What are the different types of funding ?
There are a number of types of funding available and each funder will have their own parameters as to what minimum level of funds they will lend on completion and also, possibly a minimum level of ebitda for a business before it can be considered for funding.
There are 2 primary types of lending – debt and equity.
Debt is essentially a loan with a fixed interest rate paid back over a fixed period of time. The loan repayment covers both the capital and the interest element. It is often possible to achieve a capital repayment holiday (CRH) at the start of the loan so the repayments are reduced for a period of time often 3 or 6 months. Equally the debt lender may include a “bullet” payment at the end of the final year, which means that a dis-proportionately large lump of the original capital sum borrowed will be repaid in the final year of the loan. This bullet can be around 10-20% of the initial loan amount and this is removed from the amount being repaid over the term and reserved to be paid right at the end in one lump or “bullet”. This also reduces the monthly repayment profile which assists with cash flow.
The key loan platforms offering pure debt funding include SME Capital; Thincats; Boost; Mercia; amongst others. Each of these will not require any equity in exchange for providing the loan but rather they charge a higher rate of interest relative to the high street banks (please note – high street banks typically these days will not fund the outright purchase of an SME as this is perceived to be too risky for them – historically, this wasn’t the case but post the financial crash in 2008 this has become the norm for them now).
A further type of debt lending is available which is called asset based lending. Asset based lending is where a lender uses the existing assets of the company to leverage funding. It is effectively an advance of monies against a certain asset or group of assets. Assets used can include freehold land and buildings, stocks, debtors, plant and machinery. Assets need to be unencumbered ie free from any debt, and some asset based lenders will offer up to 90% of the book value of these assets as finance for a business purchase transaction.
The second type of funding is equity, typically driven by a private equity (PE) firm. Money invested by a PE firm is often referred to as “institutional money”. There are hundreds of private equity firms across the UK and each will have their own focus on size and sector of target business. Equally, they will have portfolio companies where they are already invested and will wish to seek “bolt-on” acquisitions for some of these portfolio companies over time. Private equity is a totally different form of funding to debt funding in that the PE firm will require a sizeable stake in the business and you will work in tandem with them to effect the future growth and development of the business. Some people say that working with private equity is working for private equity but it depends on you and your attitude to risk and reward. With private equity, you have a partner to share the highs and lows and the amount of cash you will have to invest/risk is typically smaller than completing a debt based deal but please note that you will own a much smaller proportion of the business under a PE backed deal.
There are also other forms of private lending such as business angels, high net worth investors, investing Non Executives. Valius has access to many of these types of investor who can potentially support you on a transaction, both financially with investment and also, with additional skills and experience to complement your team; skills which are often gained from within the sector or within a specific functional area, or both.