Essential guide to financing your high-growth business

The right financing lets you make the most of your growth potential, whether you need to invest in developing new products and approaching new markets, or fund increasing levels of working capital as sales increase, the right financing lets you make the most of your growth potential.

Banks and other forms of borrowing may not be the only, or the best, option. You may need to bring in outside investors or specialist funders, including government schemes and grants, to help finance your business.

Your growth finance needs

Investigate potential grants

Consider bank finance

Consider investment finance

Get your business investment ready

Prepare your business plan

Agree the financing

1. Your growth finance needs

Establish your key objectives

• For example, you might want to develop a new product or gain access to a new market.

Calculate how much financing you need

• Evaluate how much of a financial buffer might be required to allow for unexpected events, and whether you are being ambitious enough to attract serious investors.
• Include best- and worst-case scenarios. This allows investors and lenders to get a feel for the level of risk involved, and shows you have a good understanding of the market and expected returns.

Consider what contribution you can make from your own resources

• If you are starting up, you will probably need to make a significant personal investment. Other sources of funding are unlikely to be willing to provide finance unless you can demonstrate commitment in this way.
• One option may be to take out a mortgage on your personal property, then lend the money to your business. However, your home will be at risk if the business has financial difficulties and you cannot keep up repayments.
• Ask family and friends if they would be prepared to invest. Ensure that they only invest money they can afford to lose and draw up legally binding agreements.
• Once you begin trading, you may be able to build up retained profits within the business to help finance growth.

Identify which types of financing will suit you

• You may qualify for a grant to cover part of your funding requirements.
• You may be able to use bank finance or similar alternatives if you have reliable cash flow and can offer security. A bank's prime concern is repayment of finance. They are usually in it for the shorter term and are interested in ability to repay.
• Consider investment finance if you need to finance development costs and initial losses. You will have to be prepared to give up equity in your company, and offer investors a high return and an exit plan.
• The balance between borrowing and investment finance depends on your circumstances. High-growth businesses are likely to need a high proportion of investment finance to fund their expansion.
• Business angels and venture capital investors will be a lot more interested in the interpersonal dynamics of your business and its management than a bank would be.

Plan ahead

• Arranging investment may take months. Allow at least six months from the point when you realise you need the money to completion.
• Plan your total finance requirements for the next few years, even if you will not need all the money in the short term.

2. Investigate potential grants

Find out whether any grants are available

• Grants typically support innovation, research and development, or investment in relatively deprived areas.
• Grants almost always support specific projects rather than general business growth.
• Search for government-backed support and finance online.
• Search grants websites such as GrantsOnline or find your nearest Europe Direct Information Centre for access to grants databases.

Consider whether it is worth applying for grants

• Obtaining a grant may involve a complex application process and a delay of several months. If you start the project before the grant is awarded you may no longer be eligible for grant funding.
• You may be required to provide match funding - where you are required to fund at least half the cost of the project - or you may have to meet other requirements of the particular grant scheme.
• Consider using a professional to apply for a grant on your behalf. They will usually charge a percentage fee if successful. This may seem expensive, but it allows you to continue running the business with full focus.

3. Consider bank finance

Find out what financing options the bank can offer

• Banks are likely to provide at least some of the finance for your business. Most banks offer a range of options for growth businesses - loans, overdrafts and other forms of borrowing.
• Use bank loans for fixed-term financing - to cover development costs or purchase fixed assets such as plant and equipment. A fixed-term loan is a more reliable form of long-term borrowing than an overdraft, which in principle is repayable on demand.
• If you are borrowing to acquire an asset such as equipment or leased premises, the term of the loan should be shorter than the working life of the asset.
• Use an overdraft to finance cash flow fluctuations and for short-term borrowing.

Assess how much a bank is likely to be prepared to lend you

• As well as a credible business plan showing that you will be able to afford interest and capital repayments, a bank will usually require security over assets such as property or equipment.
• If your business cannot provide sufficient security, you may be asked to provide a personal guarantee. This means committing yourself to repaying your business borrowings - if necessary through the sale of your personal assets.
• If your annual turnover is no more than £45 million, another source of security may be the Growth Guarantee Scheme. The scheme is operated by the British Business Bank in partnership with private sector financial institutions such as banks.

Consider whether alternative forms of borrowing would be more appropriate

• For example, you might lease equipment or use factoring to raise finance against unpaid invoices and improve cash flow.
• Financing costs for these types of borrowing may be higher, but any comparison has to take into account the upfront costs, interest rates and tax implications. Your business adviser or accountant can help you.
• Find information on factoring and invoice discounting from the Asset Based Finance Association.

4. Consider investment finance

Consider what kind of investor(s) you might attract

• Business angels - wealthy entrepreneurial individuals - may be prepared to invest between £25,000 and £750,000 (sometimes more). Many then expect to take an active management role in the business.
• Venture capital investors usually make investments of at least £1 million or more. Many do deals of between £5 million and £10 million.
• Crowdfunding allows a group of investors to join forces to invest in a business. Investors risk less as each investor contributes a smaller stake.

Consider whether corporate venturing would be a viable alternative

• This is when a large company partners with your business, providing the resources that you need. For example, you might be able to market your product through their distribution network.
• You need to offer your partner something they want. For example, your innovative product may improve the range of products they offer.
• The partnership reduces your need for investment finance (for example, you may no longer need finance to develop your own distribution network). In some cases the company may also want to make an investment in your business.

