Business Leader talked to founders and sector leaders about what is happening to the funding landscape and what levers business owners can use to fund growth, rescue and acquisition in the coming months.
It may have escaped the attention of many but during lockdown London’s junior market, AIM, celebrated its 25th anniversary. Many are arguing that now more than ever, this institution can play a vital role in helping the UK economy to recover from the battering it is taking due to the pandemic.
But how are businesses really finding the funding landscape? Especially, considering the proliferation of options that have become available to them in the last few years.
Government support in this area, although well intentioned, isn’t always helping as Sam Smith, CEO of finnCap, explains: “To be fair to the UK government, ministers have of course helped provide funding through a variety of mechanisms to companies who need it during the pandemic. However, the fact remains that accessing such low interest loans, under CBILS, has been difficult for many businesses. Indeed, one recent survey found that 53% of coronavirus emergency business loan applications had been turned down.
“In addition, despite noble intentions, the government’s £500m ‘Future Fund’ loan scheme risks exacerbating existing inequalities. That’s because the way the Fund is structured favours companies already backed by venture capital, which the evidence shows disproportionately support those founded by men in London and the South East.”
The business perspective
You could split the types of funding businesses are looking for between rescue and growth – those looking to survive and those looking to build.
One company that falls into the latter category is Callaly, and its CEO and Co-founder is Thang Vo-Ta.
He says that raising funds in the past few months has been extremely challenging: “Raising funds in the past few months has been extremely challenging to say the least. Before this unprecedented period we’d been able to raise about £8m without any VC funding, but the private investor/angel networks completely vanished overnight between March and May.
“This is understandable, given the priorities of non-professional investors. All loan-based government support has been either too small to make a difference or unavailable to a company at our stage, not to mention the applications and process being worse than visiting multiple dentists on consecutive days.
“We also have the added pressures of being an innovative start-up with significant and regular capital demands on R&D and manufacturing machinery, plus operating and marketing costs from fulfilling orders.”
Thang continues: “We were therefore faced with a decision of whether to dramatically pull back spend to extend our runway until the climate improved, or continue through a difficult period. We chose the latter, opting to ‘trade’ our way out of the challenging environment and in fact to take advantage of the reduced customer acquisition and marketing costs – as well as our products and service being in high demand during lockdown.”
On what action he took to resolve the issue, Thang says: “Like most start-ups, the first place we went to raise capital was our existing shareholders. However, this has only been successful with the help of hard evidence that we’ve been able to trade during the pandemic, and with a strong and viable plan.
“The second part of fundraising has been to launch an equity crowdfunding campaign. As a community-focused B Corp, giving our community a chance to own a piece of Callaly has always felt like a natural next step.
“Meeting a new, diverse set of investors on Crowdcube also appealed to us, and we knew that 10 fellow B Corps (including Finisterre, Pip & Nut and Mindful Chef) have successfully raised more than £20m on Crowdcube over the years. Crowdfunding therefore made great sense as a platform to accelerate our fundraising plans.”
Borrowing levels to rise
Thang’s story shows the level of flexibility and ingenuity businesses are showing during this period to remain innovative and on track for growth; with crowdfunding and equity release clearly still an option that is in play.
But what about debt and borrowing for businesses?
Tim Boag is the Group Managing Director for Business Finance at Aldermore and his firm recently carried out a study which looked at anticipated debt borrowing levels for companies.
He explains: “Our latest research reveals that the UK’s small and medium-sized enterprises (SMEs) expect to borrow £48.3bn to support their business, following the Covid-19 outbreak.
“More than three in five (61%) SMEs anticipate borrowing nearly £65,000 in the following 12 months after the outbreak. Speedy access to funding (23%), higher levels of funding (17%) and a simple application process (17%) are viewed as needed by SMEs to navigate the months following the outbreak.
“Helping SMEs recover following the pandemic will be crucial to the economic future of the UK. As our research has shown, SME income has been hit hard by Covid-19 with many having borrowed funds in order to survive, and with some expecting to continue to do so in the year ahead.”
Funding mergers and acquisitions
It seems that recovery and survival is a core theme for businesses, with raising funds playing a big part in that, meaning that many companies involved in the funding game are busier than ever.
Stuart Andrews, Managing Director of finnCap, comments: “finnCap deals in public market equities as well as public and private market mergers and acquisitions (M&A) and funding across the capital spectrum. In response to the pandemic, public companies have been raising money either to shore up balance sheets or to be able to take advantage of opportunities that arise. In general terms, the pandemic has prompted a huge amount of interest in public market equity fundraising – we are busier in this area than we have been for quite some time.
“While we have completed some M&A transactions, a lot have been put on hold and we expect that to continue until uncertainty over the future shape of the economy becomes clear. Overall, strangely, I would say that the COVID-19 pandemic has been a positive for us so far. Whether that turns out to be true in the longer-term remains to be seen.”
On what businesses are telling Andrews at the moment, and the trends he’s seeing, he says that is all can all be summed up by one word – uncertainty.
He says: “Across the board, whether a company is currently doing well or has been hit hard by COVID-19, they are all uncertain about what the future holds. Lockdowns and the scale of government intervention represent a historic experiment, and we simply do not fully know what has happened to our economies, markets and global supply chains, despite what some may claim. Until the economic scaffolding of public money has been withdrawn, say, it is not possible to justify a strong view about future trends or outcomes.
“Again, some companies are raising money now to give them a buffer to survive future shocks. But others are putting off corporate activity, adding cash to the balance sheet and lowering spending, though that tends not to be a successful long-term strategy for any corporate.”
One funding lever that was experiencing growth before the crisis was Asset-based lending (ABL). With this funding stream beginning to consider intellectual property and ideas as assets – evolving it away from providing funding against traditional assets such as machinery and equipment.
But how is the sector being impacted during this period?
Andrew Rutherford, who is Commercial Director of Arbuthnot Commercial ABL, comments: “Refinancing of clearing bank facilities seems to be a theme, where businesses have had loans declined and are keen to seek a smaller, more nimble and supportive lender.
“Being able to use remote desktop surveys and valuations has meant we have not grinded to a halt under the UK government’s lockdown, when it comes to the issue of site audits or valuations. With the gradual easing of lockdown, we have seen our valuers returning on site, of course, subject to the appropriate precautions being taken.
“Since June, we have witnessed an increase in enquiries, which is very encouraging. Businesses are taking a longer-term view when it comes to securing facilities from lenders, and increasingly turning to asset-based lenders to fulfil these needs. These facilities will allow them, when the time is right, to rebuild and deliver future growth.”
On how businesses can utilise this form of funding going forward, Rutherford comments: “Adapting to new situations and business models can put strain on businesses’ balance sheets. Invoice Discounting, which is part of an ABL package, is an incredible facility to have now more than ever. Every time you raise a new invoice for goods or services provided, funding is made available against that invoice the very same day. We typically provide 85% against the value of the invoice, which gives the business immediate working capital to pay salaries, suppliers, and overheads.
“Asset-based lending really does provide more certainty of funding – it allows businesses to unlock the value tied up in assets like debtors, stock and machinery, and provides funds quickly. The introduction of the government-backed Coronavirus Business Interruption Loan Scheme (CBILS) means that asset-based lending facilities are more attractive than ever.
“We have approved our first CBILS loan to an existing client, which has been a textbook process and fits in with exactly what CBILS was designed to help with – a strong business negatively impacted by the pandemic, but now opening up for business with its strongest order book ever.”