What are the best funding option for your business? Debt or equity?

Financial Services | Reports

For this feature, Business Leader asks some of the UK’s leading experts – what’s the better lever to help you fund growth in your business, debt or equity?

THE PRIVATE EQUITY PERSPECTIVE

With £1bn of recently raised capital and £3.5bn of firepower to back ambitious businesses, Andrew Priest from Inflexion shares his views on why private equity is the best partner for companies to looking to scale and fund growth.

He says: “Banks may be able to provide loans to facilitate finance without equity dilution. If, however, you are looking for a solution which provides more than pure funding and includes expertise, private equity could be a better partner.

“Just as no two businesses are alike, private equity firms come in different shapes and sizes. The right private equity backer will have experience in the type of development you’re looking to pursue, for example if you’re looking to expand by way of acquisition, it’s best to seek out a firm which has relevant experience in this complex exercise.

“They can typically help with everything from sourcing and approaching targets, to negotiating with them, to introducing banks where funding beyond our equity was required, and to then integrating the businesses post-deal. Giving away equity to a credible partner also could mean they help you with elements in your business such a recruitment, digital enhancement and strategy.”

Stuart Andrews from finnCap comments: “Debt must be repaid, whereas equity finance provides the business owner with a greater degree of flexibility, albeit at the cost of giving up some control of the business. The contractual nature of the repayments obligations of debt finance will also by definition limit what a business owner may be able to do, whereas equity finance is, at least in theory, limitless.”

Andrew Ferguson from Maven Capital Partners says that flexibility is one of the main advantages: “The biggest advantage of using equity to fund growth is of course that companies are not subject to fixed repayments. In turn, businesses have more flexibility to manage and allocate capital in the short term.”

THE DEBT PERSPECTIVE

Giving away equity in your business won’t work for everybody; and for some it simply may not be possible due to previous investments. So, how may taking on debt be the best option for your business?

Stuart Andrews: “One of the key advantages of taking on debt to fund growth for a business owner is they do not have to dilute the equity in their business. That also means there is no claim from lenders on future profits over and above repayments on the debt obligations. It’s also an unobtrusive form of business funding.

“Meanwhile, there are tax advantages to borrowing rather than raising funds by giving up equity. Interest on debt financing is tax deductible whereas dividends to shareholders must be paid after tax so ultimately cost the business more. The Capital costs are lower too compared with equity loans.”

Andrew Ferguson: “There are many advantages to taking on debt to fund growth. Taking on debt can be cheap, utilising low interest rates and a wide-range of lenders that can provide debt financing, in turn making it easier to find a suitable agreement.”

Angus Grierson, from LGB Corporate Finance, comments: “Debt finance is relatively cheap now. If your business is generating cash and profits, it is worth considering as it generally does not involve giving up any ownership in a business and in the long term it can therefore be more efficient for entrepreneurs. It is typically easier and quicker to raise debt than equity, but if used inappropriately it can be damaging.”

THE BUSINESS PERSPECTIVE

No doubt many businesses will use both levers throughout their lifecycle and it’s interesting to hear what company owners themselves think about both options.

Paul Swaddle, who is the Founder of Pocket App, comments: “When we started, we initially took some equity from friends and family. This was to get us going because at that stage we didn’t have the capital to launch the company.

“Later in our journey we also looked at debt financing to help the company grow and we undertook a round of a crowdfunding finance which we found surprisingly easy. However, that did come with the normal constraints of requiring personal guarantees from the directors.

“At a later stage we also utilised a bank facility that was underwritten by the government and that enabled us to access money that otherwise the bank would not have offered. But the course still came with personal guarantees.

“The last round of funding, two years ago, was equity and carried out via Seedrs. While the process was not without its problems, it did offer us a route to finance but also gave us 400 shareholders who can become advocates and Ambassadors for Pocket App.”

Rob Shand, co-founder of Tots to Travel says: “Debt was a good route initially, when smaller sums were required and in shorter time frames. We found the non-traditional route to be far more compelling than secured bank lending, which was essentially unavailable. The banks have such a long way to go and are being left behind. To that end, we used crowdfunding through Funding Circle twice which was simple and quick.

“Experiencing rapid growth, we needed a more significant capital injection and arranged a seven-figure equity raise from a large Venture Capital (VC) team based in Berlin. The deciding factors were the size of the capital required and the shared vision for rapid international growth.

“They understood what we were trying to achieve, were relatively light on due-diligence, kept the deal simple and have since stood back and let us get on with it without interference. So for a VC-backed deal, it has been the right path for us.

“Next stage deciding factors are now all about fit with our vision and brand and who can help us take the next step up in revenue and growth – all the way to exit.”

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