5. Get your business investment ready

Build a management team

• To secure investment, do not rely solely on your own expertise. Financiers will want to see a skilled team with a strong record of success.
• Ensure that any management are really involved, rather than there in name only. You will be found out.
• Consider whether you need to bring in any new individuals, particularly if your growth plans include new activities. For example, if you plan to export, you may need someone with experience of international trade.

Ensure that clear contractual arrangements are in place

• If major assets (such as premises or intellectual property) are owned by you personally, you may want to transfer them to the business.
• Aim to negotiate long-term contracts with customers, suppliers and key employees so that financiers have confidence in these relationships.

Make your business as attractive as possible

• Set up effective management-information systems that demonstrate that your business is well managed.
• Put extra effort into credit control to reduce your level of working capital so that lenders and investors can see that you run a tight operation.
• Ensure that premises and equipment are well-maintained.

Plan how you will address any business weaknesses

• Showing that you are aware of any weaknesses and know how to deal with them will give financiers confidence. For example, you might earmark part of the money you are raising to recruit an individual with skills you currently lack.

Keep managing the business

• Do not allow your efforts to raise additional finance to distract you from the ongoing management of the business.

6. Prepare your business plan

Review your business plan

• Keep forecasts and other financial information up to date. Include data illustrating your financial performance when you have it.
• Base your plan on the assumption that you will receive the financing you are looking for and will carry out your growth plans. Include the costs of finance in your forecasts.
• Keep it crisp and engaging. If an investor does not get the idea, the market and the potential of your business within a few minutes of reading then they will not go further. Remember your plan will be one of hundreds seen by finance providers.
• A powerful and realistic plan is the key to getting a meeting. Not only do you have to be better than the competition in your market, you have to be a better bet than all the other entrepreneurs pitching for finance.

Explain the key features of your business

• These will include your products or services, the market, customers and competitors, management and any key employees, operational details and financial forecasts.
• Concentrate on proving the business case, rather than getting carried away with details of your product or technology.
• Provide evidence for your claims. Include detailed supporting evidence (such as market research data and management CVs) as an appendix to the plan.

Tailor your business plan to the audience you are addressing

• For example, a bank lender will be particularly keen to see that you can offer adequate security and have good cash flow. A business angel would be more interested in seeing the potential of the business for growth.
• The larger the funding you are looking for, the more detailed your plan needs to be.
• Keep the numbers to the back, choosing to highlight the top line only in the body of the plan. An interesting top line will draw the investor into the detail later.

Consider what you are prepared to offer investors

• Your assessment of what your business is worth may be far more optimistic than the value an investor will put on it.
• To justify the risk they are taking, investors want the prospect of a significant return. Does your business have the potential to be sold at a price that means that they will make a return of at least five times their investment?
• At this stage, you only need to outline what you are offering. Investors are likely to want an equity share of your business, along with a clearly defined exit plan.
• Most investors will want you to retain management control, even if they are putting up most of the money.

Ensure that there is a clear exit plan for investors

• Investors typically look to recoup their investment (and profits) over a three-to-seven-year period.
• Common exit routes include a trade sale of the whole business to another company or a stock exchange flotation.

Take advice on your plan

• A good business adviser can help you refine your plan to make it as attractive as possible, as well as talking through any underlying issues you need to address.
• You may want your accountant to work through the financial forecasts with you.

Prepare an executive summary

• The summary highlights the main points financiers need to know. Aim to get them excited about your business' potential.
• Usually the summary should be no longer than two or three pages.

7. Agree the financing

Approach potential financiers

• You can find business angels through networks belonging to the UK Business Angels Association.
• Approach possible crowdfunding platforms with your fundraising campaign. Try Funding Circle, Seedrs, CrowdCube and Crowdfunder.
• Your accountant may be able to help you identify and approach investors.
• Consider approaching several lenders for any borrowing requirements. Shopping around can put you in a stronger negotiating position, even if you decide to borrow from your existing bank.

'Sell' your business to them

• Present your business with enthusiasm and commitment. People buy people.

Agree a suitable financial package

• Lenders and investors will generally want to structure the deal so that they get repaid before you if the business runs into difficulties.
• Before committing themselves, investors will want to carry out due diligence to verify information in the business plan. Although many business angels may do this themselves, venture capital investors are likely to employ professional advisers.

Negotiate the deal

• It may well be worthwhile using a qualified adviser to do this on your behalf, particularly if you are negotiating investment finance.
• Investors may want to place some restrictions on you - by limiting the salary you can pay yourself, for example. These restrictions usually aim to protect investors' interests, and may be non-negotiable.
• In return for their participation and investment, equity investors will expect one or two nominations to your board of directors.
• The terms of any shareholders' agreement may include conditions that would apply if performance targets are not met.

After the deal, keep your lenders and investors informed

• You will need to keep them informed on progress and performance, usually through regular updates such as management accounts.
• Equity investors may require additional information or feedback. This could include regular board meetings, formal agendas and minutes, and a requirement for monthly management accounts to be circulated in advance of board meetings.
• Investors may also ask for special reports from executive directors.