Fifteen ways to raise £1 million

Expansion requires financial muscle, be it for operations, research and development or an acquisition. Marc Barber looks at 15 ways to get your hands on the cash

If you're looking for a sizable chunk of cash to grow your business, the traditional sources of funding are: venture capitalists; business angels (wealthy individuals); public markets, such as the Alternative Investment Market (AIM) or PLUS Markets; Government-backed regional agencies; and banks and other financial institutions.

Usually, the latter is the first port of call. Chris Scott, managing partner of HW Corporate Finance, says there is a noticeable shift in attitudes to lending from these financial institutions: ‘They’re looking much more at the industry and sector you’re in because they’re reducing risk. Certain banks will look at their investments and realise they’ve got 40 per cent of their lending in retail business, so they’re easing off in that sector. Whereas others will be less exposed and therefore happy to invest.’

That isn’t to suggest that deals won’t go through, it’s just going to be harder to negotiate. The good news is that if you have an exciting business primed for expansion, there are plenty of investment options out there.

Bob Woodland, a serial entrepreneur who heads training specialist Redtray, says the trick is to be persistent. He should know; for his first venture he spent a year doing the rounds before successfully raising just over £1 million from legendary investor Jon Moulton (who rejected him the first time).

‘It’s about confidence,’ says Woodland. ‘If you have a list of potential fund providers, pick the one you least want to deal with and use it as a rehearsal. The first time will be the most difficult because no-one knows who you are. Once you’ve made money for investors, it’s a different story.’

Business XL outlines 15 of the best options currently available:

1) Venture Capital

Getting backing from a VC firm is extremely difficult. It will look for high growth prospects from a company operating in a unique space. A management team will need to show they are ambitious, switched on and ready to push the boundaries in marketing, sales and finance. If the financials aren’t a priority for you, make them one, as the numbers will be scrutinised and matched against key performance indicators.

The better you prepare, the less radical the changes to your company will be. That said, the classic dilemma for an entrepreneur is whether to go it alone or give up control of the company.

Redtray’s Woodland observes: ‘You often hear people saying that a VC strips you naked and then hands back clothes based on performance.’

That’s not the kind of deal you want to be striking. For Woodland, it’s important to pitch for additional capital at the right time in the company’s development and to be realistic about the amount you’re asking for.

‘You need a vision for the business,’ he says. ‘There’s nothing worse than to go begging for money and admit that if you don’t get investment, it’s all over.’

For more information, contact the British Venture Capital Association at www.bvca.co.uk

2) Invoice Discounting/ Factoring

‘Many businesses fail to realise that one of the biggest assets on the balance sheet is the money owed by debtors,’ says Alex Hilton-Baird, who heads up his eponymous commercial brokering firm.

This can be done by opting for factoring or invoice discounting, which involves hiring a third party that will release between 80 per cent and 90 per cent of the money owed to you.

Naturally, there’ll be a charge, similar to a bank overdraft, on the money advanced - but if you opt for invoice factoring, a service fee will also be charged, as you’ll be effectively outsourcing your credit control function.

‘It’s a great tool for complementing other forms of financing,’ says Diane Blinkhorn, group marketing director of Bibby Financial Services, who adds that sums raised can go up to £1 million.

Hilton-Baird agrees, saying: ‘Cash flow is the most important thing for a business - people forget that. They chase turnover or focus on profits, but unless you’ve got cash your business isn’t going to survive.’

3) PLUS Markets

Headed by ex-AIM boss Simon Brickles, PLUS Markets Group is proving itself to be fertile ground for companies seeking to raise up to £1 million. The group has three operational divisions, but it’s on PLUS Quoted that young businesses can raise additional capital for expansion.

Nemone Wynn-Evans, director of business development at PLUS Markets, insists that PLUS is now the natural platform for smaller companies to go for financing, arguing that both money and profile can be raised for around half of the £500,000 you’ll need to go public on AIM.

Wynn-Evans claims that PLUS has plenty of liquidity and is attracting the interest of institutional investors.

