Continued business levels are good and the projections are even better. The business as it currently stands is ready to make the leap into the next phase of development. You may want to relocate, expand your product lines or buy the assets of a competitor. But how do you raise the funds?
There are four main options:
- raise the funds internally through internal or third party loans
- issue more shares in the company (only applicable for companies)
- bank funding
- private equity
Option 1 – Loans from internal parties or third parties
Your directors, shareholders or a relevant third party could potentially provide a loan to the business. Third parties are quite often family members or friends, but as the business grows they could be private professional investors. These are quite useful and attractive sources of lending due to the relative simplicity of the loans and the fact that they will often be unsecured and possibly agreed on a verbal basis. However, these sources tend to provide smaller amounts than banks and private equity houses.
Option 2 – Issuing shares (for companies only)
Your could take the decision, subject to the governing documents, to issue new shares in the company to provide more working capital. The new shares may be a separate new class of shares (e.g. preference shares) which could make them more attractive to investors to reflect the risk they are taking by injecting capital into the expanding company.
Option 3 – Bank lending
Contrary to the public perception, banks do continue to lend to businesses, although not possibly to the same extent as prior to the recession. However, if your business ticks the right boxes for a bank and the bank is satisfied that sufficient security can be put in place, bank lending can be a great way to fund business expansion.
Bank lending can take several forms and can be tailored to your business needs. Lending could take the form of:
- a term loan
- invoice discounting
- overdraft facilities
- asset based lending
Each of these lending types has their own advantages and disadvantages and should be reviewed against the business plan to decide whether they are suitable.
Option 4 – Private equity
Private equity lending can be similar to a hybrid of options 2 and 3. A private equity house may provide expertise and professional assistance to the business they support, but they will want a return for their investment. The investment/lending figure will often exceed what a bank can provide, but this may come at a price. Private equity investors will often look for a blend of shares, loan notes and security over the business. Their investment is likely to be accompanied by a large review of the business, not too dissimilar to that which a buyer would undertake (see Selling your business for more details). Provided your business can accommodate the exit of the private equity house (this may require a re-financing operation after 5 years to fund the equity house exit), private equity can be very attractive option.
An incorporated company is likely to be more attractive to banks and private equity houses than a non-incorporated business due to the security that can be taken over the company (e.g. debentures). Depending on the success and financial performance of your company, directors and shareholders may need to personally guarantee the repayment of any loan (therefore potentially exposing them to personal liability for the company’s debt).
With a growing business it is sometimes impossible to take the next big step without the leg up that capital injections provide. A business that is operated in an efficient and commercial manner will be more attractive to lenders/investors as it will present a lower risk on their funding.
With the correct tools and plans in place, you can potentially turn your successful expanding business into a market leader.
Read on - The end: Selling your business
back to - The middle: Commercial operations