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Steve Plaskitt Corporate Finance Partner 07881 511 853 [email protected] Funding your Business October 2014 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 Some lending statistics £170 billion £22 billion 38% £100,000 Source: National Audit Office 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 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 2 2013, August 2013 Some BIS-led “Access to Finance” schemes Nature of scheme Name of scheme Loan guarantee to SMEs Enterprise Finance Guarantee Loans to start a small company Start-up Loans Non-bank channels for small businesses Business Finance Partnership, SME tranche Venture capital fund of funds 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 Funding your business “If we wait for the moment when everything, absolutely everything is ready, we shall never begin.” Anon Sources of funding High Bank Financing JEREMIE funds Grant support Low Anticipated Investor Return Private Equity Private Investors Asset finance Internal resources Low High Financial/Operational control 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 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….. A client - Danish customers - Customers required Performance bond - 20% retentions given - Average contract £300k (£60k retention) - Cash flow and working capital issues - Performance Bond Facility - Working capital issues - Suggested UKTI to get involved - Guarantee under the Bond support scheme - Working capital issues - Guarantee depending on extra WC being provided - Application made for mezzanine finance - Dependant on Performance bond facility and UKEF guarantee Cash increase >£400,000 Performance bond facility Guaranteed 50% of the bond facility £300,000 investment 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%. Internal Business Resources “A penny saved is worth two pennies earned after taxes” Randy Thurman 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 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 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 Mainstream corporate tax rate % % % % 2012/13 24% 30 24.7 7.2 N/A 2013/14 23% 28.7 24.7 6.9 7.7 2014/15 21% 26.2 32.6 6.3 7.9 2015/16 20% 25 32.6 6.0 8.0 Tax year Sources of Grants “Free money, free money free money” Patti Smith Sources of Grants (1 of 4) • • • Technology Strategy Board (visit www.innovateuk.org) Regional Growth Fund Other RGF Programmes • Other Grants Let’s Grow versus RGF (2 of 4) Both available for SMEs and large private companies in the North East Let’s Grow • • • • • • • • 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 http://www.nea2fguide.co.uk/funds/letsgrow/ Regional Growth Fund • • • • • • • 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 www.bis.gov.uk/rgf 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% Typical eligible costs (4 of 4) Capital New jobs Eligible Costs Safeguarded jobs R&D Rents / Rates Training Asset finance “Intellectual property has the shelf life of a banana” Bill Gates Asset Finance • Invoice Discounting (including single invoice finance) – Catalyst – Inksmoor • Asset Finance • Stock Finance • Asset Based Lending 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 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. Private Investors/ Private Equity “An investment in knowledge pays the best interest” Benjamin Franklin 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 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 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 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 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 Weighing up Private Equity (4 of 4) For Against Your Corporate Finance Adviser “If you think it’s expensive to hire a professional, try hiring an amateur” Red Adair 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… 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