Until November, the market saw around 55 companies list, raising an average of £500,000.

The total amount raised for 2007 is £41 million, up from £19 million in 2006.

4) Venture Capital Trusts

Venture capital trusts (VCTs) were launched in 1995 to encourage investment in fledgling companies with bags of ambition, but lacking the cash flow to facilitate traditional forms of debt. For investors in these trusts, the risks of putting money into small, almost speculative, concerns are counterbalanced by lucrative tax breaks.

According to research by Business XL earlier this year, VCTs have over £1.1 billion on their balance sheets waiting for investment. So if you’re fronting a concern with £7 million or less in gross assets and have fewer than 50 employees, you’re eligible for some of that cash.

Due to worries that smaller companies were losing out as investments were made in safer, larger ventures for the benefit of investors, rules were changed so that the most a single VCT can invest in any venture is £1 million â“ although if there is a portfolio of trusts this can be extended to £2 million.

For more information about the full research, VCT Special Report 2007, please contact Katie Darr on 0207 250 7010 or by email.

5) AIM

So far in 2007, AIM has seen a total of 234 admissions, raising an average of £23 million. Indeed, the past month saw 20 flotations, with two of those companies raising over £200 million. In terms of secondary fundraisings, close to £8 billion has been raised, making it a record year (see page 28).

As our special report in the October issue of Business XL showed, the London Stock Exchange’s junior market continues to be a strong platform for entrepreneurs to raise growth capital.

For Business XL’s report on How to IPO, please contact Danica Pasinis on 0207 250 7039 or by email.

6) Business Angels

After you’ve sold your own business or made multiple fortunes in the City, there’s only so much golf you can play. That’s when many high net worth individuals decide to use their own cash to assist entrepreneurs in the early days of a company’s life.

Known as business angels, these wealthy individuals are increasingly forming networks and groups. Scott Haughton, a partner at angel network Envestors, says: ‘The sweet spot is probably between £500,000 and £750,000. If a company wants £2 million, then it’ll be angels plus a cornerstone investment fund - such as an early-stage VC.’

The downside is that taking the angel route could provide you with as many as ten investors with ideas on how your venture should be run. Haughton describes coming to terms with this dilution of equity as ‘crossing the equity bridge’. He says: ‘Rather than have a big chunk of something very small, you’re giving away 30 per cent to 50 per cent of something that could be much larger than you initially imagined.’

If this sounds palatable, then you can make your business a more attractive proposition by registering your company with HM Revenue and Customs under the Enterprise Investment Scheme.

Ultimately, this means that investors can receive lucrative tax breaks. ‘It’s the best scheme in Europe,’ claims Haughton.

For more information, go to the British Business Angels Association website: www.bbaa.org.uk.

7) Corporate Venturing

The IBMs and Boeings of this world rely on the ingenuity of small, specialist ventures to create the disruptive technology of tomorrow. If a larger organisation does take an interest, then it’ll provide additional funding, supporting your research and development. Essentially, these companies will be making your ideas work for them, but for many ventures this is the fast route to commercialisation.

Ideally, you’ll want to retain intellectual property rights and license out the rights to your technology to customers.

8) Cash Shells

Back in June, Business XL identified 49 shells on AIM and PLUS with combined cash resources of £79 million. For entrepreneurs intent on the fast track to growth, a shell can eliminate the time and cost of listing on the public markets.

A shell is usually a company with a stock market quote but no active business. This may be because its original business failed to thrive and/or has been disposed, or because it listed as a cash shell with the purpose of buying a business. The former are termed ‘dirty’ because while they may have cash advantages, there can be hidden liabilities.

Be careful.

For more information about Business XL’s report Cash Shells 2007, please contact Katie Darr on 0207 250 7038 or by email.

9) Network Like Crazy

Julie Purves, the MD of UK software company B2M Solutions, was reluctant to take the VC route. At a party one evening, she was chatting to someone about her business when it transpired she was talking to the MD of a commercial lettings company that also invests in technology ventures.

