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Funding your Business October 2014 Steve Plaskitt Corporate Finance Partner 07881 511 853 steve.plaskitt@taitwalker.co.uk Slide 2 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 Slide 3 Some lending statistics 170 billion Total lending to SMEs by UK banks, of which 17 billion is overdrafts 22 billion potential gap, by 2017, between the amount of finance available to SMEs and the amount they actually need 38% of SMEs that are less than five years old and apply for a bank loan have their application rejected 100,000 average loan under the governments Enterprise Finance Guarantee scheme Source: National Audit Office Slide 4 Principal Sources of external finance SMEs are most likely to turn to their bank when seeking finance Source: BDRC Continental, SME Finance Monitor, Quarter 2 2013, August 2013 SourceSMEs likely to use this source (%) Overdraft19 Credit cards17 Bank loan/mortgage8 Leasing or hire purchase6 Family and friends5 Directors4 Invoice finance2 Grants1 Slide 5 Some BIS-led Access to Finance schemes Source: National Audit Office analysis of departmental data Nature of schemeName of scheme Loan guarantee to SMEsEnterprise Finance Guarantee Loans to start a small companyStart-up Loans Non-bank channels for small businessesBusiness Finance Partnership, SME tranche Venture capital fund of fundsUK Innovation Investment Fund Public-private venture capital fundsEnterprise Capital Funds Co-investment fundBusiness Angel Co-investment Fund Slide 6 Funding your business If we wait for the moment when everything, absolutely everything is ready, we shall never begin. Anon Slide 7 Sources of funding Low High Anticipated Investor Return Financial/Operational control Low High Internal resources Grant support Bank Financing Private Equity JEREMIE funds Private Investors Asset finance Slide 8 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 Slide 9 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 Lets look at a real example.. Slide 10 -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 300,000 investment Guaranteed 50% of the bond facility Performance bond facility Cash increase >400,000 A client Slide 11 Preparing for funding 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 dont work out Regardless of the funder the questions will be the same If you have good answers to these questions your application is much more likely to succeed. We improve the odds from 3% to 75%. Slide 12 Internal Business Resources A penny saved is worth two pennies earned after taxes Randy Thurman Slide 13 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 Slide 14 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 Slide 15 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 Tax yearMainstream corporate tax rate %% 2012/1324%3024.77.2N/A 2013/1423%28.724.76.97.7 2014/1521%26.232.66.37.9 2015/1620%2532.66.08.0 Slide 16 Sources of Grants Free money, free money free money Patti Smith Slide 17 Sources of Grants (1 of 4) Technology Strategy Board (visit www.innovateuk.org)www.innovateuk.org Regional Growth Fund Other RGF Programmes Other Grants Slide 18 Lets Grow versus RGF (2 of 4) Lets GrowRegional Growth Fund 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/ 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/rgfwww.bis.gov.uk/rgf Both available for SMEs and large private companies in the North East Slide 19 State Aid Rules (3 of 4) Size of companyNon -Assisted Area 1Area 2 Large0%10%15% Medium10%20%25% Small20%30%35% Slide 20 Typical eligible costs (4 of 4) CapitalNew jobs Eligible Costs Rents / Rates TrainingR&D Safeguarded jobs Slide 21 Asset finance Intellectual property has the shelf life of a banana Bill Gates Slide 22 Asset Finance Invoice Discounting (including single invoice finance) Catalyst Inksmoor Asset Finance Stock Finance Asset Based Lending Slide 23 Bank image slide Bank Debt Bank failures are caused by depositors who dont deposit enough money to cover losses due to mismanagement D an Quayle Slide 24 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. Slide 25 Private Investors/ Private Equity An investment in knowledge pays the best interest Benjamin Franklin Slide 26 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 Slide 27 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 Slide 28 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 Slide 29 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 Slide 30 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 Slide 31 Weighing up Private Equity (4 of 4) ForAgainst New marketsContactsExperienceFunding Lose some control TransparencyPlan their exit Slide 32 Your Corporate Finance Adviser If you think its expensive to hire a professional, try hiring an amateur Red Adair Slide 33 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 Slide 34 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