What are the different types of funding?
There are several types of funding available, and each funder will have its own parameters – for example, a minimum loan size at completion and, often, a minimum level of EBITDA that a business must generate before it will be considered for funding.
Broadly, there are two primary categories of funding: debt and equity.
Debt funding for business acquisitions
Debt is essentially a loan, usually with a fixed interest rate, repaid over a fixed period. Each repayment covers both capital and interest.
It is often possible to negotiate a capital repayment holiday (CRH) at the start of the loan – typically 3 or 6 months – which reduces repayments during the early period of ownership and helps cash flow.
In addition, the lender may structure a “bullet” payment at the end of the term, meaning a disproportionately large portion (often 10–20%) of the original capital is repaid in a single lump sum in the final year.
This reduces the capital being amortised over the term and therefore lowers the regular repayment profile.
Key loan platforms offering pure debt funding include SME Capital, ThinCats, Boost and Mercia, among others.
These lenders do not usually require equity in exchange for the loan; instead, they charge a higher interest rate than the high street banks.
It is worth noting that, post‑2008 financial crisis, most high street banks will not fund the outright purchase of an SME, as they now view this as too risky.
Asset-based lending (ABL)
A further form of debt funding is asset‑based lending. Here, the lender advances money secured against the existing assets of the company.
In effect, it is a cash advance based on the value of specific assets or an agreed pool of assets.
Common asset classes used include:
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Freehold land and buildings
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Stock
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Trade debtors
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Plant and machinery
These assets typically need to be unencumbered (i.e. free from existing charges), and some asset‑based lenders will provide up to 90% of the book value of these assets to support a business purchase.
Equity funding and private equity investment
The second major category of funding is equity, most commonly provided by a private equity (PE) firm.
Capital invested by a PE house is often referred to as “institutional money”.
There are hundreds of private equity firms across the UK, each with its own focus by sector, size and stage of business.
Many also have existing portfolio companies and will actively seek “bolt‑on” acquisitions to build scale and capability within those platforms.
Private equity is fundamentally different from debt funding. A PE firm will require a significant equity stake in the business and will work alongside you to drive growth and value creation.
Some people say that “working with private equity is working for private equity”; in practice, it depends on your attitude to risk, reward and governance.
With PE backing:
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You typically invest a smaller amount of your own capital than in a pure debt‑funded deal.
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You gain a partner to share both the upside and downside.
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You will, however, own a much smaller percentage of the business than under a solely debt‑funded structure.
Other sources of private capital: angels and high-net-worth investors
In addition to institutional equity, there are other forms of private investment, including:
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Business angels
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High net worth (HNW) investors
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Investing Non‑Executive Directors
Valius has access to many of these types of investors who can potentially support you on a transaction. They can contribute:
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Capital, to help complete the funding package; and
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Experience and skills to complement your team – often sector‑specific or functional expertise (for example, in sales, operations, finance or technology).
Combining debt, equity and private capital in the right way for your deal and risk appetite is often the key to making a business acquisition both fundable and sustainable.
