Funding your Business October 2014

Transcription

1 Steve Plaskitt Corporate Finance Partner Funding your Business October 2014

2 Contents Overview Finding the right structure Sourcing the right funding Internal resources Grants Asset finance Banking JEREMIE funds Private Investors Private Equity Your Corporate Finance Adviser Ten top tips

3 Some lending statistics 170 billion 22 billion 38% 100,000 Total lending to SMEs by UK banks, of which 17 billion is overdrafts potential gap, by 2017, between the amount of finance available to SMEs and the amount they actually need of SMEs that are less than five years old and apply for a bank loan have their application rejected average loan under the government s Enterprise Finance Guarantee scheme Source: National Audit Office

4 Principal Sources of external finance SMEs are most likely to turn to their bank when seeking finance Source SMEs likely to use this source (%) Overdraft 19 Credit cards 17 Bank loan/mortgage 8 Leasing or hire purchase 6 Family and friends 5 Directors 4 Invoice finance 2 Grants 1 Source: BDRC Continental, SME Finance Monitor, Quarter , August 2013

5 Some BIS-led Access to Finance schemes Nature of scheme Loan guarantee to SMEs Name of scheme Enterprise Finance Guarantee Loans to start a small company Start-up Loans Non-bank channels for small businesses Venture capital fund of funds Business Finance Partnership, SME tranche UK Innovation Investment Fund Public-private venture capital funds Enterprise Capital Funds Co-investment fund Business Angel Co-investment Fund Source: National Audit Office analysis of departmental data

6 Funding your business If we wait for the moment when everything, absolutely everything is ready, we shall never begin. Anon

7 Anticipated Investor Return Grant support Low High Bank Financing Sources of funding Private Equity JEREMIE funds Private Investors Asset finance Internal resources Low Financial/Operational control High

8 Finding the right structure When I was young I thought that money was the most important thing in life; now that I am old I know that it is. Oscar Wilde

9 Finding the right structure What blend of finance works best? Look at your business first What do I need funding for? How much do I think I need? How much do I really need? What can I do differently to reduce funding Will you create jobs and would grants make a difference to whether you go ahead? What would my banker think? What is the gap gap is funded by equity Let s look at a real example..

10 A client - Danish customers - Customers required Performance bond - 20% retentions given - Average contract 300k ( 60k retention) - Cash flow and working capital issues Cash increase > 400,000 - Performance Bond Facility - Working capital issues - Suggested UKTI to get involved Performance bond facility - Guarantee under the Bond support scheme - Working capital issues - Guarantee depending on extra WC being provided Guaranteed 50% of the bond facility - Application made for mezzanine finance - Dependant on Performance bond facility and UKEF guarantee 300,000 investment

11 Preparing for funding Regardless of the funder the questions will be the same Why do you need the money select an appropriate funder What will the money help you achieve How much will you need How soon can the funder exit and take their return What level of profitability can a business maintain into the future What is the headroom (i.e. how far can things slip) What is the Plan B if things don t work out If you have good answers to these questions your application is much more likely to succeed. We improve the odds from 3% to 75%.

12 Internal Business Resources A penny saved is worth two pennies earned after taxes Randy Thurman

13 Internal Resources: Tax planning (R&D Tax planning) Performance Bonds (Tees Valley Unlimited Catalyst Fund) Working Capital Management Stock management Debtor collection Creditor payments VAT cycle

14 The importance of R&D tax reliefs Why are they a key source of funding Four different mechanisms Worth 18m a year to the North East economy Can provide up to 54% total relief for costs of R&D for profitable companies Can provide up to 32.6% rebate on costs of R&D for loss making companies Large companies can now get cash back on R&D projects Grant funded companies can now get cash back on grant funded R&D projects The annual value of R&D tax reliefs mechanisms exceeds the value of all RGF grants

15 The importance of R&D tax reliefs Maximum value of the R&D tax relief/credit as a percentage of qualifying spend (ie the potential amount of the cash benefit) SME scheme additional tax relief SME scheme surrenderable tax credit Large company scheme tax relief Above The Line - tax credit Tax year Mainstream corporate tax rate % % % % 2012/13 24% N/A 2013/14 23% /15 21% /16 20%

