Before taking any steps to find funding, it is vital that businesses have a clear vision for the organisation. “Raising capital isn’t the starting point,” states Stephen Price, a fractional CFO working with multiple early-stage and SME businesses. “Instead, it is about asking: ‘What do we want the business to look like? What are our goals? And therefore, what are our capital requirements?’”

Equally, businesses must have a strong understanding of their business model – the way they generate revenue efficiently – and the operation’s financial dynamics. “You have to have a compelling offering and know your target market,” says Price. “What is your business model? How much money do you make? And what is the profitability – or the path to profitability? All of these are really important questions to answer both for raising capital and, more importantly, building a business that’s going to be successful.”

Determining funding requirements

Finance directors are clearly pivotal to establishing a sound business plan and vision, and where the company lacks any expertise, it should seek professional advice (particularly from chartered accountants). Warren Ralls, Managing Director, UK Network at the British Business Bank, explains: “Businesses need to be clear on why they need money to help the business grow. Is it for recruitment? Is it to buy equipment? Is it to release some cash back into the business? Get good advice to talk you through the different options and understand how much it will cost you.”

When developing the financial models to determine funding requirements, it’s vital to establish which metrics should be used to demonstrate the business’s performance. This then helps inform the discussions with potential finance partners. “Tracking the right metrics is something successful companies do well,” says Price. “It’s about properly monitoring the pipeline and holding people to account for delivery. It’s about understanding the stages of the sales funnel for new business. It’s about understanding customer retention and churn rates.”

Different funding providers will also have different reporting expectations of the company after the finance has been provided. Companies should establish at the start what these reporting expectations are and then ensure the necessary systems and processes are in place.

Understanding the funding options

Multiple funding options are available to businesses, but there is no one-size-fits-all approach. “It largely depends on what the founder or senior managers want from running their business,” says Price. “But it also comes down to what the company does and the size of the opportunity. Broadly speaking, it is best to look at the cheaper, non-dilutive options first – ranging from tax reliefs, grants and debt financing – before turning to equity financing for a stake in the business.” 

The British Business Bank (BBB) also has a six-question finance finder to help companies understand the financing options available to them, given their individual profiles, and ICAEW also developed the Business Finance Guide with the BBB, which contains a useful decision tool. There are three key categories to consider, each with pros and cons. 

Grant funding: offered by central and local government and other bodies, such as UK Research and Innovation. Grants are typically targeted at certain types of companies, sectors or regions. They generally come with conditions, such as specific use cases and measurable outcomes, and may require matched funding. Competition can also be fierce. The government publishes a list of grant-giving bodies.

Debt financing: companies borrow funds, which may or may not be secured against the company’s or directors’ assets. There are various options, from standard debt products such as loans and lines of credit to more specialist products such as venture debt for venture capital-backed companies. Businesses must be confident they can commit to the repayment schedule and the interest rate.

Sourcing debt financing can be challenging for newer businesses with a limited trading history, particularly if the business is not yet profitable. However, there are options such as the British Business Bank’s Start Up Loans programme, which works with a variety of finance partners and also includes 12 months of business mentoring.

Equity funding: investors provide capital in exchange for a stake in the company. Types include seed funding, venture capital, growth funding and private equity. Equity funding avoids committing to a loan repayment schedule, but investors will want to understand future growth projections to determine the potential return on investment. Various investment fund programmes exist, including the Nations and Regionals Investment Funds from the British Business Bank and those operated by local authorities, such as the Greater Manchester Combined Authority. 

Exploring equity funding in more depth

There is often less awareness and understanding of equity financing. Working with a specialist capital-raising lawyer and a corporate finance adviser can help companies navigate the process more effectively. However, partners should be chosen carefully. “There are a lot of brokers who promise to raise funds and highlight their large investor network, but few actually do a matchmaking exercise specific to the business,” says Price. “The real value comes in taking a compelling proposition to people who are going to be interested in it, rather than people the broker happens to know.”

Internally, the process will involve the CEO, the finance director and, potentially, the sales leader if sales growth is fundamental to the business plan. Anish Kapoor, CEO of bank integration solution provider AccessPay, has raised capital successfully on several occasions and highlights the need for resilience and adaptability when presenting to investors: “Be prepared for numerous rejections; securing funding is a numbers game. And be ready to iterate on initial materials based on investor feedback.”

If successful in sourcing a potential investor, a term sheet will be drawn up outlining the terms and conditions of the planned investment. At this point, companies should be prepared for an intense period of activity to get the deal over the line. Business plans and future projections will all be scrutinised, and the details of the investor’s stake and involvement in the company will be solidified. Kapoor advises: “Be cautious about commitments in any plan. Things often take longer and cost more than anticipated. Work with investors who understand and are willing to support the company through challenges, as unexpected obstacles are common in business growth endeavours.”

If a deal is completed, businesses should make the most of having that investor on board and ensure open and regular communication. “Remember, the investor will want the business to succeed because they put money into it, so what they bring should be of good value in helping the business grow,” concludes Ralls.