Six financing options to help grow your business

Choosing the right financing package can be a challenge for ambitious business owners.

When the time comes to secure financing for growth, business owners can be faced with a vast array of options, and making the right decision isn’t always easy. So what alternatives are available, and what are their advantages and disadvantages?

Financing options for established businesses

1. Private equity

Private equity investment is a type of equity financing which is provided in exchange for ownership of part of a privately held business. Arranging a deal with a private equity house can be a good way to secure a large amount of capital for growth.

However, private equity investors are selective about the businesses they invest in and have a range of expectations about how your business should perform. To be eligible for private equity funding, your business will usually need to be well established with a good turnover.

Once they have invested, private equity houses typically expect to see fast growth, leading to a rise in the value of your business so that they can exit their investment at a profit, typically within a few years. The management teams of businesses sometimes fall out of alignment with their private equity investors on the question of when and how to pursue an investment exit, so it’s important to discuss these matters in advance and adopt realistic expectations.

Another feature of private equity houses is that they are often, though not always, majority investors. Founders or management teams who want to retain ultimate control of decision-making may decide that majority investment is not the right option for them.

2. Business loans

Business loans are a traditional form of debt-based financing. Unlike equity funding, business owners are not required give up a share of the business; however, they are required to repay the loan with interest. Business loans typically provide a low to medium level of funding and can be secured or unsecured.

  • Secured business loan: This type of loan involves borrowing money against an asset, which could potentially be repossessed in the event of non-payment. By opting for a secured loan, companies are generally able to borrow larger amounts with lower interest rates.
  • Unsecured business loan: Unsecured loans don’t require the use of business assets as security but tend to be less cost-effective than secured loans.

Whether a business loan is appropriate depends on the ambitiousness of a company’s growth strategy. Small and medium-sized businesses usually find that less money is available to them in the form of business loans than could be accessed by selling equity. In addition, they must factor the cost of interest payments into their growth plans.

3. Patient capital

Patient capital is a form of equity financing that emphasises long-term, sustainable growth. It works in a similar way to private equity but differs in that patient capital tends to be a type of minority, non-controlling investment. As the name suggests, investee businesses are not under pressure to provide a quick return but can grow at the appropriate pace for them.

  • This form of financing can be long-term in nature if that is what is best for the business. Patient investors typically don’t impose drag rights, which give an investor the ability to trigger a sale at a time of their choosing.
  • Patient capital is generally provided in exchange for a minority, non-controlling stake in a business. Management teams stay in control of key decision-making, setting their own path for growth.

Ambitious businesses that are apprehensive about the pitfalls of traditional private equity often turn to patient capital to help find their growth. BGF has provided patient capital to more than 450 businesses across the UK and Ireland.

Financing options for start-ups

4. Venture capital

Venture capital is another type of equity financing option that provides funding for privately owned companies. Venture capital investors differ from private equity in a few ways:

  • Venture capital firms usually look to back early-stage start-ups with high growth potential, rather than more established companies.
  • Venture capital financing is usually given in exchange for a minority stake in the business, rather than a controlling one.
  • Because the target companies are early-stage, venture capital is viewed as a riskier form of financing for the investor themselves.

Like private equity firms, venture capital investors may look to make a reasonably quick exit from a business – inside five years, for example – with the goal of having grown the business’s value significantly. Venture capital is not usually considered patient; however, some investors of patient capital can support start-ups as well as established companies. BGF has invested patient capital in many early-stage businesses.

Like private equity firms, venture capital investors may look to make a reasonably quick exit from a business

5. Crowdfunding

Equity crowdfunding is an alternative to venture capital for early-stage businesses. Instead of capital coming from a small number of established investment firms, it is instead raised from a large number of small investors, including individuals. Equity crowdfunding has become possible for more and more businesses over recent years thanks to crowdfunding platforms such as Crowdcube and Seedrs, and the increased visibility of crowdfunding on social media.

Crowdfunding can be a useful financing avenue for start-ups with an innovative new service or product they are trying to launch. It is less commonly used by more established companies, and it should be noted that the large number of investors these solutions can bring could represent heightened administration over the longer term.

6. Angel investor

An angel investor is typically a high-net-worth individual who invests in a business using their own personal wealth. This type of financing is viable for start-ups or entrepreneurs with an early-stage business. Angel investment can be a form of equity or convertible debt-based financing.

Angel investors may offer more favourable terms than a venture capital or private equity investor. However, entrepreneurs who are successful in raising angel funding often have a prior relationship with their investor, such as a link through friends or family. Without such connections, this type of funding can be hard to access.

This article originally appeared on the BGF Insights hub.

About BGF

BGF provides patient capital, allowing management teams to stay in control. The company has invested in over 450 British and Irish businesses with ambitious growth plans in the last decade, all for a minority, non-controlling equity stake.

Because of its long-term, ‘evergreen’ funding model, it is able to support businesses for the long haul, enabling them to grow the way they want to. With the opportunity for follow-on funding, as well as support from BGF’s huge network of board-level non-executives, partnering with BGF brings an exceptional level of extra value.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

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