do so, your business must appear attractive to them.
The benefit of floting your company is that it generally raises your company’s profile and provides a continuous valuation of the business. Publicised successes will invariably raise the value of your shares and thus encourage more investors. However, failures can be equally as public and deter them.
Attracting a venture capital firm or business angel is a much more personal process. They will want to know the amount of capital you are looking for, details of the projected returns on the investment and proposals for shared ownership of the business. Most importantly, they will want to know that your business plans are realistic. Well thought and laid out business plans, including aspects such as financial forecasts and proof of your own ability to manage the project, are vital. If you are manufacturing a new product, you should at least be at the prototype stage. If you are selling a new service, potential customer research will help to show there is a need for it. The current BBC2 programme “Dragon’s Den” is an excellent illustration of how this process works.
If you are having trouble attracting investment or are considering raising finance for the first time, you may wish to seek the advice of a business advisor or corporate solicitor. They will be able to help you choose the most suitable type of finance for your organisation and help prepare your business case. The added advantage of a qualified adviser is that they will also be able to ensure you are as protected from risk as possible – something that could potentially save you money and even your business in the long-term.
For further information please contact Chris Wilks on 01727 798000 or email chris.wilks@salaw.com.
© SA LAW 2005
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.