THE MON£Y SHOW ME

According to data company Experian, in spite of high inflation, rising energy costs and other economic challenges, around a quarter of UK small and medium-sized enterprises remain resilient – making them “good risk” prospects for lenders. The challenge for would-be lenders will always be how to di erentiate between those which are a good credit risk and others which may be less able to meet their financial commitments over time.

From bank loans to private equity, angel investment or crowd-funding, there are many di erent types of borrowing, or ways a business can raise investment to drive a long-term strategy or to manage shorterterm cash flow challenges. But start-ups or scale-ups seeking to raise money should proceed with caution and always take expert advice.

Debt finance

The most widely used form of finance used by UK businesses.

A business borrows a sum of money, either as a loan, or (generally more expensive) an overdraft and pays it back over an agreed period of time.

There are additional forms of debt finance. Two of the most widely-adopted are finance secured on assets and factoring.

Asset finance (leasing or hire purchase) can be ideal for businesses seeking help to buy expensive assets, without using funds earmarked for cash flow.

Factoring turns invoices into working capital. A business sells its invoices to a third party (a factoring company) at a discount. Invoice factoring can be provided by independent finance providers, or by banks.

Venture Capital

Capital is invested into promising startups or small businesses in exchange for equity. Funding such as this usually comes from wealthy investors, investment banks or other financial institutions looking for opportunities to support young companies in the hope that early investment will help them grow faster, making money for the investor and the founders. The financial investment may come with managerial or technical support.

Venture capitalists will often invest in a number of small companies, taking around 50 per cent equity in the business. This helps them spread their risk, and often allows the business founders to retain equity in the business so that its success will also deliver for them as well as their investors.

Revenue-based financing

This is a way for young companies to secure financing without giving up equity or having the burden of inflexible debt repayment conditions.

Investors agree to invest capital in a company in exchange for a percentage of the company’s ongoing total gross revenues. It is an alternative investment model to more conventional equity-based investments, such as venture capital and angel investing, as well as debt financing.

It means a young company can raise capital without sacrificing part of its equity or pledging a part of its assets as collateral.

Private equity funding

Private equity investors take shares in a business. Like venture capital, the investors are generally high net worth individuals, or large institutional investors, such as pension funds or companies acting on their behalf. The goal of private equity investors is generally to take control of the whole business and so they usually invest in mature or proven businesses which the investors feel have fundamentally good products or services but have unrealised potential because of poor management or other ine ciencies.

Angel investment

High net worth individuals (“angels”) who are willing to invest their own funds.

Angel investors seek to share in the successful growth and have a return on their investment. However, angel investing is generally regarded as “patient capital” (an investment made for the longer term), and they may not see an exit or a return on their investment for up to eight to 10 years.

While business angels can invest on their own, more frequently investment is made alongside other angel investors through syndication. This enables them to pool funds and share the risks.

There is a regulatory framework for angel investing that protects angels and the entrepreneurs.

Before receiving business plans or beginning to make angel investments, an angel investor must self-certify as either a High Net Worth or Sophisticated Investor.

A certified high net worth individual must have a net income in excess of £100,000 or net assets in excess of £250,000 over and above their pension fund assets and private residence.

A sophisticated investor must have either been a director of a company turning over at least £1 million within the last two years, have made more than one investment in an unlisted company in the last two years, be a member of a network or syndicate of business angels for at least six months or have worked in the past two years professionally in the private equity sector or in the provision of finance for small and medium enterprises.

The government’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give angels generous tax breaks. By making investing less risky for investors, the schemes help businesses grow.

Under EIS, angels cannot take more than a 30 per cent share of a business, which makes sure that entrepreneurs stay incentivised.

Government grants

Not strictly borrowing, because they don’t have to be paid back, grants from government are often di cult to find and sector specific. Application forms are also often time-consuming to complete. Contact the government’s innovation agency, Innovate UK, which operates many funding schemes.

The value of grants varies greatly but can be between £1,000 to £100,000 for small or medium-sized businesses, or much larger for the high growth businesses that the government wants to encourage.

Crowd funding

Raising capital through collective funding of individual investors. These can be friends and family or, increasingly, amateur investors or individuals seeking opportunities to invest their money via online or social media platforms.

Crowdfunding platforms, such as Crowdcube or Seedrs, o er a public arena to showcase a business’s products or services. There are di erent sorts of crowdfunding websites, including rewards-based where the investee o ers their product or service as a reward, equity-based where the investee gives up a portion of the business to the investor, or donation-based – often used for social enterprises or community interest companies.

Peer-to-peer lending

Peer-to-peer lending matches up potential investors with borrowers, who could be individuals or businesses.

They appeal to investors willing to take on more risk with their cash for higher interest rates o ered than typical savings accounts.

Retail investors access an online platform to provide loans to consumers or small business borrowers. These platforms facilitate the lending, undertake credit assessments and other risk management, but do not act as a counter-party to the loan, and contracts are direct between the investor and the borrower.

In 2019, the Financial Conduct Authority imposed stricter rules for peer-to-peer platforms to protect less experienced investors. One of these rules was the introduction of a requirement that platforms assess investors’ knowledge and experience of peer-to-peer investments where no advice has been given to them.

Nine out of 10 UK scale-up companies expect to grow this year

Although concerned that the UK is becoming a harder environment to scale in, nine in ten of the UK’s scaling companies expect to continue growing in the coming 12 months.

One in five expect to scale at 50 per cent or more. These insights were revealed in the ScaleUp Institute’s 2022 Annual Review, which also recorded a strong scaling pipeline and a 13 per cent increase in the number of ‘visible’ scale-ups to 8,457 – which it defines as those breaking through the £10.2 million turnover barrier or £5.1 million in assets. That is a 119 per cent increase since these were first tracked in 2017.

The report included a survey of more than 300 chief executives of high-growth scaling companies across the UK with a combined turnover of £2.5 billion.

Almost 40 per cent of the scale-ups surveyed have a female or ethnic minority founder or chief executive. More than 60 per cent want to export more this year and more than half expect to raise further funds to fuel growth.