16 Sources of Grants Free money, free money free money Patti Smith

17 Sources of Grants (1 of 4) Technology Strategy Board (visit Regional Growth Fund Other RGF Programmes Other Grants

18 Let s Grow versus RGF (2 of 4) Both available for SMEs and large private companies in the North East Let s Grow Regional Growth Fund RGF grants of 50,000 to 1m Project size of at least 250,000 Similar rules to RGF Competitive quarterly competition Online process which requires Forecasts (with and without project) Additionality argument Grant must make a difference to the project going ahead No commitment before application 2% due diligence fee paid up front RGF grant must be over 1m Focus on capital not R&D grants and training Based on the previous rounds grant per job is 5,000 private sector leverage is 5.5 x i.e. average 6.5m project for 1m Competition is tough Round 6 launches in July 2014 State Aid rules/boundaries changes will impact large companies Visit the website

19 State Aid Rules (3 of 4) Size of company Non - Assisted Assisted Assisted Area 1 Area 2 Large 0% 10% 15% Medium 10% 20% 25% Small 20% 30% 35%

20 Typical eligible costs (4 of 4) New jobs Capital Safeguarded jobs Eligible Costs Rents / Rates R&D Training

21 Asset finance Intellectual property has the shelf life of a banana Bill Gates

22 Asset Finance Invoice Discounting (including single invoice finance) Catalyst Inksmoor Asset Finance Stock Finance Asset Based Lending

23 Bank Debt Bank image slide Bank failures are caused by depositors who don t deposit enough money to cover losses due to mismanagement Dan Quayle

24 Bank debt Banks will and should only lend to the right proposition Back to basics banking focus on meeting Bank Covenants Full security Ability to serve the debt Strong management with a robust plan Not too geared in case interest rates increase Plan B is available too Some sectors are favoured more EFG is still available but business owners must demonstrate that they have exhausted all personal security first Cash flow lending may be available in some cases but only to larger businesses.

25 Private Investors/ Private Equity An investment in knowledge pays the best interest Benjamin Franklin

26 Private Equity Crowd sourcing: for up to 50,000 Business Angels: typically for 50,000 to 250,000 JEREMIE funders and UK Steel ( 150,000 to 1.25m) Business Growth Fund: for equity over 2m Private Equity Funds: for equity over 2m for fast growth and quick exit

27 Private Equity In the business cycle Launching a new business Start up Funding a step change Rapid, organic growth or buy and build Effecting a change of management or control Buy-in / buy-out / public to private (NB not with current JEREMIE funds!) Funding long term development Typically high technology

28 JEREMIE funds Managed by Rivers Capital Partners 7.5 fund all eligible sectors Start-ups and early stage businesses 50K to 150K Managed by Northstar Ventures 15m fund primarily technology Very early-stage start-ups 50K to 150K Managed by Northstar Ventures 25m fund all eligible business sectors Early stage business with high growth potential 50K to 750K Managed by IP Group 25m fund Focussed on technology 50K to 1.25m

29 JEREMIE funds Managed by Entrust 5m fund all eligible business sectors Start ups and established micro and small businesses up to 25K Managed by NEL Fund Managers 23m fund - all eligible business sectors Established businesses requiring development capital - 50K to 750K Managed by FW Capital 17m fund all eligible business sectors Established businesses requiring development capital 350K to 1.25m

30 The role of Private Equity Picking winners Working closely with entrepreneurs Investing in line with Fund objectives Taking calculated risks But only if potential reward merits it! Aim to get Double their money Ten times their money

31 Weighing up Private Equity (4 of 4) For Against

32 Your Corporate Finance Adviser If you think it s expensive to hire a professional, try hiring an amateur Red Adair

33 Your Corporate Finance adviser What is my role? I identify the funding package required I find funders I ensure the business model / forecast works I translate (both to and for the funders) I present in a way the bank understands I find the best course of action with existing shareholders I help negotiate I project manage so the fund raising process is smooth and you can run your business My aim is to maximise shareholder value

34 1. Funding your business is more complex than before 2. Specialist funds are available 3. Start early and be prepared 4. Banks do still lend but you need to be better prepared and think of alternatives 5. Approach the right funders, research and check that the funder is right for you 6. Funders invest in management teams 7. Businesses with strong management with quality information are more likely to be successful 8. Have a business plan and forecast that explains your project, the risks and your Plan B 9. Be prepared to back your business 10. Professional advisors are here to help