Unusually for a software company, B2M had won two rounds of funding from the Department for Business, Enterprise and Regulatory Reform (BERR) before the chance meeting at the party - but Purves knew that additional funds were required to move to the next level.

She says: ‘Their first investment was made in 2004 and here we are three years later and the market is really starting to take off. I don’t think either they or I could really have anticipated the journey we’d go on, but it’s been an incredibly robust and open relationship, which is why it’s worked.’

10) Regional Venture Capital Funds

There are nine regional venture capital funds (RVCFs) across the country. Cornerstone funding was provided by the Government, with the selected fund managers raising the balance from institutional investors.

Government rules state that each of the first two rounds of investment is capped at £333,000 (recently increased from £250,000). If there is to be a third round, the fund has to co-invest with other parties, which could be VCs, business angels or banks.

In addition to RVCFs, there is the European Regional Development Fund (ERDF), which has a cap of €1.5 million (£1 million). With the ERDF, there is no cap on how much can be co-invested with institutions in the initial funding round, but this finance will only be available for companies in areas deemed in need of economic assistance by the European Union.

Usually, a regional fund will take a minority stake, which can be anything between ten per cent and 40 per cent.

For more information, go to BERR’s website: www.dti.gov.uk

11) Debt

‘I like debt,’ says Redtray’s Woodland. It may not be the most fashionable statement, but Woodland is unequivocal about the advantages of debt over other types of finance.

‘If you’re building a business to sell it or float, you need an end in mind. I tend to build up EBITDA [earnings before interest, taxes, depreciation and amortisation].

‘That minimises the amount of share capital that you issue to investors, maximising the loan and other forms of finance - by doing this you give less away. I also like debt because it improves my EBITDA, as the measurement of my performance is based on calculations before I pay interest on my debt.’

12) Your Own Pocket

Investing your own cash will send a signal to investors that you’re serious. In the beginning, it’s unlikely that you’ll have any choice but to put yourself on the line - be it through remortgaging your house, providing a personal guarantee to a bank, or canvassing friends and family for finance.

13) Commercial Finance

Commercial finance firms will lend against a whole host of assets in addition to invoices - including stock, machinery and equipment, and property and land - and they can play a role in leasing and hire-purchase agreements too.

In recent years, it’s not been unusual to find an acquisition or buy-out being fully or part-funded in this way. Don’t be fooled by talk about it being a middle ground between banks and VCs - it’s high risk, and assets will be taken if you fail to meet payments.

Alex Hilton-Baird says: ‘If you were to buy a big piece of plant machinery, you’d go for some form of asset finance. There are specialist lenders that like different types of kit, and specialist lenders that’ll supply money (if your balance sheet is good) as
opposed to what you want to purchase.

Others, even if you don’t have a balance sheet, will lend money as they know there’s value in the machinery or the plant they’re financing.’

14) The Personal Touch

Deciding on what type of finance you want is one thing, persuading people to part with their cash is something altogether different. Redtray’s Woodland observes: ‘Lots of people can tell you how the process works, but few people have actually done it - and that includes finance directors and lawyers.’

You’ll need to inspire confidence in your investor, whoever it is, and that entails demonstrating an in-depth understanding of the business.

‘I think £1 million is a fairly big chunk even these days,’ says Woodland. ‘The individual who gives you the money and puts their faith in you - they want to look you in the eye.

‘I rarely bring a finance person to the initial meeting, and it’s because the investor wants to be sure you really understand your business. That involves digging down right into the roots of the numbers.’

15) Enterprise Capital Fund

Set up in November 2006, the Enterprise Capital Fund is open for companies that fit within the European Commission’s definition of a small- to medium-sized business.

This states that a concern must have fewer than 250 employees, annual turnover should not exceed €50 million (£35.7 million) and/or no annual balance sheet total should exceed €43 million.

If deemed a viable investment, a company can receive from £500,000 to £2 million.

For more information, go to BERR’s website: www.dti.gov.uk